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

Good afternoon. This is Tom Wadewitz from UBS. I apologize that we're getting started a bit late here that I made a bit of an error in my timing on moderation here. But anyway, it's a pleasure to have TFI International with us. We have David Saperstein, the CFO. David is going to provide some slides and a presentation, and then we'll go through a fireside chat. We will run somewhat over just to provide some time, some additional time given the late start. But David, thank you for your patience and go ahead and take it away with your remarks and presentation.

Okay, great. It's a pleasure. Thank you, Tom, for hosting us today, and hello, everybody. So I will just take 5 to 10 minutes max to walk through a couple of slides in the slide deck. We're -- I'm on Page 3. We're a diversified transportation and logistics company across Canada, United States and a bit of Mexico, very diversified in end markets, in geographies, in types of transportation. And we started in Canada, but over time, have grown to about 50-50 in our U.S.-Canadian footprint. On Page 4 now. We provide good services to our customers and strong value proposition, but we do that in a way that makes sense for our shareholder. And this is the core of our philosophy, is providing transportation services, but making what we feel are the appropriate business model decisions in order to do it more profitably, in order to do it in a less capital-intensive way, which allows us to get higher returns on the capital that we do invest and then better returns ultimately for our shareholders. And we'll talk a little bit about how we do that specifically. On Page 5. We like our leadership positions. We like being the leader that we are in most of our segments in Canada. We're also a leader in same-day parcel delivery in the United States. And we think that there are really important benefits of leadership positions. Diversification, we've talked about. Returns, we've talked about. M&A, a very important part of our story. We've got a very rigorous program around that. It's very easy to buy a company, but what -- the only thing that makes sense is to buy companies and make money doing it. And that's where we put our focus. And that's what our track record has been over 25 years. And all of that leads to top-tier returns over the very long term. Page 6. Some of the numbers that we focus on. We focus on margins, of course, operating margin around 11% across a pretty broad portfolio of types of operations. Free cash conversion, 78%. This is EBITDA minus CapEx and the whole thing divided by EBITDA. This is -- this number is a function of the business mix that we have, ranging from totally asset-light businesses to traditionally asset-based businesses and then some that are in between. That is also a function of some of the business model decisions we've made to reduce capital intensity even within traditionally asset-based businesses. Free cash flow yields, extraordinarily high. I don't think that will last. That's really a function of the share price for the cash flow. We work on that, and the share price takes care of itself over time. M&A. We talked about. We return capital to our shareholders. It's important to do that to balance that with deploying it on growth, and we're very conscious of that. Dividend, important piece of that for us, but also buybacks. Dividend yield over 3% right now. So on Page 7, talked a little bit about capital intensity. This is our net CapEx as a percentage of revenue relative to our peers. And you can see on the bottom of the page who the peers are. They're the same peers throughout this presentation. They're all U.S. transportation companies. So we're at 3.7% compared to our peers across the board, 2, 3 -- 3x higher. On Page 8, we drill down now into the capital intensity by division. So when I mentioned earlier that, that we've made business model decisions to provide the same service as other people, but in ways that provide higher ROIC, this is what I was talking about. And it's different reasons in each of these segments. I'll touch on a few examples. In Package and Courier -- Package and Courier this is a hub-and-spoke package delivery business in Canada. So same as the big purple guys, same as the big brown guys. You can drop a parcel into our system in Montreal and the next day, it will pop out in Vancouver, track and trace, all that stuff, right? But we're at 80%, whereas those guys are at 32% free cash conversion. Why? Because we don't own the planes doing the line haul. We use a third-party cargo plane carrier. And we don't own the trucks doing the line haul. So we have the sortation facilities. We own the sortation equipment. We own some of the vehicles, doing the pickup and delivery, but even there, we use 50% owner-operators. So same service, less capital intensive, better ROIC. LTL. We're at 88%. The other guys are at 40%. Why? Well, this is because 1/3 of that division is intermodal. Intermodal, very, very light. Truckload. Our most capital-intensive division. Even that is 70% compared to the peers at 46%. Why is that? It's because we strive to have 1/3 of the fleet owner-operator. So we're there in Canada. We're there in our specialized portion. We're at about 15% in the U.S. So there's still room to go, room to lighten the capital intensity. We also use brokerage for overflow. We prefer instead of telling our customers, no, call somebody else if we don't have the trucks. We prefer to say yes and then we broker it out. This, again, provides us with a profit stream without having to invest the capital. On Page 9, M&A. Really important kind of piece for us. We're a privileged position in Canada, and we've had a very good experience in the U.S. as well, just buying deals in a disciplined way and then improving them. We like to buy companies that are relatively well run, but that we can improve. And the improvements, they always come in the same places. They come in -- they come from procurement costs. We buy everything cheaper than a small independent shop. They come from real estate costs. There's almost always overlap that we can just take out. And they come from information. That information can be in the form of rates. Not uncommon for us to buy a company that's running the same -- the same Canada -- running the same sorts of the -- same route for the same customer as us, but they're not charging the same rate as we are. So they weren't aware of what the market rate was. So we can correct that. But then it's also the benchmarking of our core operations relative to the target and driving those improvements. Page 10. This provides an overview of what the portfolio looks like. Truckload, split between conventional and specialized. This is important because a lot of our U.S. peers are just conventional. They're just dry van guys. But specialized, this is liquid bulk. It's dry bulk. It's waste, very different dynamics, higher barriers to entry. You get paid round trip, not just one way. There is much more of a dedicated-type nature to it. You're an integral part of your customer supply chain. It's a different business. Frankly, it's a much better business than dry van. Logistics. This is 22%. This is mostly the same-day parcel delivery. Same-day parcel delivery in the U.S. and in Canada. LTL, as I mentioned, over-the-road and intermodal, and then Package and Courier, this is the hub-and-spoke business up in Canada. On Page 11, we have a breakdown of our end markets. Totally diversified across end markets. Totally diversified across geographies, across North America. Now I'm on Page 12, 13, 14, 15. These are all similar pages. I'm just going to make one comment for all of them, which is the following. You see all the names at the bottom of the page. These are our operating companies. So these companies have their own brands, they have their own management teams. They have their own P&Ls. We take synergies on the back end. We integrate back offices, we combine our procurement, all of those things. But what -- having independent companies with management teams responsible for their results provides us with, which is really valuable is data. It allows us to bucket these companies and then benchmark them against one another. And so we can see exactly what is best-in-class for specialized truckload in Ontario, Quebec, hauling liquid bulk food, okay? So what is required for that in terms of SG&A as a percentage of sales? Real estate. What's a reasonable maintenance cost per mile. We know that. Nobody else has that level of information to be able to benchmark against. And so this allows us to say, okay, what's best-in-class? What's top quartile in every KPI, in every cost bucket, and then our bottom half performers, we know exactly how to fix them. We know exactly where the problems are. And if the guys or the team responsible for those bottom half performers aren't able to fix it, well then responsibility for those operations go to a top quartile performance team. So this is a continuous, continuous, continuous improvement and continuous merging sometimes of our businesses, and this is how we drive this over time, continually, continually, continually. And now on to Page 17. This is our track record. I mean, this is what we do it for. And so this is the long-term, 20-year track record. EPS growth rate, 17% annually. Cash from ops, 18%, 19% annually, year in, year out. And then on Page 18, we show our TSR, total shareholder return relative to our peers. And guess what, for every period, you look at, 1-year, 5-year, 10-year, 15-year, we are #1. We are #1 in TSR. And that's because of everything we've talked about. It's market position. It's the culture of benchmarking. It's the attention to detail. It's the culture on asset, on higher returns on invested capital. It's the consciousness about capital allocation. It's everything altogether that just produces these results. And this is what we do. And on Page 19, we show you what that looks like also on the downside. What happened during the financial crisis? Our revenue went down 18%, and our EBITDA went down 19%. That's not a lot of negative operating leverage. A lot of guys, their revenue goes down 20%, their earnings go down 50%. Well, not us, because we're very, very, very close to the operations. We're not emotionally attached to equipment. We make our cuts quickly. And we're very decisive. And in this crisis that we're going through right now, we made our cuts, which were broad-based, and we talked about them on our earnings call. We made them in the third week of March, and they were across the organization in the third week of March, and it serves us very, very well, very well. And as we're bringing people back now we're realizing that you know what, we don't have to bring everybody back and -- even as the revenue is coming back. And we're learning how to be even leaner than we thought we could be. So I'm going to very briefly mention e-commerce, which is an important sort of segment for us on Page 20, on Page 21, 22. It's between 7% and 10%, depending on the period of our revenue and growing quickly. We service it primarily in our same-day parcel delivery business, which sits in the Logistics segment, but also a bit in our Truckload. So with that, I will stop and take questions from Tom.

Great. Thank you, David. We appreciate that. Maybe you've -- obviously, you've complexity in terms of when I ask you about demand, you could probably talk about that for quite a while because you have so many different businesses. But maybe you could offer some quick thoughts, I think, what we've seen or heard today from other trucking companies, what we see in the data. And we've heard this from rail companies as well is that, at least in the U.S. market, it seems that trucking hit a bottom in late April and has shown improvement. That's primarily probably a dry van and refrigerated comment. How have you seen things kind of play out? Have you seen this kind of bottoming in your broader trucking markets? Or is the bulk side acting quite a bit differently from what we see in terms of the U.S. spot metrics that are probably again more dry van and refrigerated driven?

Yes. Yes. Yes. So the bulk has been far less -- has been less volatile than the dry van market. There isn't kind of the same kind of active movement on the spot market and things like that. But Tom, what we're seeing in terms of demand across the board is this. I mean we shared on our earnings call what the first 2 weeks of April look like. And when you think about the nature of this crisis, it's that everything stopped right away. So by the first 2 weeks of April, we'd in a way seeing the floor because in all of the geographies we operate in, all of those states and provinces had pretty much shut down. Whatever was going to be shut down at that point had been shut down. So since then, what's happened? Since then, 2 things have happened. One, things have opened up a bit. So you can draw implications for what that means for demand. But then the other thing is that we've pivoted to where the revenue is and sometimes the revenue in this particular environment is in a different spot than it normally is. In dry van, for example, apparel retail went to 0. But big box retail and essential goods and all that went up a lot. So they kind of net each other out. In P&C, B2B went down a lot. But B2C went up a lot. And so those net each other out. In the B2C, we were always concerned about the profitability of B2C. But the fact that we got so much all at once and the fact that we just can pick and choose the ZIP codes we want to go to. We don't have to go everywhere. We're not -- no one expects us to go everywhere. Make it such that we have quite a good amount of density even in the B2C. So yes, I mean, I agree with your comments, Tom.

In the P&C business, I think when we heard the commentary about early April and how hard B2B was falling, it seemed like that would set up for a pretty tough backdrop. But your comment that you just made sounds a bit more optimistic in terms of the mix effect and how B2C has played out. Does that give you a sense that maybe in terms of the medium-term strategy, you would target a different mix and be willing to have kind of more B2C within the book from a kind of a multiyear basis?

Absolutely. Absolutely. We're looking at that and saying, how can we organize ourselves to be permanently larger because we've taken on all this new B2C business, okay? It's plugging the hole right now that B2B left. But the B2B is going to come back. It will come back. Let's say it comes back at 80% of what it was or 90% of what it was, whatever it is. We have an opportunity to be a whole lot bigger, if we keep portions of that B2C. So then the logical question is, okay, well, what kind of capital do you need to invest in order to do that? Well, the answer is not much. We need some more drivers. We might need some light vehicles, sprinters, that kind of thing. We're about 50-50 company drivers versus owner-ops that we could grow kind of in that proportion. Maybe over time, some real estate, but we have capacity in our buildings because we're investing in sortation equipment, which allows us to increase our throughput. So absolutely, Tom. There are some silver linings on a more permanent basis for some of our segments from this.

And do you think, is there an adjustment in the way you think about margin, if you think about a different mix of B2C versus B2B? Or is there a path where you can continue to achieve the same level of profitability in P&C, even with a different mix?

We'll have to see. Could there be -- if we took on substantial B2C more permanently, could there be a slight margin impact in terms of percentage, but a significant increase in profit from an absolute dollars perspective? Yes, that's possible. But it's not likely to be dramatic, and here's why. We have a lot of density in B2C because all this business came on all at once. And the nature of the Canadian market is that the populations are -- population is clustered in a handful of cities. And so you can kind of -- it lends itself well to density. And we have no requirement to go everywhere. I mean right now we are just -- we're literally within the cities. We're picking and choosing post codes that we're going to. And that's totally okay. There's a market for that. So we feel pretty confident about our ability to have good density and therefore, good margin even in the B2C.

Great. How do you think about the Last Mile business? And what -- you've done some acquisitions, you have kind of an algorithm to make that business work. It seems like you've got a lot of opportunity to improve some of the businesses that you bought. So how do we think about the path and is that path pulled forward or accelerated given the COVID and potentially -- the COVID impact and potentially more need for that? Or perhaps I'm looking at it the wrong way and the COVID puts you back a bit. But how do you think about what's happening with the Last Mile business?

Yes. Yes. So this is a really interesting topic. So for sure, the -- all of the e-commerce activity is really helping our Last Mile, same-day parcel delivery. It's a very cost-effective way to service e-commerce customers, cheap and fast. And so it's a great, great solution. So our e-commerce growth sort of through this crisis has been substantial in that space. The other end markets that we have are medical, which have also been performing very well, partially offset by some B2B, particularly in the U.S. which was temporarily impacted, but the overall net of e-commerce and medical is more positive than the drag -- it more than offsets the drag from B2B. A couple of other thoughts around this. This solution is -- we really believe -- and I think we talked about this on our earnings call. It's the biggest kept secret in e-commerce fulfillment today. This solution is, if you think about the big e-commerce guy, spent a lot of money building a very powerful network of distribution, where the DCs are close to the end consumer. And so then they can just dispatch their couriers out same day and make those deliveries. Customers love it. It's fast and it's great. So we have the exact same thing, and it's for hire. Anybody who wants to use it can become our customer. And we're in all the major and secondary cities, and we're delivering packages same day. Sometimes we work out of our facilities. We even prefer to work out of our customers' facilities because then we don't have to have the real estate expense, and we're able to provide that service. So this is -- people are starting to become aware in the marketplace. They're saying this is a very good solution. It's inexpensive and our customers love it. On top of that, we have a margin improvement plan in the U.S. because we're doing this in the U.S., and we're doing it in Canada. And in Canada, the margin differential is more than 10 points. And we're doing this for -- our operating ratio is at least 10 points better in Canada than it is in the U.S. doing the exact same thing. And it wasn't always that way. They used both to be in the same place. So the team that was responsible for getting us up there, getting us to that level in Canada for the last -- about 3 quarters ago, we promoted that team. They're in charge. They're supporting the U.S. now doing that. And so we're driving a lot of improvements. When we're down, we've taken out costs. We don't have 3 regions anymore. We have 2. We've outsourced certain sort of basic functions like call centers and things like that, put through price increases. We've taken out now 3 distressed competitors that didn't understand their costs and that lends to the result. So this is -- there's a lot to do, and you can see it in the last 2 quarters, you can see the margin improvement and the bottom line growth in our Logistics segment. And this is coming from everything that we've just been talking about.

So I guess if you identified one of your businesses that would do the best in the current downturn, it sounds like the kind of Last Mile and Logistics business would be the, I guess, the winner in terms of just how it's doing amid downturn?

Yes. Yes, without a question.

What is the facility footprint? What is it -- what do you want it to look like over time to really drive growth in that business? Is there a benefit to having the capability on a broader network of cities? Or is it really just a local solution? And whether you have it in L.A., it doesn't matter how well you sell the service in New York?

Yes. So it's important -- so on -- actually on Page 22 of the presentation, you can see our facilities footprint. You'll see we're in most major and secondary cities in this space. We think it's important to be nationwide because customers don't want to deal with a mom-and-pop. They don't want to deal with different regional players. They want to deal with a nationwide customer that -- or service provider that can service them nationwide. So we think that, that's important. The next step in the solution to really develop this solution to be the same as the big e-commerce guy to take it to the next step would be to really hold customers' inventory. Because right now our facility footprint is more -- bring us your packages -- you want to deliver 4,000 packages in Dallas today? No problem. Bring us your packages by 12 noon, and we'll have them delivered by 10:00 p.m. So packages come in, we sort them into routes, and they're out. Maybe they stay with us for 2, 3 hours, that's it, in and out. The next step could be to actually hold customers' inventory and then fill out of those facilities. We will not buy or lease real estate to do that. What we will do to do that, as is developed out, is have partnerships with a contract warehousing company, one or more and just use third-party space and have the solution that way.

So you don't have a desire to add on the warehousing piece in a significant way?

No, no.

Is that -- are there a good number of players you can partner with or is that something that -- yes?

Yes. Loads.

Okay. Okay. Great. Let's see. The -- I guess the M&A is an important part of your business. It's -- you kind of look at bigger deals every couple of years. I know it's been a few years. Obviously, you've been active with the Last Mile area. But what do you think are the areas that you might be interested in for larger M&A? I mean, is it really in the bulk truckload space in the U.S.? Is it -- maybe it doesn't follow the same pattern as in the past and do you do a larger number of midsized players? Or how do you think about the kind of potential paths for when you drive growth through acquisition, obviously, recognizing that's hard to execute on when you can't meet with someone in person? So thinking a bit forward, not in the next couple of months.

Yes. Yes. But even in the next couple of months, I mean, you're going to see us resume the closing of tuck-in acquisitions that we had started before the crisis. So tuck-ins for us, a normal year is $200 million or maybe $250 million of capital deployed, and it could be across -- typically, that would be across 5 to 10 deals in the course of the year, and they would be across a variety of our segments. And they're typically family-owned businesses, and we feel like we can improve the OR by 5 to 8 points of margin over time. Sometimes there's some distressed stuff in there. There's been a bit of distress recently in the same-day space. So that's a normal year for us. There's no reason to think that as things resume to normal, we'll go back to that. This year, obviously, we've had to put things on pause a little bit, but we're resuming. We're resuming some of the tuck-ins, some of the really kind of clear, obvious deals for us that just -- we make a whole lot of sense. In terms of areas that we like, look, we really like the specialized truckload space, particularly the bulk side, liquid bulk, dry bulk, food, chemicals, agriculture. These are good, very good end markets, very good barriers to entry, very good elements that we discussed earlier. We also like LTL. We like LTL. We like the LTL, the consolidated nature of the LTL business in the U.S. In Canada, there are a lot of underperforming LTL companies that need to be consolidated out. And so they're on both sides of the border. That's an area that we like. And then, of course, parcel. We'll continue to do parcel. Don't expect that there'll be much capital to be deployed on the parcel side because there's a lot of distressed work to be done, but there'll be very meaningful, very high returns on the capital.

What's left on the parcel side? Is that like regional players in the U.S.? Or what?

Yes, yes, yes. Courier businesses, different regional courier businesses. There are a few larger regional ones and then some smaller ones.

Do you look at -- when you look at something like that, is customer concentration a big issue or not necessarily?

It depends. I mean if it's truly a distressed deal, like the last 3 that we've done, we've basically paid for the working capital, right? So when you're paying for the working capital, maybe a few bucks over the working capital. Your downside is covered. And you don't worry too much about customer concentration. If there's large customer concentration, we typically also do business with that customer. There are a handful of customers that we know as soon as we buy the business, they leave because they know they're going to get a price increase and that's fine. We know that going in, and we just price that into the deal. There are less and less places to go, though.

Right. Yes. I guess I was thinking of the particular large player that you were mentioning with the warehouse and last mile footprint that I think some of the regional players although maybe -- some of that business may have been taken away already. So that may no longer be the same concern.

I don't know if you're talking about -- yes, I think you're talking about that. We don't do big and bulky. This is just packages. And so a lot of the people -- a lot of the peers that do last mile in the U.S., you're talking about big and bulky, refrigerators, that kind of thing, that's not us.

Right. Right. Okay. Let's see. What's happening with your U.S. truckload business? I think that's -- there's been restructuring opportunity. Obviously, that -- the cycle is important. But I think that your own idiosyncratic initiatives have been particularly important for what's happening with truckload margin improvement. So where do you think things are out with the 2 big elements of your U.S. Truckload business? And how much kind of runway for your company-specific initiatives is less -- excuse me, is left?

Yes. Yes. There's still runway. There's still runway that's left. The margin gap between CFI and TCA, maybe 5 quarters ago, it was 10 points. Today -- meaning, CFI was 10 points better than TCA. Now it's more like 5 points. And over time, this should close. So that comes from integrating the companies on the back end more and more and more. So we've just put them both on the same financial system. So that's going to allow us to, over time, have one finance team. They're already -- there is only now one HR team. The maintenance is overseen by CFI. They're recruiting more and more combined. So there's still work to do for sure.

And then I think we can wrap up in another minute or 2 here. But how do you think about the labor markets? And how your model works? Obviously, we've had a remarkably abrupt change from a very tight labor market to a very loose labor market. How does that affect in the owner-operator side and your kind of model in general? And obviously, I mean, I guess the U.S. Truckload business is kind of more driver sensitive and pressures on the driver availability over time. But how do you think about the change in labor markets and what changes you might see with the owner-operator side as well?

Yes. Yes, that's a great question. So we've never seen this many qualified driving applicants, especially in the U.S. In Canada, we don't have a big turnover problem, even in normal times. I mean, even in 2018, turnover in our Truckload division might have been like 10%, 15%. I mean no big deal. But in the U.S. what we're seeing now is great talent coming in the door. And we've also been able to increase our owner-operator fleet. I think we added about 40 in the U.S. in Q1. So this is great. This is exactly where we want to go.

So this is -- I guess it's just a positive in terms of -- you can kind of gives you the ability to attract talent and position for future growth. And I guess make sure you have the right quality in the driver network as well.

Yes. Look, I mean, exactly. It allows us to bring qualified, experienced drivers in the door and then it's on us to provide them with the miles and the work environment that they stay with us long term. But this labor thing is always -- it's always a funny thing because specifically, at the time when everyone is crying about recruiting and turnover, that's precisely at the time that the trucking companies are making the most money, right, because it's when the market is strong. Right? They go hand-in-hand. And then now, it's like, it's a downturn, it's easy to recruit. Good. I mean -- but the market is weak. So it's a little bit of like -- it's an issue. It's an operating issue. But overall, I'll take a tough recruiting and retention environment over an easy one any day.

Yes, indeed. Last element of that question. Just on the mix of ICs and owner-operators, is that something you try to kind of mix more heavily toward that when the owner-operators are potentially having a tougher time kind of finding trade on their own?

Yes. Yes. So in Canada, it's stable. And for your -- for the listeners, you can see in our MD&A, we actually break down owner-ops and company trucks by our 3 subsegments. In Canada and in specialized, you'll see, we're pretty stable at 1/3 of the fleet being owner-op. In the U.S., it fluctuates more. I mean in a strong market, we lose owner-operators because they feel like they can just go out on their own and get their own loads. And then in a weaker market, they come back and it's just the way the cycle works for us.

Right. Right. Okay. Great. David, thank you so much for spending time with us today. Again, I apologize to you for being running over on my prior panel and being late to start. But we very much appreciate your time and the insights and providing the -- really good insights on how the business is responding to the cyclical pressures and also helping us understand the strategies, the longer-term strategies better as well. So thank you, David. We appreciate it, and we look forward to being in touch soon.

Yes. Super, super. Appreciate it, Tom. Thank you.

Okay. Great. Thank you.

Take care. Bye-bye.

You too. Bye-bye.