Q4 2022 TFI International Inc Earnings Call

Good afternoon, ladies and gentlemen, thank you for standing by welcome to T. F. I Internationals fourth quarter 2022 results conference call. At this time all participants are in listen only mode. Following the presentation. We will conduct a question and answer session callers will be limited to one question and a follow up.

Again, that's one question and a follow up so that we can get to as many callers as possible further instructions for entering the queue will be provided at the time.

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 Monday February six 2023.

I'll now turn the call over to Alain Bedard, Chairman, President and Chief Executive Officer of T. T F I International.

Please go ahead Sir.

Well. Thank you operator for the introduction and thank you everyone for joining us this afternoon.

Today after the market close we released our fourth quarter 2022 results, which capped a successful year for T. F. I international despite obvious macro related top line headwinds.

We generated increased operating income versus the year ago quarter, we expanded our overall operating margin by more than 200 basis point.

And we produced free cash flow of 188 million, which is 56% higher than the year ago quarter.

For the full year, we produced adjusted diluted earnings per share of just over $8, an increase of 53% over the prior year. We also generated full year free cash flow of 881 million up 26%, Despite our calculation alright calculation fully reflecting.

Working capital on the order of 147 million associated with higher fuel cost.

We view our robust free cash flow is especially important during times of uncertainty affording us the flexibility to capitalize on market share Bill Lynch through strategic investment.

Our adjusted net income expanded to 152 million up from 149 million, while our adjusted diluted EPS climbed the full 10% to $1 72, Despite a foreign exchange headwind up nine cents.

Perhaps more important the hundred and 88 million in free cash flow that we produce what's up shortly from 121 the prior year.

Further enhancing our flexibility to strategically deploy capital into acquisition and returned the access to.

Two shoulders when possible, which is as I mentioned are two of the overreaching principle.

Let's now review the performance of our four business segments, all of which generate a strong return on invested capital in three of which were able to grow operating income and expand margins. Despite.

Economy conditions.

Beginning with P&C. This.

This business represents 8% of our segment revenue before fuel surcharge during the quarter, we saw a continuation of the more sluggish volume from the third quarter as a result revenue before fuel surcharge was down 14% year over year and volumes 6%.

Our operating income of 38 million was up slightly over the prior year. Similarly, our return on invested capital was up was a 32.5%.

Yeah.

Next is our L. G L, which is 44% of segment revenue before fuel surcharge $721 million of revenue before fuel surcharge was down 12% in volume down 19% operating income was 88 million down 15%.

What would the margin off by only 40 basis point, despite the deliberate deliberate gene caused by lower revenue.

Digging deeper on the L. T. All Canadian revenue before fuel surcharge was up 15% and yet we achieve a notable improvement in adjusted operating ratio, which came in at 75.3.

This was 300 basis point improvement over the prior year.

<unk>, what we believe is the best in class performance.

In addition return on invested capital for Canadian L. T L was 24%.

But I think to the U S. L. T. L revenue before fuel surcharge was up was off 12% despite meaningful volume headwinds.

As we continue to refine this business following the acquisition of T Force right. Our adjusted operating ratio was 90.4 relative to $89 four a year earlier, which is an okay result, given seasonality weaker volumes and the overhead costs related to our transition services agreement. However, I'm pleased to report.

<unk> done as of last week to finance more module of the transition agreement is behind us with the financial system migration.

<unk> completed successfully as of last week.

More broadly the stability in margin in the face of volume pressure across the industry reflects our appraising focus and the real progress were making on the cost side, where we see some opportunity I had a return on invested capital for U S. L. T. L was 23 point.

Eight.

Let's move on to truckload, which is 25% of our segment revenue before fuel surcharge.

Reflecting our sales of the <unk> business I mentioned earlier, our focus corridor revenue before fuel surcharge was 403 million as compared to 506.

A year earlier.

Most impressively despite the sale of our truckload operating income manage to grow 16% to 72 million.

We now have you our truckload segment is more resilient during volatile market conditions. Following the sale of <unk> assets last year, which ended our exposure to the U S dry van market.

Yeah.

Within truckload, our specialized operation our revenue before fuel surcharge nearly flat at 325 million.

Benefiting from our diversity and exposure to a high end better than market and favorable niche, including the industrial out and market more important to them.

Our adjusted operating ratio of managed to improve to an 87.4, while our specialized strike little return on invested capital came in at 13.4.

Specialized truckload the scenario, where the self help excuse me nature of our opportunity is readily apparent.

As for our Canadian based convention, a little truckload, we are able to capitalize on tier five diversity and the relative strength of the Canadian market.

Which add pockets of strength this quarter, what drove up 7% and revenue before fuel surcharge to 79 million.

We also remain focus on network density and cost control, where we were able to produce an adjusted operating ratio of 81.1. Although this was helped by a gain on sales of real estate of 15 million. So our return on invested capital was 21.3.

Wrapping up our review of business segment logistics represent 23% of segment revenue before fuel surcharge revenue before fuel surcharge at 376 million was up 12% year over year, which was slightly impacted by foreign exchange as much as our revenue this quarter.

However, our operating income climbed 4% to 34 million as we successfully contained operating expenses.

That equates to an operating margin of nine 1% up a healthy 100 basis point in our return on invested capital was 21 nine.

Turning to our balance sheet do you find to national ended the year with a funded debt to adjust to adjusted EBITDA ratio of just under one.

And our debt is almost entirely at fixed rate as the weighted average cost of less than three five.

Our strong capital position benefited from the 56% increase in free cash flow that I mentioned at the outset of the call and permits us to strategically invest in the business. While also returning capital to our shoulders whenever possible as I also mentioned during the fourth quarter was ready to <unk>.

Located capital towards three tuck ins acquisition and have completed the one in January .

Further our pipeline of further tuck ins is large with the majority of the anticipated closing expected to take place in the first half of the year. We also announced that our board of directors approved a U S 35 quarterly dividend, that's an increase of 30% over the previous quarterly.

Dividend, reflecting the ongoing success of our business and a continued favorable prospect for generating cash.

Also during the quarter, we repurchased approximately 900000 shares for about 83 million.

I'll conclude with our outlook for the for the new year. We currently expect $7.50 to $7 at 60 cents of earnings per share in 'twenty three.

We also anticipate free cash flow of more than 800 million, which is based on net capex of between 250 to 275 million.

With that operator, we're ready to move to the Q&A. If you could please open the lines.

Ladies and gentlemen to ask a question you will need to press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

Colors would be limited to one question and a follow up in order to get to as many callers as possible.

That's star then one to ask a question please.

Please standby, while we complete the Q&A roster.

The first question comes from Scott Group from Wolfe Research.

Please go ahead.

Hey, Thanks, good afternoon.

I just wanted to follow up on the guidance I think you said $750 to 760, so a pretty tight range, but maybe if you can just walk us through the different businesses in there.

Thoughts on revenue and margins for the businesses within the guidance that'd be great.

Yeah, Yeah. That's a very good question. So what we're seeing so far is that are you know on the L. T outside we see still some pressure Q1 Q2 up 23.

Softer volume both on the U S and Canadian inside the Canadian side were mostly affected in our intermodal division because we're competing with one of our fears a competition. There dealing are you know using C. P. US we're mostly C N and this guy is very aggressive so that's really the big.

Big pressure on volume for us on the kidney and the L. T outside the U S. L. T O. We believe that our we're going to go through a soft patch Q1 Q2, no the benefit of that that gives us a chance to and there'll be more focus on our costs, reducing our costs with the renewal of our fleet, reducing the number.

Miles et cetera et cetera.

So the L. T L. Okay, we believe that our.

If you look at the year, we should do probably a little bit less in Q1, Q2, but a little bit better in Q3 and Q4.

Also the TSA that we have with our U B S.

Is slowly going away, replacing with our own car. So that should also be a tailwind for T force rate going forward are you know into twenty-three so U S. Canadian L T O.

Stable right.

She oh, yeah, we're doing a fantastic job over there in Canada, but we need some growth I mean, we've been down okay for the last I would say 18 months, okay. Since the beat to see okay as drop okay with the E Commerce, I mean, where we're having a tough time competing with.

The company and the the competition that's owned by the Canadian government there in Canada. So really our goal there is to keep some organic growth because like you said that where we're down about 6% in volume now that being said, we're making some say a major investment in Edmonton Dream 'twenty three to be up and running into a new sorting facility we.

Just finish Winnipeg, So we got a lot of good things on the go there to keep our costs down and and do even a better job on the cost control truckload side. We believe that this is gonna be some some some major improvement. The fact that now T. A our dedicated business is now much.

Better run that there's ever been run I mean, I was just looking at the month of January and you know where we're heading in the right direction. So I believe that our truckload and even if you look at our Q4 did you see some improvement slight improvement year over year and there I I continue to think that we're gonna do way better than.

And then last year logistics.

The market fell out for us on the logistics side, but we've protect our margin. So our margin is about 9%. So when you do all of this sum up okay. Like always Scott we're very conservative we could have said you know guys, maybe maybe it will beat $8, but we're not going to say that now I mean, we have only one month out right. So.

This is why we're coming out with something that I think is conservative and reasonable.

And you know if things got better after Q1 for sure. We will update you guys on the guidance.

Okay and then just on the guidance can you just clarify is there anything in there for for buybacks or M&A in the guide and how you're thinking about the M&A environment right now no no. There's nothing there in terms of M&A or buyback.

So we believe that our well we would close about $300 million of M&A deals between now and the end of June . Okay. So our guys have been very active okay and in all sectors I would say and you.

You know I've always said you you're buying bad news you sound, good news and and right now for the last I would say eight nine months.

About trade recession, and all of it is it's been bad news and you've got a lot of guys that are tired right.

So it creates an opportunity for us our leverage is less than one like I said the on the on the tax there.

So we're very well positioned so for US you know a nice tuck in three to 400 million U S for sure that's going to get done in 'twenty three but this is not part of that guidance.

Okay. Thank you I'll pass it along.

The next question comes from Kenn Hoekstra from Bank of America. Please go ahead.

Great Hey, Elaine I and David can we just maybe just follow on that that outlook, a little bit more it seemed like at U S. L. P. L tonnage does.

Celebrated or declined at an accelerating pace maybe talk about your your thoughts.

On the volume side, and what to expect at L. T Allen and throw in margin thoughts too.

Yes, yes. So so you know what Ken I mean, when we bought this company UBS freight a third of the volume didn't make any sense for us it didn't fit at all so we got rid of a lot of that but we're not done right. Now if you look year over year were down about 19, 20% in volume.

Now some of that is market. If you look at some of my peers are good peers. I mean, those guys are down 568% right us were down 19%. So the reason being is that we had a lot of afraid that did not fit the operation. So during the course of of AR of 23.

One is that you know, we're gonna grow up organically slowly okay by about 5% you know versus where we're at today. So let's say today, we're doing about 'twenty three 'twenty 4000 shipments a day in you know in the first month of the year January .

The plan right now sits at about 25 by the end of the year. Okay. So I mean, it's a it's not a very tall order for our sales department because don't forget when we bought the company. We were at 32000 shipments a day right. So now we're down to 'twenty three 'twenty two 'twenty three 'twenty four so it's it's.

We took a hell of a beating but we had to we had to get rid of that afraid that didn't fit and well. We also lost some business because of the softness of the market right, but we believe that the first six months are going to be maybe soft, but things will start to get better in Q3 and in Q4.

So it's not a big improvement in terms of volume, but it takes time. It takes time and we're really busy working on our cars are you know we were getting all the trucks that we've order that we're always late late late now I would say since the end of November I mean, we're just getting flooded with all these new trucks that we have to.

It'll get in there and that's where you sell the old one improve the M. P. G. A save money on their maintenance and all of that so this is going to come or gates towards.

Twenty-three, but in terms of volume I mean, our our sales team out of a lot of work to do there.

But just to clarify did you throw in a cost estimate for that for what I don't know whatever the the last piece of the U P. S to to put that in perspective, and then Mike My follow up question was on on truckload. It sounded like you Might've mentioned freight heading in the right direction, maybe maybe just expand on that if if there's just chewing up inventories and we're starting.

To see a turn or maybe is there any sign of of of a floor.

Yeah. So so to answer your first part of the question I mean, we have to spend a ton of money for the transition okay of the financial system from UBS to us. It's a matter of fact, I mean, we were paying $600000 in month, Okay for the financial service of U B S. Number one number two is we also had to pay.

For them to provide us the information to be able to transition.

Huge expense so.

So I would say that probably Q3 and into Q4 all of these transition costs you were talking maybe 15 $15 million in there or additional cost to do all of this transition now we still have to do the transition of the a or the HR, Okay, which is April may.

Hey, we still have to transition the fleet, okay, sometimes in the fall of 'twenty three and then we're just going to be left with the I T late into twenty-three early into 24. So all of these costs will because we have like double costs right now because we have to do it ourselves, they're still doing it through us and.

So that's why we feel pretty good that even with you know the 25000 shipments a day I mean, we will be able to position this company pretty well with cost reduction into the new year 'twenty three.

No in terms of the truckload again my comment is really because now we are exposed in the U S. In the dedicated truckload. Okay. So with all of these are sales that we'd done with C. F. I in Sexton and all of that the dry van is gone. So now we're focused only on dedicated truckload anywhere.

Doing really really well so for sure revenue has dropped okay, but now we make money on every account if you remember when we bought UBS their truckload division, we were losing like four or $5 million a quarter, where these guys I'm.

I'm talking about a 18 months ago, when we bought the company.

And now that that's not the case at all I mean this company you know if you look at our what we know so far and 23 is going to run better than the nine you are we gonna be the 90 or in that U S truckload dedicated specialized business that.

We that we own now.

Great very helpful. Thanks, Mike Thank.

Thank you.

The next question comes from Walter as Brooklyn from RBC Capital markets. Please go ahead.

Thank you very much operator, good evening How're you doing.

Hey, pretty good how about you are Walter.

Good good I just wanted to turn back to acquisitions I noted that you have broken our investments out of other assets in your balance sheet and you put a footnote there are indicating that you own about 4% of Earth's best and that's.

That seems like more of a strategic rather than passive investment and just wondering if you could share any of your any color on what your intentions are with regards to to that investment.

Well you know.

We we really like this company. So when you when we talk about the investment that we've done is we believe that are now just to talk about it. So it was the right thing to do for us to really disclose that okay now.

Now in terms of what do we want to do we would like to do I have some discussion some very positive discussion down. The road are okay. With these are these guys. This management team because we believe in.

Being a unionized carrier like they are I mean, there there's some things that we could work together and improve okay overtime I mean, it's just a we once in a while we can invest in a in a in a public company in one of our peers are they're not the only one where we're having some discussion okay in terms of what we could do to improve.

Our our company and there are companies that were having discussion with other peers in terms of the real estate what kind of discussion. We can have you know as we know we have a very large portfolio of real estate within T Force right that a lot of it is unused so what kind of discussion we have with these guys.

That that is really the intention behind all of that.

Okay, a lot of follow ups I couldn't do on that one, but let's put that one on hold for now just in terms of your outlook you mentioned too with your guidance I I got the sense that.

Really my question is what kind of economic scenario are you, assuming when you give that guidance and I and I get the sense that you're assuming you know based on what you said in your divisional respond some weakness in the first half and perhaps some strength in the back half. So are you are you price it or are you is there a recession in those numbers.

That's what we should frame that context that.

That oh disclosure around or just a little bit of color on the outlook, Yeah, well you know what Walter I mean, I'm listening to all the different players in our industry and I think that everybody has the same kind of feeling which may be wrong right, but what we believe is that Q1 and Q2 is going to be soft you know and.

And then things will get better. This is based on the what we're hearing from the economy, the economy might be et cetera, et cetera, but who knows right. So this is why we're going ahead with a very conservative okay kind of.

Our forecast right now if I look at my month of January Okay, I feel pretty good versus versus our forecast. So I mean, one month is not a year, okay, but I think that we're on the right track.

We're a very well position I think we're gonna do better T Force right down the road not so much in volume Okay. Early in the year, but in terms of controlling our costs better doing a better job getting rid of a lot of these transition costs and excess staff that we had to have to do with the transition.

But now what is that we do all of these transition in 'twenty three.

We should see a major reduction in our costs over there. So we feel that it's reasonable it's fair.

It's a little bit less than what we've accomplished in 'twenty. Two we did $8. We think that no C. F is gone. She F. I was contributing about I don't know like 40 million of net earnings last year.

Okay. So theyre gone AR, but we have a lot of them any undergo oh. These guys slowly should you know replaced the C. F. I investment that we had there and probably do better than when we used to own C. F. I N T.

There's a return on invested capital and profitability. So we're conservative Walter we've always been like that.

We'd like to under promise and over deliver right.

Thanks, a lot of sense appreciate the time delay.

Sure Walter.

The next question comes from Ravi Shanker from Morgan Stanley . Please go ahead.

Thanksgiving, You'll then Oh can I just I mean, you you gave us a little bit of a detail on the kind of what are you thinking of arc best but can you confirm that if you've ever had any discussions with them or had any engagement with the board and I. Thank them.

No no no engagement whatsoever, I mean, it's just a no what what we're trying to do is to have some discussion on the business. Okay. Like I said down the road, we would like to talk to because you know we have a lot of expenses that we could reduce if we would work together with them and also with the other oh.

A unionized carrier right another of our peers. So it's just guys can we make things better for both companies right now.

It is really a D.

Nominal goal for what we're doing that's the most I can say right now.

Got it understood and then maybe for my follow up.

Is that a couple of times that you believe your guidance is conservative and clearly you guys have a very strong track record of beating by a long way, but at the same time at the top of the Q&A, you've kind of laid out a whole list of oh of items to be concerned about or does that mean your headwinds I'm just trying to get a sense off.

When when you've kind of put these two things together are kind of do you feel like you said, there's other comfortable bar here and kind of what are the moving parts lake or.

Do you feel like the macro really needs to come your way in the back half of the year to kind of thought this guy.

You know where where Ravi we're very early in the game, we have only one one down. So this is why what we look at right now is that our competition volume I mean, it's it's a it's not as good as it was in 'twenty. Two. So this is why we're cautious okay. We believe that things will get better.

<unk>, Okay. During the course of the year, but so far I mean, we see a in some market some of our peers panicking lowering rate like a if you look at our P&C. Our average revenue per shipment is down because of competition.

If you look at our Canadian L. T. L. We have some some pressure from some of our peers. So this is why we're looking at I would say things will get better but right now I think that we have to be conservative.

That's the way we look at it.

Very good thank you.

Bocom.

The next question comes from Jordan Alegar from Goldman Sachs. Please go ahead.

Yeah, Hi, just wanted to get back to E. L. T L. A couple of things on.

On our volumes were down 19%.

How much of that is there a way to get a sense how much of that is macro versus the ongoing.

Calling because I thought you were sort of winding down on that and then secondly talk a little bit about the price strategy on LTE out are you seeing the core price do you think some of those competitive pressures because I think yields ex fuel were perhaps not not quite as high as some of your peers. So I'm just sort of curious what's going on with the core L. P. L U S pricing.

Yeah. So in terms of pricing I mean for sure. Some of my peers are you know ex fuel plus five plus six plus four okay. So we're not doing as well as the other guys, but don't forget we're new to the game, where we have a reputation that is not as good as maybe some of my peers. So our sales team I have some difficulty sometimes to get more.

From the customer the service also is when we took on the company I mean, the service was maybe not AAA. So we're still working on improving our service. So in terms of pricing I don't see too big of an issue.

In terms of volume okay.

I said it earlier when we bought this company a third of the volume did not fit.

At all I mean, it was so we would have to go from let's say 32000 shipments down to 20000 shipments.

I mean, we can't do that I mean, so we went down big time like 19%. Okay. Some of it is the softness of the market. Okay like everybody else of my peers, except maybe for one that I've seen so far everybody's down a few points, 678% were down more than that why because we got rid of it.

A lot of that freight that did not fit our network at all right now.

Now.

That's why I'm, saying, if you look at our forecasts are part of our discussion in terms of guidance. We believe that we're going to get back on average are key in the latter part of the year.

Towards the 25000 shipments maybe 26000 shipments, whereas right now we sit at 23000 shipments. Okay. Now for sure. This is February January February it's not the best water, but we're still very low and we're still like 16% less than last year in February .

So far right. So we're still lapping a freight that we were hauling last year that did not fit that we got rid of well, it's a little bit of the softness in the market like like all of our peers.

Alright, thanks for the color.

Pleasure.

The next question comes from.

<unk> from Scotiabank. Please go ahead.

Thanks, I'll pass it up into L. A.

Good afternoon.

Good afternoon. My first question is on on the competition, you're that sounds too on your prepared remarks with respect to a Canadian L. T out there that supports a CP rail and you guys. Some more on the CN site I'm just trying to understand if they are supporting C. P. M. You guys starting to see and what exactly is causing the competitive pressure from those guys.

It is very simple all right I mean that what this fear okay. He's got a sweet deal with one railroad, which US we don't have right and and now this guy is taking advantage of that to be more aggressive in the market.

So us we're protecting our margins. So we have to let go some volume plus also like in the U S. There's also a little bit of a softness in the market right.

Okay that makes sense, so just leveraging that kind of protection they have okay.

Now with respect to.

The trends in the U S. Here you spoke about some of the volume trends in that a T L. A and some of the trends in the truckload.

If you compare the Canadian and the U S marketplace today, clearly the U S consumer.

Consumer spending has taken a hit and the rates are still going up they are they're at the bank of Canada is talking about slowing down here in Canada.

Any major defense you are noticing in the freight transfer the volume trend, especially between Canada and the U S.

Oh, Yeah. That's you know if if we look at our Canadian operation the Big difference.

It is probably the Canadian economy.

Could do whatever it wants so we don't control that but one thing we control is our costs and we're very efficient lean and mean, except and ends on.

In the U S. We're not as sharp I mean, we're new to the game on the U S. L. T. L. L. We're beefing up the team Oh, we're investing a lot in and Oh information tools and all of that but this is why we're not as good as you know some of my peers. Okay. So if there's a fluctuation in the mark.

It sometimes you know in Canada, we're very very active okay are in the U S. We're still too slow in my mind. So if you look at my Q3, and that Q4, I'm I'm disappointed a little bit in the sense that we were too slow to adjust ourselves okay in our U S. L T O versus.

The drop in volume to adjust our labor force et cetera et cetera now.

Hughes says well you know what L. A are the way we do it is that we do it from top down versus in Canada. Our approach has always been from bottom up so it's the terminal managers that manage their labor force not the guy that office.

So it's a change in culture that we're doing over there and that helps you win the market is getting to a soft patch that you can react faster. So if I look at one of my peers in the U S. L T O.

The volume was down, let's say, 8%, but EPS was up a you know 9%. So that's the kind of company that is really sharp in the guy on Amazon and fast if you look at what we're doing in Canada US, let's say on the kidney and L. T. L. A revenue is down okay, but our or is also down.

Right, because we're short where were on the ball etcetera etcetera. So so this is you know when we look at what's going on in the market. The biggest important thing for us is to accelerate the decision making in the U S based on changing conditions right.

Okay.

Thanks, so much and all the best for this year. Thank.

Thank you.

As a reminder, ladies and gentlemen, please limit yourself to one question and a follow up our next question comes from Brian <unk> from JP Morgan. Please go ahead.

Hey, good afternoon, thanks for taking the question.

Just to go back to the T Force freight and you mentioned all the initiatives.

You've laid out in terms of the system migration, but maybe you can talk about the workforce productivity 'cause it sounded like that was being put into place last quarter, maybe it didn't come through this quarter.

As long as you might've hoped, but when you get out you know three or four quarters from now what do you what do you think the run rate.

So our margin is going to be as you have visibility to a lot of it is self help you know even if the macro doesn't come through as you might hope.

Yeah, well you know our goal Brian is to get to an AUR right and we said it from day one we believe that this company could get there now listen twenty-three star.

Started is as difficult, we're investing in equipment and technology and all of that but it's also a big push at the about the style of the management style like I was just explaining to the all fast can you start moving and make the decision. So so we're making a lot of changes with Paul and the team there to be fast to.

Just ourselves because like I said, we could have done in my mind, a better job of controlling our costs labor costs I'm talking about in in Q3, and then Q4, Okay. Now that being said we've implemented are the you know.

New tools, new information, so that the guys could start doing a job much faster, but that will take time and that takes education, So Ken week, and we'd do better than the 90 you are in let's say in Q4 of 'twenty three.

I think so I think that with all the cars that we're gonna be shedding, okay will help us get closer to a maybe an 87 in twenty-three maybe an 88 are all the admin costs that we have to get rid of because we have way too many cost right now because we.

We're going through a transition agreement and all that so we were paying on one side with the transition agreement and we're paying on the other side because we had to hire people and train them that you know for them to be able to do their job once we run away from UBS.

So this is all going on into 'twenty three so that's why we feel good that by the end of this year. The contribution of T force rate is going to be better than just a 10 point of Hawaii.

Okay. Thank you for all that and as a follow up I know you said you can't give too much information on arc, best and where you might be at this point, but maybe you can just maybe put some general thoughts around that would that be some sort of joint venture in the U S. It's a little hard to figure out what that.

Might be so any thoughts on on your on your actions or potential there would be helpful.

Well, Brian I think I've said enough on that I don't want to say more at its very early in in this this kind of a process right now right. So I think that I've said are you know you would probably even more than I should have said on that.

We believe that this is a good company, okay and if.

If we work together like we do with a lot of our peers because we we make some deals O'brien with non union carriers on the real estate side. Okay. We're having some discussion with nonunion courier with on different aspects of this as well that's what we're trying to do is is what we're doing in Canada. So as an example in Canada.

Work with we work with Mullen.

One of my peers.

So it's not Oh no no no you can't work with this Guy Who's company no. So this is something that we're trying to do on the U S side with <unk>.

This company and others.

So the benefit all of our employees.

Customer and shareholder if we can.

Okay. Thank you very much I appreciate it.

Pleasure.

The next question comes from Jason Seidl.

From Cowen. Please go ahead.

Thank you, operator, Hey, Ali and good afternoon.

No Jason.

I wanted to talk a little bit about what your customers are telling you about inventory levels and when do you think that theyre going to be sort of appropriately right sized to start seeing some more growth going forward.

I still high.

It's still high I mean.

No because of all this mess in the supply chain you know so what do you do I mean, you need to your order for because you were afraid that you'll get on day, one so I mean, and then whoops stuff starts to come in everybody's busy, but then everybody has got too much so that [laughter].

So that takes time, okay to go through all of this sort of supply that there's too many now.

Depending on who you talk to it's it's the end of Q1 it could be the end of Q2, but for sure it's going to happen in 'twenty three.

Okay. That's good color wanted to talk a little bit about the P&C side could you break down what's going on between B to C and b to be and where you think the trends are going to run as we move throughout 'twenty three.

Yeah. So so during COVID-19 I mean, our our B to C went as high as about 40% of our revenue.

And we were growing big time, okay at the time and I'm going back to 'twenty 'twenty 'twenty. One 'twenty one was a big growth year for US and then things started to slow down in 'twenty two early in the year and now our B to C is is really like probably like more 15% to 20%.

So that was replaced by B to B, Okay, where our profitability has always been a little bit better than me to see because it beats you see it's more difficult to get density right because.

On average one stop is one package.

So this is what we're going through right now, but no. We could do I think a better job in terms of organic growth. So this is why our focus over the last I would say six months six months of 'twenty, two and into 'twenty three.

Bob and the team there goal is really to start growing organically again now we're fighting competition there.

And and some of my peers are not about making money. So that is a little bit the difficulty that Bob and his team have is that we're competing with with with some of our peers that they don't really care, if they make a 5%, 10% or 20% because they're owned by the Canadian government.

Understood and I appreciate the color on time as always.

Thank you thank you Jason.

Okay.

The next question comes from Tom.

UBS. Please go ahead.

Yeah. Thanks, Helane I wanted to see if you could clarify a little bit your comment on U S. L. T. L. Operating ratio I think you said like 80 788, but I didn't know if that was the view on full year 2023, what would be thinking about you also kind of mentioned sub 90 for <unk>. So just wanted to see if you could revisit that and make sure I understand.

What the comment was yes, yes, very good so what I'm, saying is that I think that by D. N. Okay of twenty-three Q4, okay, hopefully, we get to an 87 or an 88 or a T force right.

Why is that because our volume should start to pick up again, okay number one and number two is we're shedding a lot of cars through the T. S. E. T. S. A day one was costing us on a yearly basis 72 million. Okay. So just to finance a portion was about a <unk>.

Seven or $8 million, but over and above that cost is we were stuck with trying to build a team that's going to replace what you P. S is doing right. So it's all of these costs are slowly you know are getting rid of and and now that's why I believe that our you know if everything that were doing works.

According to our plan is that we should end up this year on an 87 nine for the year, but for the fourth quarter.

Of 87.

And so should we think about C. Like seasonality would suggest you know normally pork. He is not as good as two Q3, Q, but you know it sounds like you have things that might you know kind of overcome the seasonality should we think about kind of sequential improvement to Q3, Q4, Q worried or is that the wrong way to look at it.

Well I think that the best way to look at them is that right now we're at 90 or in Q4, and we should be in 87 or in 'twenty three.

In Oregon, we have 20 basis point 300 basis point improvement year over year in Q4.

In Q4, Okay yeah.

Okay. That's great. Thank you for that Oh, gosh going back to the topic of acquisitions. You know you you've got a lot of visibility and conviction on small carrier.

Courier acquisition, and 300 million Tuck ins you mentioned and you said you know you want to kind of buy when things are bad I think it's bad for big Big targets as well like do you think you are you optimistic about you know a larger acquisition potential or is that tougher to say.

You know what the problem with something Big is it takes a long long time and see you do something small, let's say 100, 200 and $300 million revenue you you could do that fast and let's see within three months. It's done when you. When you look at something of size, let's say over $1 billion in revenue $2 billion revenue I mean this.

Takes a lot of time, a lot of convincing a lot of discussion and like I said the first answered from the target My experience has always no no no. We don't do that why would you do that I mean, so you know it takes time it takes a lot of discussion. So this is why.

I've said on average we do something of size every three used three four years right. So last time, we did something of size was a year and a half ago with U P. S.

Yeah, so yeah.

Maybe we could get something done in late 'twenty, three but I think it's going to be more like in 'twenty four.

So are these going to get better in 'twenty, four probably right. So you're buying bad news you sound. Good news. So this is not going to apply in 'twenty four but that takes so long to do something of size my experience.

Yeah, Okay, yeah, great. That's very helpful. Thank you Elaine.

Sure Tom.

The next question comes from Kevin Chiang from CIBC. Please.

Please go ahead.

Good evening.

Thanks for taking my question.

My pleasure again, if I could.

If I could just go back to Evan talked about maybe a U S. L. T O a segment, maybe just reacting slow with it.

What you what you've typically seen in Canada.

You talked about some of the system transition.

The one thing you just completed a week ago is that it.

Enough for them to tighten up that feedback loop or what do you need to get to that H R.

Our rollover before you start.

All.

No I think that now okay with the financial tools that we have in place and your education and the training and the tools and all of that I mean, we're well positioned now to start doing what we're supposed to do is manage costs at the terminal level right.

Right. So in Canada every terminal that we manage us as a P&L. So we know what's going on we don't have that T force right today right.

Right. So the manager is not responsible for all the costs.

He doesn't know he's got no financial information. So so now we are running on tsi. Its financial now we are in a position to slowly implement that at the terminal level. So that our guys could start managing the business the way it should be managed.

Add the terminal.

Managing the Cos and understanding what's going on and understanding that your labor costs per ship and your target is let's say $40.

That's 50, but 40 right.

Right now, we're starting to implement those kinds of targets.

I guess in dollar right. So we manage dollar us we don't manage stopped per hours or pounds on the dock or things like that we educate our guys to manage dollars because that's what we bring to the bank.

Right.

So that makes it makes a ton of sense and it sounds like Oh.

There'll be harvesting those benefits in the near future here Oh, yeah.

Maybe just on the longer term U S O Tel O arm target, Oh lets say, 80% to 85% in the next couple of years here.

Mhm does that require you to get that.

30000 shipments a day.

I understand the need to kind of find that think that fits but.

He stepped back too.

Well the absolute volume numbers that you inherited when we acquired this business to hit the margin targets or about 25000 shipments a day you can hit that.

You can hit the market you need to hit.

Yeah, Yeah, no no the or I mean, we have a lot of fixed cost okay. Kevin I agree with you and what we're gonna start shedding those fixed costs to bring this company lean and mean that will take time I mean, it's not going to happen now we we could get to an 80 885 war within two years at 25.

And shipments why because we're working at the same time on fixed costs. So we are leasing doors leasing yard selling real estate selling trucks.

I'll give you an example, I mean are there.

Fleet that Oh, we have right now I remember the first day that they were talking about planning for 'twenty three that we're talking about for U 200 trucks now we're running at about 35 3600 trucks.

Right, So where we're doing more with less slowly and like I was explaining that day that we started moving the management of cost at the terminal level I mean.

We will see a major major improvement in terms of of course, because that's the role of this badger He's got to manage this people who's going to manage this cost.

You know he's gotta manages equipment.

Is one of the first thing that we've done in 'twenty. Two is all the real estate has been leased right now to the operating company and in 'twenty three all the truck and trailers in 'twenty three are being leased to the operating company now so so the manager and now she's a rent costs.

As real estate do you see a rent costs or you will see a rent costs for his fleet equipment and and we know by experience that this is really a major high over there for a manager. That's qualified now if you have a manager that's not good well he's not going to be able to do their job and we'll just have to replace this guy.

Overtime right.

Right no. That's that's great color. Thanks for taking my questions and best of luck and playing for here.

You.

The next question comes from.

Credit Suisse. Please go ahead.

Great. Good afternoon, So I wanted to ask you about.

Hey, How're you doing.

I wanted to ask you about the $800 million free cash flow target, yes, how do you think about the resiliency of that figure. So you know, it's obviously a pretty material step up from from a couple of years ago I think in a softer environment is certainly a good a very good result, I think we would characterize it as and especially given some of the investments that you're talking about whether it's.

Kind of the working capital drag that you saw last year or some of these investments that you're making on the I T side do you think we should think about that $800 million of free cash flow figure as a floor for cash generation from the from the business going forward and kind of where do you get confidence in that number yeah, I think sorry, I think so.

Don't forget that in 'twenty, three we're still doing major investment not normal for T Force rate right. Because this fleet was abandoned for years and years and years and by the end of 'twenty three the average age of our fleet in the U S. L. T. O is gonna be normal so we're gonna be running like a four year old fleet versus the seven.

In a half year old fleet like when we bought the company. So so this takes that into account. Okay. So by the end of 'twenty three we should be probably more into a normal kind of environment. So if you remember what I've said in the taxes, we're gonna do net capex of between 250 to 200.

75, or so so we feel about that this 800 is still very conservative based on what we know so far.

Got it so in a more normalized environment and how do how should we think about what that number could look like if you get rid of some of these economic headwinds you get rid of some of this I keep spending you get rid of a kind of a fleet replacement or you know excess costs associated with kind of bringing down the the fleet age.

How should we think about kind of what that number looks like on a more normalized basis.

You know between <unk> between $801 billion should be the normal now no you gotta be careful about inflation on the cost of Capex. So so if if inflation kills me by about 10%. So on 300, that's 30 million, but this is you know I would say.

Debt between 800 to a $1 billion is the is the normal range of free cash flow for a tier five going forward.

Got it that's that's Super helpful. And then I wanted to ask Oh, obviously, especially in Canada I was a little bit of a challenging winter in terms of December and Q4 are you you mentioned some encouraging trends that you're seeing in January I was hoping you could both address kind of to what extent.

Weather impacted fourth quarter results and then also what is it that you're seeing in January that you said, you're kind of encouraged by yeah, Yeah, well, we had some issues also with the weather in January I mean, we have major storm in Toronto, a major storm in the U S too, but this is winter I mean, it happens every year now.

One of the good thing, though is that it's been a warm winter. So far right. If you look at January and December to a certain degree December wasn't so bad but even January was very warm.

Warmer than normal right, so that helps us a little bit.

So I feel good when I look at our actual results for.

The month of January is that at all.

A lot of what we anticipated has being you'll dark and they know very soft is not happening so I would say that the.

So we're probably a little bit ahead of the plan so far so far so good. So it's normal we should be out of the plant because every year, we have to beat the plan right.

Yeah.

Got it no absolutely that's that's very helpful. Thanks for the thanks for the thought there.

Sure.

The next question comes from Cameron.

From National Bank financial Please go ahead.

Thanks, very much good afternoon.

Good afternoon, Kevin.

I just have really one question I was hoping maybe you could talk a little bit more about a I guess the outlook for the logistics segment, just just what youre seeing there and maybe specifically on the last mile operations, how how are things going there.

That smile Cameron in Canada are doing really really well I mean, our operation is second to none.

We are you know we went through a soft patch in 'twenty two because we've lost are the largest E. Tailers in North America, our friend at Amazon and I wouldn't say that but so we have to recoup all that volume with with other customers. So we are starting to see some organic growth in the 'twenty three in a can.

Adrian operation on our U S operation our revenue is about flat okay.

So we've done that a little bit of an M&A on the medical side in the U S. In Q1 in January as a matter of fact.

So so that's gonna is with this M&A are we are now organically, including this M&A ahead of last year and we're going in the U S to a transition again, okay. That's been going on for years and years, where where you know replacing.

Average account by better account right. So we've not been growing the top line that much but we've been growing the bottom line every year year over year. So that will continue so we feel pretty good now the big hit that we had in our logistics in Q4 is really coming from a T F Ww.

<unk>, which is our logistics arm in the U S and that was because the L. T. L really dropped like a rock in a I would say our November and December with these guys and if you look at one of my peers that came out with their numbers I mean, it was like a very difficult quarters for them right. So.

If you look at another of my peers that came out the last week a dirt logistics also is a 2% bottom line operation. So I mean, those were coming out with a nine so there's not that many guys that can run a logistics operation where the ninth.

Or 91 the war.

Okay and have you seen any I guess trends on that business change and in Q1, so far.

No no. So Q1, I think that is going to be an uphill battle on the revenue side, okay, but we're holding firm on our profitability and I think that our overall.

If you look at 'twenty, three I think twenty-three will do better in 'twenty three than we did in 'twenty. Two overall in terms of our dollars of OE for that for the logistics.

Perfect well I appreciate the color thanks very much.

Sure Kevin.

The next question comes from Ben Rob how are you.

Please go ahead.

Hey, good good afternoon L. A.

But anyway.

Yeah, just in terms of M&A or strategic investment we know about the we are aware about you're fortunate to do a really increased density as part of your your U S. L. T O business, but would you Willie to increase significantly the size of your logistics business.

Ali.

Well, yeah, well it depends right. It depends so we bought T. F. W. W about two years ago because.

Because we saw that there was a lot of positive with this company because they have a lot of market intelligence on the market.

So that was a nice acquisition for us it really was a good fit so I'm not saying no.

The two something of size.

But we're always very careful about what we do in the logistics sector. Because you know we don't want to be stuck with some other guys like on the tech sector, where you buy something that doesn't make any money and you pay a fortune for it.

Okay and in the L. T L. A business there's always a question mark around the unionized workforce with the pension stuff I have you.

<unk> seen a big change was on the structural side from a pension deficit standpoint, where may be some interesting takeover targets are may be more attractive, but have you seen a big change with respect to the way our pension deficit the structure.

Well you know a few years ago are the federal government in the U S came in and supported the Union carriers that Andy a a specific two of my peers that are unionized or a part of that we are not part of that I mean us well, we got from UBS in terms of pension is really we have a stand.

[noise] alone pension plan for our employees. So we're not part of that group of of company that had some issues with the deficit on the pension plan now I mean every situation's gotta be looked at Oh, we like to do a deal friendly we don't we're not big fan of doing a you know.

The style.

Transaction. So every time, we do a deal is as always I've never done that deal our style anyway, because I mean, so these kinds of discussion like I was saying with a target of size is really takes a lot of time a lot of discussion a lot of convincing because.

A lot of people like to buy.

Not that many people like to sell because when you sell you know you lose rather you you lose a some profit and then you have to find something else to do so us like for example, we sold Shanghai to Heartland, Oh, great transaction for the buyer, but now US Okay fine we got cash in the bank, but we got to find something what are we going to do with it.

Capital down well the idea is to do better than the C. F I asset when we used to own it but we have to find it. So we're doing a lot of these small tuck ins right now, but the big whale. Okay is is is you know it's.

It's insight, we're trying but we didn't catch it yet.

Okay. Thank you very much for the time on it.

Pleasure Benoit.

The next question comes from Tim James from TD Securities.

Please go ahead.

Yeah. Thank you thanks for taking my question.

Hum.

I turned to P&C for a minute you've talked about having to face a not for profit competitor there and the challenges that that brings and yet that business. I mean, you know you you've done great things with that business I realize growth, maybe it's been challenging but the returns have actually been very good.

You know stepping up we're putting your foot on the gas for growth what does that look like then given this environment and I guess given that that competitor sort of how should that look and whats the.

The execution required there.

Yeah [laughter], that's a very good question you know when I'm talking to Bob and the team. There I mean, our focus is to you know where we're having our teams focus on try to get more business from existing customer because some customers. The split the business business between lets say us and one of my peers right.

So it could be 50 50, it could be let's see us we have 70 and some of our piece of 30, but sometimes we have 20%. Then my appears to have 80%. So can you guys sit down.

With this customer and try to get you know the 'twenty up to 50 right. So that's what we're trying to do not necessarily try to get new customers into door. Yeah. If we could find a good one so be it but what the focus has always been guys in order to create more density you need more freight per stop right there.

That's always been tier fives go get more freight per stop.

I don't travel miles just for the pleasure of running a truck. So this is the the.

The mission that we have with with our team there in Canada is that guys were running a fantastic operation I mean, 'twenty 2021 'twenty percent OE who's doing that.

Wow. This is great well, we just have to do more right. So that's that's girl with our existing customers. The ones that are giving us only 20% of their business because we get 40 can we get 50, that's that's going to be really the goal for US now for sure. We have some capacity issue like for example, we're building.

A new hub in Edmonton I mean, this is going to start this summer so so edmonton for us Matt.

Even if we want to grow Edmonton is going to be difficult, but we opened up Calgary new hub in Calgary two years ago. We just opened up our Winnipeg last fall so that helps US you know.

Creating or getting rid of a bottleneck, okay or the old terminals with old technology, K, where you bring more volume in but you don't have good cause but now with new terminal New technology, New conveyors, you can bring more volume in so this is what the goal is to.

Keep polishing that diamond and tried to get the diamond at little bit bigger.

Okay. That's that's helpful. My follow up question I'm looking at the intermodal business and you touched on on some of the challenges there related to to appear.

I think longer term on intermodal.

<unk> is the potential for a migration of some of the over the road.

Volume back towards intermodal is it is that a challenge for T. F. I you know as you look out over the next couple of years or or could that be an opportunity for you.

It's really a challenge because what we put on the rail is it's always a relationship between cost and service.

So I mean, you can't really are when you have a customer that wants really a AAA kind of service you can't take the risk of the rail because rail service is.

Is it seems okay, but even more so in the winter, there's always a avalanche or things like that or it's so cold that they have to reduce the speed you have to reduce the length of the of the convoy et cetera et cetera. So so what we're doing us is really to try to keep what's over the road okay.

Are they profitable because we we made way more money with our freight over the road and then versus our the rail stuff the intermodal stuff and then when a customer wants savvy a better deal wants to save money. Okay. Not so picky about service then okay well, we'll fight then we'll bring this.

Guy to our rail operation our intermodal operation.

That is really the play okay that we have on the Canadian side. So it's really a two split kind of in the operation. So you've got TST overland that runs road you got the T Force rate, Canada that runs role, but then you've got via trend in Florida that runs rail.

Okay. Thank you very much for the time that's great.

Pleasure.

This concludes the question and answer session.

I would like to turn the conference over to Mr. <unk> for any closing remarks.

Well, thank you very much operator, and a favorite much appreciate everyone. Joining the call today I Hope you have a wonderful evening and please don't hesitate to reach out if you have additional questions and we appreciate your interest in Tia flying International So thank you again and have a great evening.

Bye.

Okay.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

Hum.

[music].

Yeah.

Okay.

Okay.

[music].

Yeah.

Yeah.

Yeah.

Yeah.

Yeah.

Yeah.

Yeah.

[music].

Yeah.

Uh huh.

[music].

Okay.

Okay.

[music].

Okay.

[music].

Okay.

Yeah.

Okay.

Yeah.

Yeah.

[music].

Yeah.

Yeah.

Yeah.

Yeah.