Judging by its third-quarter results, Canadian transport and logistics company TFI International Inc. is doing fine. But the one segment that’s very much a work in progress, TFI’s U.S. less-than-truckload business, T-Force Freight, dominated much of the discussion during Friday morning’s analyst call.
The Montreal-based company (NYSE/TSX: TFII) late Thursday reported $2.01 in adjusted diluted earnings per share, a 38% year-on-year increase and about three cents above consensus. Operating income, which included a $75.7 million gain from its $525 million sale in August of its U.S. dry van and temperature-controlled fleet and its Mexican logistics operation to Heartland Express (NASDAQ: HTLD), rose to $318.4 million from $191.6 million. Revenue before fuel surcharges increased 7% to a bit more than $2.24 billion.
Net cash from operations rose to $337.8 million from $211.2 million. TFI’s strong cash flow led its board to approve a 30% increase in the company dividend to 35 cents per common share.
The LTL division, TFI’s largest of its four units at about 45% of total revenue, reported a $43.6 million drop in revenue to $817.2 million. Operating income rose $4.4 million to $100.9 million. The revenue decline was due to lower volumes in the U.S. operation that pressured the unit’s top line, as well as an ongoing process to cull unprofitable or marginally profitable freight from the U.S. network.
The difference between TFI’s U.S. and Canadian LTL operations was like night and day in the quarter. Its Canadian business posted a 72.8% operating ratio, meaning that it spent 72.8 cents for every $1 in revenue. T-Force Freight, by contrast, posted a 90% operating ratio, a reflection of TFI’s struggles to get control of the business it acquired from UPS Inc. (NYSE: UPS) in early 2021 for $800 million.
“We haven’t controlled our costs” at T-Force Freight, said Alain Bédard, TFI’s chairman, president and CEO.
Bédard was blunt in his assessment of the U.S. business, saying it was burdened with a legacy IT system that came with the acquisition. The system, which is different from what other TFI segments use, provides poor visibility into virtually everything the unit tries to do, and the results have been higher costs and mediocre customer service, he said.
The unit is expected to migrate to TFI’s IT system at the beginning of 2023.
TFI’s goal is to reduce the U.S. unit’s operating ratio to between 80% and 85% over the next two years. Such a range would be normal, but not exceptional, relative to top-tier U.S. LTL carriers, Bédard said.
At this point, the unit is not anywhere near parity with elite U.S. LTL carriers in terms of service quality and customer responsiveness, Bédard said. He also said that T-Force Freight is not yet in lockstep with the TFI culture.
Perhaps due to users’ perceptions of service issues, T-Force Freight’s rates are priced well below the offerings of other carriers, Bédard said. He added that an obstacle to elevating T-Force’s rates is the current macro environment, which has slowed and will likely do so into 2023.
Fixing the rate disparity is “easier” to accomplish when conditions are better than they are today, he said.
When TFI acquired the old UPS unit, which at the time was known as UPS Freight, it discovered that about 25% to 30% of its volume “didn’t make sense for us,” according to Bédard, who said over the long run, TFI will continue to shed ill-fitting freight. For now, however, it is taking a pause in that process.
T-Force Freight needs to work on boosting its average weight shipment, which is at about 1,075 pounds compared with rivals at 1,300 to 1,500 pounds, Bédard said. It also must improve volume density and reduce the distance a shipments travel between terminals and the origin and destination points.
“We can’t chase freight that’s 100 miles from a terminal,” he said.
TFI’s U.S. business has also been saddled with an aging truck fleet that was another legacy of the acquisition, Bédard said. TFI plans to significantly modernize the T-Force Freight truck fleet next year. However, TFI can’t control the speed in which new equipment enters the fleet. “All we can do is place the order.”
TFI, which has long made an annual practice of tuck-in acquisitions, will continue on the M&A hunt in 2023 and may look for something larger to swallow, Bédard said. The company has ample cash and manageable debt and will not be deterred by higher interest rates or a slowing macro environment if it finds an attractive target.
TFI can capitalize on the tough financial climate, Bédard said, because selling prices will become more reasonable and it will face fewer competitors for the asset that it wants. “There will be less buyers showing up with stupid pricing.”
Shortly after mid-afternoon Friday, TFII shares were trading 5.84% lower.
Eric Brown
I just retired from T Force Freight with 30 years of service, starting with Overnite Transportation, to UPS Freight and ending with TFI. What I have noticed that still exists at T Force is the top heavy UPS mentality. If TFI wants to turn T Force into a profitable company, the former UPS management team has got to be shown the door. I’ve never seen a more poorly run company.
Eric Abbott
Making pickups should be a number one goal. This company still generates the UPS mentality that only allows certain amount of drivers on the street. What the system doesn’t consider is the amount of miles, traffic, rush hours, customer wait time at freight doors…etc. we don’t have enough drivers due to layoffs to make these pickups or give customers the satisfaction they need from a competitive LTL company. Why don’t we hold our management to tonnage instead of operating numbers. Light a fire under them to get more good freight into the system instead of “adjusting” to the failing system. It’s just going to get slowly worse until we’re down to one driver and a TM at each terminal.
Rudy Herrer
This is the beginning of the end, if y’all don’t start getting rid of the ups management! NOW! Listen to your truck drivers……
Easton
There is an XPO terminal in that 100 mile chase the freight scene that we ignore that has 200 doors and can’t keep up, I see thousands of tons a week were missing but hey I’m only a driver
JT
Michael Stout you’re absolutely correct. I’ve worked for several LTL companies in this city, and I’ve never seen an outfit like this one where equipment is the bare minimum, no extra anything! We’re a trucking company, without enough trucks, pickups are being missed daily, and hidden, but hell if it weren’t for the good drivers the real face of the company, we wouldnt be able to smoothie over customers. Reviews in my city are horrible,hatred, flat out more negative then positive. Other companies are running 300+ bills daily, and We’re still in the law 100s. RDO’s are full of it, saying drivers are gonna see less delivery stops to maintain both pickups and deliveries. Haven’t seen it yet… what makes a successful operation? Well it start from the top and on down… if you’re in customer service well you have to bike your lip when your getting yeld at by a pissed off customer, speaking with professionalism goes along way. Cause drivers hear it all from their customers. Being on the same page upper management,,… communication…management….
We’re somehow divided in this company. There is a huge lack of communication throughout the entire system. Everything starts from the top,,, a triangle…our beliefs, culture… There isn’t culture here like other places.. This needs to be fixed ASAP…
Suzanne smith
I am sure you will never see this.. this company is going fast… I was a outbound supervisor was let go about 3 weeks ago in this lay off which I am so upset over… I enjoyed my job and I also did clerical work for months and then 2 weeks before I was laid off the clerical kept her job- so unfair to me when I have the time in… Again I enjoyed my job so much
Otis Sanders
Customers see little changes, however what the are still seeing is the UPS Mentality. The ones at the top still want to run a freight company the way small pack was. To many upper management getting bonuses for a numbers game.
Michael Stout
The biggest problem we have is the numerous missed pick ups we have every day . Upper management won’t let us have enough drivers on the street. It’s the same old UPS mentality, all they care about is numbers and their BONUSES! Very piss poor management, and the costumers are the ones getting the short end of the stick! Missed pick ups are being hid somewhere in the system , so corporate can’t see them. I’ve been here 16 years and I have never seen it this bad !