TFI’s Bedard: Buying UPS’ LTL operations was not a mistake

But the fact that the question even came up, as the fourth anniversary of the acquisition looms in just a few months, highlights the fact that TFI’s LTL operations, mostly made up of the legacy UPS Freight business, remain a significant laggard in the trucking conglomerate’s overall performance.

For example, the operating ratio at TFI’s U.S. LTL operations in the third quarter, which ended Sept. 30, was 92.2%. That is a deterioration of 140 basis points from the 90.8% recorded in the third quarter of 2023.

In Canada, TFI’s LTL operations posted an improved OR of 76.3%, compared to 77.2% a year ago.

While none of TFI’s U.S. peers in the LTL segment have yet posted third-quarter earnings, the numbers at TFI (NASDAQ: TFII) are worse than second-quarter ORs that ranged from 89.8% for ArcBest (NASDAQ: ARCB) to 69.5% for Old Dominion Freight Line (NASDAQ: ODFL).

Bedard’s conference calls with analysts are like no others in the trucking industry. He does them solo; not even his CFO is on the call, which is almost guaranteed on every similar forum. Bedard talks for a few minutes, reviewing numbers that were almost all released the day before in the company’s earnings report. The call went on for 90 minutes; 60 is standard, and on those calls the company side is generally represented by several people, not just one. 

And most of all, Bedard doesn’t hold anything back.

It’s taking longer than expected

“The only mistake we made is that we probably underestimated the time it will take to turn this thing around,” he said of the UPS Freight acquisition. 

Among the changes that still need to be implemented: “improving the management skill of our guys by training, by providing them with financial information to continue to improve our cost basis by following metrics of service.”

For the nine months, the OR in U.S. LTL was 91.8%. Asked by an analyst if he thought TFI could get to a sub-90 OR by the end of the year, Bedard said no, though he conceded the company had thought at one point that such a goal could be reached.

Bedard then went through a few specifics of the reason TForce, the name of the LTL carrier that holds the assets of the former UPS Freight, has struggled.

In possibly the starkest moment during the call, Bedard spoke of a “chicken and egg” dilemma with growing the company’s LTL business.

The combined Canadian and U.S. LTL operations, based on shipments data in the TFI earnings, handle about 22,900 shipments per day. “If we would get from 22,000 to 25,000 shipments a day, that would help our cost basis,” Bedard said. But the TForce business is “too fixed, not variable enough. This is why we have to work with our team, our terminal managers, to really adjust on a daily basis our costs versus the volume we have.”

Which came first?

He then shifted to his chicken/egg analogy. “If you talk to our sales guys, they say, ‘Well, you know it’s tough for us to get more business because the service is maybe not up to par to some of our peers,’” Bedard said. “So when we talk to our operations, we say, ‘Guys, you gotta fix the service.’”

Fixing the service comes with a cost, Bedard noted. But he was adamant: “No. You have to improve the service and reduce the cost at the same time. So this is quite a challenge and this is where the talent of our management comes into play.”

Bedard criticized the level of “churn” in the customer base at TFI. “If you get 3,000 shipments more a day, but you lose 3,000 because of the churn, well, you’re back to zero,” he said.

He praised the management of TFI’s Canadian LTL operations. “This is a team that has been educated, trained, focused for years and years,” Bedard said. “If you look at the results, OK, in Canada, we’re doing very, very well.”

TFI reported that its average third-quarter weight per shipment in its U.S. LTL operations was 1,222 pounds, up from 1,153 a year earlier. Canada’s average weight per shipment was 1,997 pounds, down from 2,141 pounds a year earlier. 

“The only good thing we’ve done with the sales team so far is we moved the average weight per shipment to 1,200 so we have a little bit more dollars per shipment,” Bedard said. But a weight per shipment of 1,200 pounds is “not optimal,” he added. “By adding more freight per stop at the same time, you split the cost of that stuff over two shipments or three shipments, instead of one or two shipments.”

Fixing the billing system

Bedard repeated statements from TFI’s second-quarter conference call that the company was implementing a new billing system that it believes should have a significant impact on efficiency, particularly in giving managers at the terminal level greater information about their customers. 

“It’s unimaginable that in 2024 we still have issues billing customers, but it’s a fact,” he said. “So we’re changing that.”

He called the current billing system at TForce “another excuse for not growing the business.”

Efficiency also should be improved by several other steps, such as a narrowing of its maintenance shops to about 15 from what is near 100 now, Bedard said. That large number “was completely out of control,” he added.

Capex also has reduced the average age of the vehicles in the TFI fleet, Bedard said.

Looking forward, he said he had not seen the operating plans of the U.S. LTL team for 2025, “but I would be really disappointed if we don’t break the 90 level in 2025.”

Because of TFI’s concerns about its service levels in the U.S. LTL operation, Bedard said it has shifted about 30% of its freight traffic to rail, which he described as “too much.” He said the goal is to shrink that to about 20%, which he said is roughly on par with its LTL peers.

Though Bedard summed up the company’s performance by saying, “Our third quarter wasn’t good, right?” Wall Street didn’t seem too concerned.

At approximately 2:15 pm EDT, TFI was up 0.88% to $135.90 on a day when overall markets had declined. TFI stock is up about 14.8% for the 12 months but is down about 12.6% in the past three months.

The company in releasing its earnings increased its quarterly dividend by 5 cents per share to 45 cents, an increase of 12.5%, payable on Dec. 31.

In a report released after the earnings report Monday evening but before the earnings call, Jason Seidl at TD Cowen noted that the 92.2% OR at U.S. LTL was 170 bps worse than the company’s forecast. 

But a decline in the company’s yield – revenue per hundredweight – of almost 6% and the 7.4% decline in shipments were the culprits in the shortfall, Seidl said.

Seidl expressed concern in his report that the issues in TFI International’s earnings were not just a unique situation at the company.

The shortfall in performance lends “credence to worry that a soft industrial economy is affecting LTL pricing, a negative for the LTL group,” Seidl said. TD Cowen already had become “cautious” on the LTL sector.

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