Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's 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 1 question and a follow-up. Again, that's 1 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 6th, 2023.
I will now turn the call over to Alain Bédard, Chairman, President, and Chief Executive Officer of TFI International. Please go ahead, sir.
Well, thank you, operator, for the introduction. 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 TFI 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. 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 fully reflecting higher working capital on the order of $147 million associated with higher fuel cost. We view our robust free cash flow as especially important during times of uncertainty, affording us the flexibility to capitalize on market turbulence through strategic investment. Our adjusted net income expanded to $152 million, up from $149 million, while our adjusted diluted EPS climbed a full 10% to $1.72, despite a foreign exchange headwind of $0.09.
Perhaps more important, the $188 million in free cash flow that were produced was up sharply from $121 the prior year, further enhancing our flexibility to strategically deploy capital into acquisition and return the excess to shareholders when possible, which is, as I mentioned, are two of the overreaching principle. Let's now review the performance of our four businesses segment, all of which generated strong return on invested capital and three of which were able to grow operating income and expand margins despite economic conditions. Beginning with PNC, 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 volume 6%.
Our operating income of $38 million was up slightly over the prior year. Similarly, our return on invested capital was 32.5%. Next is our LTL, which is 44% of segment revenue before fuel surcharge. $721 million of revenue before fuel surcharge was down 12% and volume down 19%. Operating income was $88 million, down 15%. With the margin off by only 40 basis points despite the deleveraging caused by lower revenue. Digging deeper on the LTL, 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 points improvement over the prior year, reflecting what we believe is the best in class performance.
In addition, return on invested capital for Canadian LTL was 24%. Turning to the U.S. LTL, revenue before fuel surcharge was off 12% despite meaningful volume headwinds. As we continue to refine this business following the acquisition of TForce Freight, our adjusted operating ratio was 90.4 relative to 89.4 a year earlier, which is an okay result given seasonality, weaker volumes, and the overhead costs related to our transition services agreement. I'm pleased to report that as of last week, the finest module of the transition agreement is behind us with the financial system migration completed successfully as of last week. The stability and margin in the face of volume pressure across the industry reflects our pricing focus and the real progress we're making on the cost side, where we see some opportunity ahead.
Return on invested capital for U.S. LTL was 23.8%. Let's move on to Truckload, which is 25% of our segment revenue before fuel surcharge. Reflecting our sales of the CFI business I mentioned earlier, our core revenue before fuel surcharge was $403 million as compared to $506 million a year earlier. Most impressively, despite the sale of our truckload operating income managed to grow 16% to $72 million. We now view our truckload segment as more resilient during volatile market conditions following the sale of CFI assets last year, which ended our exposure to the U.S. dry van market. Within truckload, our specialized operation held revenue before fuel surcharge, nearly flat at $325 million, benefiting from our diversity and exposure to high-end barrier market and favorable niche, including the industrial end market.
More important to us, our adjusted operating ratio managed to improve to an 87.4, while our specialized truckload return on invested capital came in at 13.4. Specialized truckload is an area where the self-help, excuse me, nature of our opportunity is readily apparent. As for our Canadian-based conventional truckload, we are able to capitalize on TFI diversity and the relative strength of the Canadian market, which add pockets of strength this quarter with growth of 7% in revenue before fuel surcharge to $79 million. We also remain focused 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. 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. Our operating income declined 4% to $34 million as we successfully contained Operating Expenses. That equate to an operating margin of 9.1%, up a healthy 100 basis points, and our return on invested capital was 21.9%. Turning to our balance sheet, TFI International ended the year with a funded debt to adjusted EBITDA ratio of just under 1, and our debt is almost entirely at fixed rate as a weighted average cost of less than 3.5%.
Our strong capital position benefited from the 56% increase in free cash flow that I mentioned at the outset of the call. Permits us to strategically invest in the business while also returning capital to our shareholders whenever possible, as I also mentioned. During the fourth quarter, we strategically allocated capital towards three tuck-ins acquisition and have completed 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 approve a $0.35 quarterly dividend. That's an increase of 30% over the previous quarterly dividend, reflecting the ongoing success of our business and our continued favorable prospect for generating cash. Also, during the quarter, we repurchased approximately 900,000 shares for about $83 million.
I'll conclude with our outlook for the, for the new year. We currently expect $7.50-$7.60 of earnings per share in 2023. We also anticipate free cash flow of more than $800 million, which is based on net CapEx of between $250 million-$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. Callers will be limited to one question and a follow-up in order to get to as many callers as possible. Again, that's star then one to ask a question. Please stand by while we complete the Q&A roster. The first question comes from Scott Group from Wolfe Research. Please go ahead.
Hey, thanks. Good afternoon.
Good afternoon.
Alain, I just wanna follow up on the guidance. I think you said $750-$760, a pretty tight range. Maybe if you can just walk us through the different businesses and, you know, thoughts on revenue and margins for the businesses within the guidance, that'd be great.
Yeah. Yeah, that's a very good question. What we're seeing so far is that, you know, on the LTL side, we see still some pressure, Q1, Q2 of 2023, softer volume, both on the U.S. and Canadian side. The Canadian side were mostly affected in our intermodal division because we're competing with one of our fierce competition there dealing, you know, using CP. Us, we're mostly CN, this guy is very aggressive. That's really the big pressure on volume for us on the Canadian LTL side. On the U.S. LTL, we believe that we're gonna go through a soft patch Q1, Q2.
Now, the benefit of that is that gives us a chance to, you know, being more focused on our costs, reducing our costs with the renewal of our fleet, reducing the number of miles, et cetera, et cetera. The LTL, okay, we believe that 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 UPS is slowly going away, replacing with our own cars. That should also be a tailwind for TForce Freight going forward, you know, into 2023. U.S.-Canadian LTL, about stable, right? PNC, you know, 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 B2C has dropped, okay, with e-commerce. I mean, we're having a tough time competing with the competition that's owned by the Canadian government there in Canada. Really our goal there is to keep some organic growth because like you said, we're down about 6% in volume. Now that being said, we're making some major investment in Edmonton during 2023 to be up and running into a new sorting facility. We just finished Winnipeg. We got a lot of good things on the go there to keep our costs down and do even a better job on the cost control. Truckload side, we believe that this is gonna be some major improvement.
The fact that now TA, our dedicated business, is now much better run that it's ever been run. I mean, I was just looking at our month of January and, you know, we're heading in the right direction. I believe that our truckload and even if you look at our Q4, you see some improvement, slight improvement year-over-year. There I continue to think that we're gonna do way better than last year. Logistics, I mean, the market fell out for us on the logistics side, but we protect our margins. Our margin is about 9%. When you do all this sum up, okay, like always, Scott, we're very conservative. We could have said, "You know, guys, maybe we'll beat $8," but we're not gonna say that.
I mean, we have only one month down, right? This is why we're coming out with something that I think is conservative and reasonable. You know, if things get better after Q1, for sure we'll update you guys on the guidance.
Okay. Then just off that, guys, can you just clarify, is there anything in there for buybacks or M&A in the guide-?
No.
How you're thinking about the M&A environment right now?
No, no. There's nothing there in terms of M&A or buyback. We believe that we will close about $300 million of M&A deals between now and the end of June, okay? Our guys have been very active, okay, in all sectors, I would say. You know, I've always said, you buy on bad news, you sell on good news. Right now for the last, I would say 8, 9 months, about trade, recession and all this, it's been bad news. You got a lot of guys that are tired, right? It creates an opportunity for us. Our leverage is less than 1, like I said, on the on the tax there. We're very well positioned.
for us, you know, nice tuck in, $300 million-$400 million U.S., for sure that's gonna get done in 2023, but this is not part of that guidance.
Okay, thank you. I'll pass it along.
The next question comes from Kenneth Hoexter from Bank of America. Please go ahead.
Great. Hey, Alain, and David, can we maybe just follow on that outlook a little bit more? It seemed like at U.S. LTL tonnage decelerated or declined at an accelerating pace. Maybe talk about your thoughts on the volume side and what to expect at LTL and throw in margin thoughts too.
Yes. Yes. You know what, Ken, I mean, when we bought this company, UPS Freight, a third of the volume didn't make any sense for us. It didn't fit at all. We got rid of a lot of that, but we're not done, right? If you look year-over-year, we're down about 19%-20% in volume. Some of that is market. You know, if you look at some of my peers, good peers, I mean, those guys are down 5%, 6%, 8%, right? Us, we're down 19%. The reason being is that we had a lot of freight that did not fit the operation. During the course of 2023, the plan is that, you know, we're gonna grow up organically, slowly, okay, by about 5%, you know, versus where we're at today.
Let's say today we're doing about 23,000-24,000 shipments a day in, you know, in 1st month of the year, January. The plan right now sits at about 25 by the end of the year, okay? I mean, it's not a very tall order for our sales department because don't forget, when we bought the company, we were at 32,000 shipments a day, right? Now we're down to 23, 22, 23, 24. We took a hell of a beating, but we had to. We had to get rid of that freight that didn't fit. We also lost some business because of the softness of the market, right? We believe that the 1st 6 months are gonna be, maybe soft, but things will start to get better in Q3 and in Q4.
It's not a big improvement in terms of volume, but it takes time. It takes time. We're really busy, you know, working on our costs. you know, we're getting all the trucks that we've ordered that were always late, late. I would say since the end of November, I mean, we're just getting flooded with all these new trucks that we have to, you know, get in the network, sell the old one, improve the MPG, save money on the maintenance and all that. This is gonna come, okay, towards 2023. In terms of volume, I mean, our sales team have a lot of work to do there.
To clarify, I don't know, did you throw in a cost estimate for that? For what? I don't know, whatever the last piece of the UPS to put that in perspective. My follow-up question was on truckload. It sounded like you might have mentioned, you know, freight heading in the right direction. Maybe just expand on that. If.
Yeah.
This is chewing up inventories and we're starting to see a turn.
Yeah.
maybe is there any sign of a floor?
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 UPS to us, right? As a matter of fact, I mean, we were paying $600,000 a month, okay, for the financial service of UPS, number one. Number two is we also had to pay for them to provide us the information to be able to transition. A huge expense. I would say that probably Q3 and into Q4, all these transition costs, you're talking maybe $15 million in there of additional costs to do all this transition. Now, we still have to do the transition of the AR. The AR. The HR, okay, which is April, May.
We still have to transition the fleet, okay, sometimes in the fall of 2023. Then we're just gonna be left with the IT late into 2023, early into 2024. All these costs. Because we have, like, double costs right now because we have to do it ourselves. They are still doing it for us and, you know. That's why we feel pretty good that even with, you know, the 25,000 shipments a day, I mean, we'll be able to position this company pretty well with cost reduction into the new year, 2023. In terms of the truckload, again, my comment is really because now we are exposed in the U.S. in the dedicated truckload, okay.
With all these sales that we've done with CFI and Sexton and all that, the dry van is gone, so now we're focused only on dedicated truckload, and we're doing really, really well. For sure, revenue has dropped, okay, but now we make money on every account. If you remember, when we bought UPS, the truckload division, we were losing, like, $4 million or $5 million a quarter with these guys. I'm talking about 18 months ago when we bought the company. Now that's not the case at all. I mean, this company, you know, if you look at what we know so far in 2023, it is gonna run better than the 90 OR. We're gonna beat the 90 OR in that U.S. truckload dedicated specialized business that we own now.
Great. Very helpful. Thanks, Alain.
Thank you.
The next question comes from Walter Spracklin from RBC Capital Markets. Please go ahead.
Thank you very much, operator. good evening, Alain. How are you doing?
Hey, pretty good. How about you, Walter?
Good, good. I just wanna turn back to acquisitions. I noted that you have broken investments out of other assets in your balance sheet, and you put a footnote there, indicating that you own about 4% of ArcBest, and that seems like more of a strategic rather than passive investment. Just wondering if you could share any of your, any color on what your intentions are with regards to that investment.
You know, we really like this company. When, when we talk about the investment that we've done is we believe that, now just to talk about it was the right thing to do for us to really disclose that, okay. In terms of, what do we want to do, we would like, you know, to have some discussions, some very positive discussion down the road, okay, with these guys, this management team, because we believe being a unionized carrier like they are, I mean, there's some things that we could, you know, work together and improve, okay, over time. I mean, it's just, Once in a while, we can invest in a public company, one of our peers.
They're not the only one where we're having some discussion, okay, in terms of what we could do to improve, our company and their company. We're 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 TForce Freight. That a lot of it is unused, so what kind of discussion can we have with these guys? You know, that is really the intention behind all of that.
Okay. A lot of follow-ups I could do on that one, but let's put that one on hold for now. Just on, in terms of your outlook now. You mentioned, too, with your guidance, I got the sense that. Really my question is what kind of economic scenario are you assuming when you give that guidance? I get the sense that you're assuming, you know, based on what you said in your divisional response, some weakness in the first half and perhaps some strength in the back half. Are you price or are you? Is there a recession in those numbers and that's what we should frame that context that disclosure around?
Yeah, just a little bit of color on the, on the outlook.
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? What we believe is that Q1 and Q2 is gonna be soft, you know, and then things will get better. This is based on the, what we're hearing from the economy, blah, blah, et cetera, et cetera. Who knows, right? This is why we're going ahead with a very conservative, okay, kind of forecast, right? If I look at my month of January, okay, I feel pretty good versus our forecast. I mean, one month is not a year, okay, but I think that we're on the right track. We're very well positioned.
I think we're gonna do better at TForce Freight 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 the transition. Now once that we do all these transition in 23, we should see a major reduction in our costs over there. We feel that it's reasonable, it's fair. It's a little bit less than what we've accomplished in 22. We did $8. We think that. Now CFI is gone. CFI was contributing about, I don't know, like $40 million of net earnings last year. Okay, they're gone. We have a lot of them in the Indigo.
All these guys slowly should, you know, replace the CFI investment that we had there and probably do better than when we used to own CFI in terms of return on invested capital and profitability. We're conservative, Walter. We've always been like that. You know, we'd like to underpromise and overdeliver, right?
Makes a lot of sense. Appreciate the time, Alain.
Pleasure, Walter.
The next question comes from Ravi Shanker from Morgan Stanley. Please go ahead.
Thanks. Good evening, Alain. Alain, can you just, I mean, you gave us a little bit of detail on the kind of where you're thinking of, ArcBest, but how can you confirm that if you had any discussions with them or had any engagement with the board or anything on them?
No. No, no engagement whatsoever. I mean, it's just. No. 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. 'Cause, you know, we have a lot of expenses that we could reduce if we would work together with them and, yeah, also with the other unionized carrier, right? Another of our peers. It's just, guys, can we make things better for both companies, right? That is really the nominal goal for what we're doing. That's the most I could say right now.
Got it. Understood. Maybe for my follow-up. You've said 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. At the same time, at the top of the Q&A, you kind of laid out a whole list of items to be concerned about or that can be headwinds. I'm just trying to get a sense of, you know, when you kind of put these two things together, kind of do you feel like you set yourself a comfortable bar here and kind of what are the moving parts like?
Do you feel like the macro really needs to come your way in the back half of the year to kind of stop this guide?
You know, we're Ravi, we're very early in the game. We have only one down. This is why what we look at right now is that competition, volume, I mean, it's not as good as it was in 22. This is why we're cautious, okay? We believe that things will get better, okay, during the course of the year, so far, I mean, we see in some market, some of our peers panicking, lowering rate. Like, if you look at our PNC, our average revenue per shipment is down because of competition, okay? If you look at our Canadian LTL, we have some pressure from some of our peers. This is why we're looking, I would say things will get better. Right now, I think that we have to be conservative.
That's the way we look at it.
Very good. Thank you.
Welcome.
The next question comes from Jordan Alliger from Goldman Sachs. Please go ahead.
Yeah, hi. Just wanted to get back to the LTL. A couple things on volumes, the down 19%. Is there a way to get a sense how much of that is macro versus the ongoing culling? I thought you were sort of winding down on that. Secondly, talk a little bit about the price strategy on LTL. Are you seeing the core price? Are you seeing some of those competitive pressures? I think the yields ex fuel were perhaps not quite as high as some of your peers. I'm just sort of curious what's going on with core LTL U.S. pricing. Thanks.
Yeah. In terms of pricing, I mean, for sure, some of my peers are, you know, ex fuel +5%, +6%, we're +4%, okay? We're not doing as well as the other guys. Don't forget, we're new to the game. We have a reputation that is not as good as maybe some of my peers, so our sales team have some difficulty sometimes to get more money from the customer. The service also is... When we took on the company, I mean, the service was maybe not triple A, so we're still working on improving our service. 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...
We would have to go from, let's say 32,000 shipments down to 20,000 shipments. I mean, we can't do that. I mean, 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, 6%, 7%, 8%. We're down more than that. Why? Because we got rid of a lot of that freight that did not fit our network at all, right? Now, that's why I'm saying if you look at our forecast, part of our discussion in terms of guidance. We believe that we're gonna get back on average, okay, in the latter part of the year towards a 25,000 shipments, maybe 26,000 shipments.
Right now we sit at 23,000 shipments, okay. For sure this is February. January, February, it's not the best quarter, but we're still very low, and we're still like 16% less than last year in February so far, right? We're still lapping freight that we were hauling last year that did not fit, that we got rid of. Plus a little bit of the softness in the market like all of our peers.
Great. Thanks for the color.
Pleasure.
The next question comes from Konark Gupta from Scotiabank. Please go ahead.
Thanks, operator. Good afternoon, Alain.
Yes, you.
Good afternoon. My first question is on the competition you referenced on your prepared remarks, with respect to a Canadian LTL carrier that supports, CP Rail and you guys are more on the CN side. I'm just trying to understand if they are supporting CP and you guys are into CN, what exactly is causing the competitive pressures from those guys?
It's very simple, Kunal. I mean, this peer, okay, has got a sweet deal with one railroad, which us we don't have, right? Now this guy is taking advantage of that to be more aggressive in the market. 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. It's just leveraging that kind of introduction they have. Okay. Now with respect to, you know, the trends in the U.S., you spoke about some of the volume trends in LTL, and some of the trends in the truckload. If you compare the Canadian and U.S. marketplace today, clearly the U.S. consumer spending has taken a hit and the rates are still going up. There's the Bank of Canada is talking about slowing down here in Canada.
Yeah.
Is there any major difference you are noticing in the freight trends or the volume trends, especially between Canada and U.S.?
That's. You know, if we look at our Canadian operation, the big difference is probably the Canadian economy, you know, could do whatever it wants. We don't control that, but one thing we control is our cost and we're very efficient, lean and mean, et cetera, and hands-on. In the U.S. we're not as sharp. I mean, we're new to the game on the U.S. LTL. You know, we're beefing up the team. You know, we're investing a lot in, you know, information tools and all that, but this is why we're not as good as, you know, some of my peers, okay? If there's a fluctuation in the market, sometimes, you know, in Canada we're very, very active, okay? In the U.S., we're still too slow in my mind.
If you look at my Q3 and my Q4, I'm disappointed a little bit in the sense that we were too slow to adjust ourselves, okay, in our U.S. LTL versus the drop in volume to adjust our labor force, et cetera, et cetera. The excuse is, well, you know what, Alain, the way we do it, is that we do it from top down versus in Canada our approach has always been from bottom up. It's the terminal managers that manage the labor force, not the guy at head office. It's a change in culture that we're doing over there. That helps you when the market is getting to a soft patch that, you can react way faster.
If I look at one of my peers in the U.S. LTL, the volume was down, let's say 8%, but EPS was up, you know, 9%. That's the kind of company that is really sharp and the guy hands-on and fast. If you look at what we're doing in Canada, let's say on the Canadian LTL, our revenue is down, okay, but our OR is also down, right? Because we're sharp, we're on the ball, et cetera, et cetera. This is, you know, when we look at what's going on on the market, the biggest important thing for us is to accelerate the decision-making in the U.S. based on changing conditions, right?
Okay. That makes sense, Alain. Thanks so much, and all the best for the share.
Thank you.
As a reminder, ladies and gentlemen, please limit yourselves to one question and a follow-up. Our next question comes from Brian Ossenbeck from JPMorgan. Please go ahead.
Hey. Good afternoon, Alain. Thanks for taking the question.
Pleasure.
Let's just go back to TForce Freight. You mentioned all the initiatives that you've laid out in terms of the system migration. Maybe you can talk about the workforce productivity 'cause it sounded like that was being put into place last quarter, maybe didn't come through this quarter as well as you might have hoped. When you get out, you know, 3 to 4 quarters from now, what do you think the run rate OR margin is gonna be as you have visibility to a lot of this 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 80 OR, right? We said it from day one. We believe that this company could get there. Listen, 23, the start is difficult. We're investing in equipment and in technology and all that, but it's also a big question about the style, the management style. Like I was just explaining that How fast can you start moving and make the decision? We're making a lot of changes with Paul and the team there to be fast, to adjust ourselves because like I said, we could have done, in my mind, a better job of controlling our cost, labor costs, I'm talking about in Q3 and in Q4. Okay?
That being said, we've implemented the, you know, new tools, new information so that the guys could start doing, you know, a job much faster. That will take time and that takes education. Can we do better than a 9 OR in, let's say in Q4 of 2023? I think so. I think that with all the cars that we're gonna be shedding, okay, will help us get closer to, maybe an 87 in 2023, maybe an 88. All the admin cars that we have to get rid of because we have way too many, costs right now because we're going through a transition agreement and all that.
We're paying on one side with the transition agreement, and we're paying on the other side because we have to hire people and train them that, you know, for them to be able to do the job once we run away from UPS. This is all going on into 2023. That's why, you know, we feel good that by the end of this year, the contribution of TForce Way is gonna be better than just a 10 point OR.
Okay. Thank you for all that. As a follow-up, I know you say you can't give too much information on ArcBest, we might do at this point, if 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. Any thoughts on your actions or potential there would be helpful.
Yeah. Well, Brian, I think I've said enough on that. I don't wanna say more. It's very early in this kind of process right now, right? I think that I've said, you know, even probably even more than I should have said on that. We believe that this is a good company, okay? If we work together, like we do with a lot of our peers, because we make some deals, Brian, with non-union carriers on the real estate side. Okay, we're having some discussion with non-union carrier on different aspects of business. Us, what we're trying to do is what we're doing in Canada. As an example, in Canada, we work with Mullen, one of my peers.
It's not, "Oh, no, no, you can't work with this guy, his company." No. This is something that we're trying to do on the U.S. side with this company and others. To the benefit of our employees, customer, and shareholder, if we can.
Okay. Thank you very much, Alain. Appreciate it.
Pleasure.
The next question comes from Jason Seidl from Cowen. Please go ahead.
Thank you, operator. Hey, Alain. Good afternoon.
Good afternoon, Jason.
Wanted to talk a little bit about what your customers are telling you about inventory levels and when do you think that they're gonna be sort of appropriately right-sized to start seeing some more growth going forward?
Still high. Still high. It's still high. I mean, you know, because of all of this mess in the supply chain, you know? What do you do? I mean, you need 2, you order 4 because you're afraid that you'll get only 1. I mean, whoops, stuff starts to come in. Everybody's busy, everybody's got too much. That takes time, okay? To go through all this supply that there's too many. You know, depending on who you talk to, it's the end of Q1, it could be the end of Q2, for sure it's gonna happen in 2023.
Okay. I want to talk a little bit about the peak and CC side. Could you break down what's going on between B2C and B2B and where you think the trends are gonna run as we move throughout 2023?
Yeah. During COVID, I mean, our B2C went as high as about 40% of our revenue. And we were growing big time, okay, at the time. I'm going back to 2021. 2021 was a big growth year for us. Then things started to slow down in 2022, early in the year, and now our B2C is really like, probably like more 15%-20%. That was replaced by B2B, okay? Where our profitability has always been a little bit better than B2C, because B2C is more difficult to get density, right? Because on average, 1 stop is 1 package. This is what we're going through right now, but, you know, we could do, I think, a better job in terms of organic growth.
This is why our focus over the last, I would say six months, six months of 2022 and into 2023, Bob and the team there's goal is really to start growing organically again. We're fighting competition there, and some of my peers are not about making money. That is a little bit the difficulty that Bob and his team have, is that we're competing with some of our peers that they don't really care if they make 5%, 10% or 20% because they're owned by the Canadian government.
Understood. Alain, appreciate the color and time as always.
Thank you. Thank you, Jason.
The next question comes from Thomas Wadewitz from UBS. Please go ahead.
Yeah, thanks Elaine. Wanted to see if you could clarify a little bit your comment on U.S. LTL operating ratio. I think you said like 87, 88. I didn't know if that was a view on full year 2023, what would you be thinking about? You also kind of mentioned sub-90 for 4Q. Just wanted to see if you could revisit that and make sure I understand what the comment was.
Yeah. Yes. Very good, Tom. What I'm saying is that I think that by the end of 2023 Q4, hopefully we get to an 87 or an 88 OR at TForce Freight. Why is that? Our volume should start to pick up again, number one. Number two is we're shedding a lot of costs through the TSA. TSA, day one was costing us, on a yearly basis, $72 million. Just the finance portion was about $7 million or $8 million. Over and above that cost is we're stuck with trying to build a team that's gonna replace what UPS is doing, right? It's all these costs are slowly, you know, getting rid of.
Now that's why I believe that, you know, if everything that we're doing works according to our plan, is that we should end up this year on an 87%. Not for the year, but for the fourth quarter. Of 87%.
Should we think about like seasonality would suggest, you know, normally 4Q is not as good as 2Q, 3Q? You know, it sounds like you have things that might, you know, kinda overcome the seasonality. Should we think about kinda sequential improvement, 2Q, 3Q, 4Q? Is that the wrong way to look at it?
Well, I think that the best way to look at it, Tom, is that right now we're a 90 OR in Q4, and we should be an 87 OR in 2023.
In 4 2023.
300 basis point. A 300 basis point improvement year-over-year in Q4.
In Q four. Okay.
Yeah.
Yeah, okay. That's great. Thank you for that. I guess going back to the topic of acquisitions, you know, you've got a lot of visibility and conviction on small, carrier acquisitions, the $300 million tuck-ins you mentioned. You said, you know, you wanna kinda buy when things are bad. Are things bad for big, big targets as well? Like, are you optimistic about, you know, larger acquisition potential, or is that tougher to say?
You know what, Tom, the problem with something big is it takes a long, long time. You see? You do something small, let's say $100 million, $200 million, $300 million revenue, you could do that fast. Let's say within 3 months it's done. 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. Like I said, the first answer from the target, my experience always, "No. No. No, we don't do that. Why would you do that?" I mean, you know, it takes time, it takes a lot of discussion. This is why I said, on average, we do something of size every 3 years, 3-4 years, right?
Last time we did something of size was a year and a half ago with UPS, you know. Maybe we could get something done in late 2023, but I think it's gonna be more like in 2024. Are things gonna get better in 2024? Probably, right? You buy on bad news, you sell on good news, this is not gonna apply in 2024, but that takes so long to do something of size. My experience.
Yeah. Okay. Yeah, great. That's, that's very helpful. Thank you, Alain.
Pleasure, Tom.
The next question comes from Kevin Chiang from CIBC. Please go ahead.
Good evening, Elaine. Thanks for taking my question.
A pleasure, Kevin.
If I could just go back to, I mean, talked about maybe your U.S. LTL segment, maybe it's wrapping slower than what you, what you typically see in Canada. You talked about some of the system transitions.
Mm-hmm.
The one that you just completed a week ago, like, is that enough for them to tighten up that feedback loop, or do you need to get to that HR rollover before you start, you know, driving?
No.
better productivity?
No, I think that now, okay, with the financial tools that we have in place and the education and the training and the tools and all 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? In Canada, every terminal that we manage, us, has a P&L. We know what's going on. We don't have that at TForce Freight today, right? The manager is not responsible for all the costs. He doesn't know. He's got no financial information. Now that we are running on TFI's 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: at the terminal.
Managing the costs and understanding what's going on and understanding that your labor cost per shipment, your target is, let's say $40. Not 50, but 40, right? Right now we're starting to implement those kinds of targets. Targets in dollar, right? We manage dollar us. We don't manage stop for 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. That makes a ton of sense, and it sounds like you'll be harvesting those benefits in the near future here.
Oh, yeah.
Maybe just on the longer term U.S. LTL OR target of, you know, let's say 80%-85% in the next couple of years here.
Mm-hmm.
Does that require you to get back to, you know, 30,000 shipments a day? I understand the need to kind of find a freight that fits, but do you need to get back to, you know, the absolute volume numbers that you inherited when you acquired this business to hit the margin targets? Or at 25,000 shipments a day, you can hit the margins you need to hit.
Yeah. Yeah. No, no, the OR... I mean, we have a lot of fixed costs. Okay, Kevin, I agree with you, we're gonna start shedding those fixed costs to bring this company lean and mean. That will take time. I mean, it's not gonna happen. Now, we could get to an 80, 85 OR within 2 years at 25,000 shipments. Why? Because we're working at the same time on fixed costs. We are leasing doors, leasing yards, selling real estate, selling trucks. I'll give you an example. I mean, the fleet that we have right now, remember the first day that they were talking about plans for 2023, they were talking about 4,200 trucks. Now we're running about 3,500-3,600 trucks, right? We're doing more with less slowly.
Like I was explaining, the day that we start moving the management of costs at the terminal level, I mean, we will see a major improvement in terms of cost because that's the role of this manager. He's gotta manage his people, he's gotta manage his costs. You know, he's gotta manage his equipment. One of the first thing that we've done in 22 is all the real estate has been leased right now to the operating company. In 23, all the truck and trailers in 23 are being leased to the operating company now. So the manager now sees a rent cost for his real estate. You see a rent cost, or he will see a rent cost for his fleet equipment.
We know by experience that this is really a major eye-opener for a manager that's qualified. Now, if you have a manager that's not good, well, he's not gonna be able to do the job, and we'll just have to replace this guy over time.
Right. Right. No, that's great color. That answers my questions and best of luck in 2023. Yeah.
Thank you.
The next question comes from Ariel Rosa from Credit Suisse. Please go ahead.
Great. Good afternoon, Alain. hey, how 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? you know, it's obviously a pretty material step up from 2 years ago. I think in a softer environment, it's certainly 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.
Yeah.
investments, that you're making on the IT side, do you think we should think about that $800 million free cash flow figure as a floor for cash generation from the business going forward, and kinda where do you get confidence in that number?
Yeah. I think so, Ari. I think so. Don't forget that in 2023, we're still doing major investment, not normal for TForce Freight, right? Because this fleet was abandoned for years and years and years. By the end of 2023, the average age of our fleet in the U.S. LTL is gonna be normal. We're gonna be running like a 4-year-old fleet versus a seven-and-a-half-year-old fleet like, when we bought the company. This takes that into account, okay? By the end of 2023, we should be probably more into a normal kind of environment. If you remember what I said, in the taxes, we're gonna do net CapEx of between $250 million-$275 million.
We feel about that this $800 is still very conservative based on, you know, what we know so far.
Got it. In a more normalized environment, Alain, 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 IT spending, you get some rid of, kind of the fleet replacement, or, you know, excess costs associated with, kind of bringing down the fleet age, how should we think about kind of what that number looks like on a more normalized basis?
You know, between $800 million and $1 billion should be the normal. Now, you gotta be careful about inflation on the cost of CapEx. If inflation kills me by about 10%, on $300 million, that's $30 million. This is... You know, I would say that between $800 million to $1 billion is the normal range of free cash flow for TFI going forward.
Got it. That's super helpful. Then I wanted to ask, obviously especially in Canada, it was a little bit of a challenging winter, in terms of December, in Q4.
Yes.
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. Well, we had some issues also with the weather in January. I mean, we had major storm in Toronto, major storm in the U.S. too. 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? That helps us a little bit. I feel good when I look at our actual results for, you know, the month of January is that, you know, a lot of what we anticipated as being, you know, dark and, you know, very soft is not happening.
I would say that, you know, we're probably a little bit ahead of the plan so far. Far, so good. It's normal. We should be ahead of the plan because every year we have to beat the plan, right?
Got it. No, absolutely. That's, that's very helpful. Thanks for the, thanks for the thought there, Alain.
Pleasure.
The next question comes from Cameron Doerksen from National Bank Financial. Please go ahead.
thanks very much. good afternoon.
Good afternoon, Cameron.
I just have really one question. I was hoping maybe you could talk a little bit more about, I guess, the outlook for the logistics segment, just what you're seeing there and maybe specifically on the last mile operations, how are things going there?
Last mile, Cameron, in Canada are doing really, really well. I mean, our operation is second to none. You know, we went through a soft patch in 22 because we've lost the largest retailer in North America, our friend at Amazon, I would say that. We had to recoup all that volume with other customers. We are starting to see some organic growth in 23 in our Canadian operation. On our U.S. operation, our revenue is about flat. Okay? We've done a little bit of an M&A on the medical side in the U.S. in Q1, in January, as a matter of fact. That's gonna with this M&A, we are now organically, including this M&A ahead of last year.
We're going in the U.S. to a transition again, okay, that's been going on for years and years, where we're, you know, replacing average account by better account, right? We've not been growing the top line that much, but we've been growing the bottom line every year-over-year. That will continue. We feel pretty good. Now, the big hit that we had in our logistics in Q4 is really coming from TFWW, which is our logistics arm in the U.S. That was because the LTL really dropped like a rock in, I would say, November and December with these guys. 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?
If you look at another of my peers that came out, I mean, last week, their logistics also is a 2% bottom line operation. I mean, us, we're coming out with a 9, there's not that many guys that can run a logistics operation with a 9 or a 9.1 OR.
Okay. Have you seen any, I guess, trends on that business change in Q1 so far?
No. No. Q1, I think that it's gonna be an uphill battle on the revenue side, okay? We're holding firm on our profitability, I think that overall, if you look at 2023, I think 2023 will do better in 2023 than we did in 2022 overall in terms of $ of OE for the logistics.
Perfect. I appreciate the color. Thanks very much.
Pleasure, Cameron.
The next question comes from Benoit Poirier from Desjardins. Please go ahead.
Hey. Good afternoon, Alain.
Hey, Benoit.
Yeah. Just in terms of M&A or strategic investment, we know about the, we are aware about the opportunity to really increase density as part of your U.S. LTL business.
Yes.
Would you be willing to increase significantly the size of your logistic business, Alain?
Well, it depends, right? It depends. We bought TFWW about two years ago because we saw that there was a lot of positive with this company because they have a lot of market intelligence on the market. That was a nice acquisition for us. It really was a good fit. I'm not saying no to something of size, but we're always very careful about what we do in the logistics sector because, you know, we don't wanna be stuck with some of the guys like on the tech sector, where you buy something, doesn't make any money and you pay a fortune for it.
Okay. In the LTL business, there's always a question mark around the unionized workforce with the pension stuff. Have you seen a big change on the structural side from a pension deficit standpoint, where maybe some interesting takeover targets are maybe more attractive? Have you seen a big change with respect to the way a pension deficit is structured?
Well, you know, a few years ago, the federal government in the U.S. came in and supported the union carriers that had a specific. Two of my peers that are unionized are part of that. We are not part of that. I mean, us, what we got from UPS in terms of pension is really we have a standalone pension plan for our employees, so we're not part of that group of company that has some issues with the deficit on the pension plan. I mean, every situation's gotta be looked at. Us, we like to do a deal friendly. We're not big fan of doing, you know, enough style kind of transaction. Every time we do a deal is always.
I've never done a deal hostile anyway, because, I mean. 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 revenue, you lose some profit, and then you have to find something else to do. Us, like for example, we sold CFI to Heartland. You know, great transaction for the buyer, but now us, okay, fine, we got cash in the bank, but we gotta find something. What are we gonna do with this capital now? Well, the idea is to do better than the CFI asset when we used to own it, but we have to find it.
We're doing a lot of these small tuck-ins right now, but the big whale, okay, is, you know, it's in sight. We're trying, but we didn't catch it yet.
Okay. Thank you very much for the time, Alain Bédard.
Pleasure, Benoit.
The next question comes from Tim James from TD Securities. Please go ahead.
Thank you. Thanks for taking my question, Alain. I wanna turn to PNC for a minute. You've talked about having to face a not-for-profit competitor there and the challenges that that brings. Yet that business, I mean, it, you know, you've done great things with that business. I realize growth maybe has been challenging, but the returns have actually been very good. What does, you know, stepping up or putting your foot on the gas for growth, what does that look like then, given this environment, I guess given that competitor? Sort of how should that look and what's the execution required there?
Yeah. 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, We're having our team focus on try to get more business from existing customer. Because some customers, they split the business between, let's say, us and one of my peers, right? It could be 50/50, it could be, let's say us, we have 70 and some of our peers have 30. Sometimes we have 20% and my peers have 80%. Can you guys sit down with this customer and try to get, you know, the 20 up to 50, right? That's what we're trying to do, not necessarily try to get new customers in the door. Yeah, if we could find a good one, so be it.
What the focus has always been, guys, in order to create more density, you need more freight per stop, right? That's always been TFI's goal, get more freight per stop, and don't travel miles just for the pleasure of running a truck. This is the mission that we have with our team there in Canada is that, guys, we're running a fantastic operation. I mean, 20 OE, 20% OE. Who's doing that? I mean, wow, this is great. We just have to do more, right? Let's grow with our existing customer. The ones that are giving us only 20% of their business, can we get 40? Can we get 50? That's gonna be really the goal for us. For sure, we have some capacity issue like, for example, we're building a new hub in Edmonton.
I mean, this is gonna start this summer. Edmonton for us, meh. Even if we wanna grow Edmonton, it's gonna be difficult, we opened up Calgary, new hub in Calgary two years ago. We just opened up Winnipeg last fall. That helps us, you know, creating or getting rid of a bottleneck, okay? Old terminals with old technology, okay, where you bring more volume in, but you don't have good costs. Now with new terminal, new technology, new conveyors, you can bring more volume in. This is what the goal is, to keep polishing that diamond and try to get the diamond a little bit bigger.
Okay. That's, that's helpful. My follow-up question, looking at the intermodal business, and you touched on some of the challenges there related to a peer. If I think longer term on intermodal, you know, is the potential for a migration of some of the over-the-road volume back towards intermodal, is that a challenge for TFI, you know, as you look at over the next couple of years, 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. I mean, you can't really. When you have a customer that wants really a triple A kinda service, you can't take the risk of the rail. 'Cause rail, you know, service 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, they have to reduce the length of the convoy, et cetera, et cetera. What we're doing, us, is really to try to keep what's over the road, okay, highly profitable because we make way more money with our freight over the road than versus the rail stuff, the intermodal stuff.
When a customer wants to have a better deal, wants to save money, okay, not so picky about service, then, okay, 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. It's really a two-split kind of an operation. You got TST Overland that runs road. You got TForce Freight Canada that runs road. You got Vitran and Clarke that runs rail.
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. Bédard for any closing remarks.
Well, thank you very much, operator, and I very 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. We appreciate your interest in TFI International. Thank you again, and have a great evening. Bye.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.