Good morning, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's first quarter 2021 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Callers will be limited to one question and one follow-up in order to keep to as many callers as possible. Further instructions for entering the queue will be provided at that time. Before we turn the call over to management, please be advised that this conference call will contain several statements that are forward-looking in nature and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Also, as a reminder, TFI changed its presentation currency at year-end, and all dollar amounts are in US dollars.
Lastly, I would like to remind everyone that this conference call is being recorded on Wednesday, April 28, 2021. I will now turn the conference over to Alain Bédard, Chairman, President, and Chief Executive Officer of TFI International. Please go ahead, sir.
Thank you very much for the introduction, operator. I'm pleased to welcome everyone to this morning's call. Yesterday, after the market closed, we released our first 2021 results. First quarter 2021 results. TFI International had an exceptionally strong quarter to begin the new year. A quarter that marked the one-year anniversary of our listing on the New York Stock Exchange. During the height of the pandemic, we made the right moves to preserve our long-term growth opportunities, and we are beginning to see the benefits. We maintain a relentless focus on the fundamentals of the business and on getting the details right. We look for opportunities to enhance efficiencies as we do in good times and bad. As always, we look to increase returns on invested capital, optimize our free cash flow, and grow our earnings per share.
This, in turn, place us in a position of strength with a strong financial profile that allows us to strategically expand our business with the ultimate goal of creating long-term shareholder value and returning excess capital to shareholders whenever possible. The identification of strategic accretive acquisition opportunities is another important part of our strategy. In a highly disciplined manner, we have continued to selectively seek acquisition candidates that are both accretive and strategic to extend TFI International's long and successful track record growth through M&A. As you know, in January, we announced an agreement to acquire UPS Freight in one of the most strategic transactions in our company's history. The acquisition immediately propels TFI International to become one of the five largest North American LTL carrier. It will strengthen our service offering, accelerate our strategic expansion across the U.S., and fortify our ongoing relationship with UPS.
This transaction is on track to close this quarter. Let's turn to our first quarter results. That includes strong year-over-year growth in both revenue and operating income, despite very solid results a year ago. Our total revenue for the quarter, for the first quarter of $1.1 billion was up a very robust 24% compared to the prior year's first quarter. Despite much of the prior year's quarter being before the pandemic. Just as important to us, given our focus on profitability and despite significant one-time item, I'll discuss our operating income grew 17% to $102 million, and our adjusted EPS on a diluted basis expanded 26% to $0.77. Our net cash from operating activities was $155 million, up 13% over the prior year.
As you know, we consider this strong cash flow to be strategically important, allowing us to invest in our business and seek out attractive expansion opportunities. Regarding those one-time items, the first relates to the mark to market of our cash-settled Deferred Share Units or DSUs, due to the rise in our share price during the first quarter. This had a $0.07 impact on our adjusted diluted EPS, which was further impacted by $0.01 per share of transaction expense related to the acquisition of UPS Freight. In total, that's $0.08 of combined one-time cost. Let's now take a more granular look at the operating results for each of our four segments, all of which contributed to our strong overall performance. Starting with our Package and Courier.
P&C represents 13% of total segment revenue and saw a 26% increase in revenue before fuel surcharge versus the prior year. Operating income of $18.3 million expanded an even greater 58% with an operating margin of 13.9% up 280 basis points. This strong growth was driven by improved yields on both B2C and B2B activity, which have continued to rebound this year. We're pleased with our more balanced mix of B2C and B2B following the pandemic and see additional growth opportunities ahead. Our LTL segment, also 13% of total segment revenue, generated revenue before fuel surcharge of $132 million, especially flat compared to the prior year quarter.
While demand is still feeling the effect of the pandemic, most important to us, our LTL operating margin expanded more than 700 basis points to 16.8% from the less than 10% a year earlier. Driving a nearly 70% increase in operating income to $22.1 million. This strong growth in operating income benefited from strategic consolidation in our over-the-road operation, as well as a $2.7 million contribution from the Canada Emergency Wage Subsidy. Next is our truckload segment, which represents 41% of total segment revenue. Revenue before fuel surcharge was up 7% year-over-year, while operating income was up 8% to $50 million, reflecting a slightly higher operating margin of 11.8%.
Our growth in this segment was driven mainly by business acquisition as well as strong spot pricing and tight capacity in the U.S. market, offset by severe winter weather. Within truckload, our U.S. operations saw a 1% decline in revenue before fuel surcharge, while our Canadian operation grew 6% and our specialized business grew 13%. We also had a $2.7 million overall benefit from the Canada Emergency Wage Subsidy. Rounding out our business segments, logistics represent 33% of total segment revenue. Our revenue before fuel surcharge jumped nearly 90%, driven by e-commerce strength in Canada as well as acquisition over the past year. Our operating income was up 52% to $29.1 million, reflecting a margin of 7.7%.
Turning to our balance sheet, it remains a significant source of strength for TFI International that allows us to execute our growth plan by making disciplined investment both in organic growth and attractive M&A opportunities. Our strong free cash flow of $143 million allows us to end the quarter with more than $1.3 billion of liquidity benefiting from January's private placement of $500 million in senior notes, which also substantially extend maturities to between eight and 15 years at fixed rate. I wish to provide our outlook for the year. Which include a range of $3.80-$4.00 of earnings per share and $475 million-$525 million of free cash flow.
In addition, despite the anticipated closing of the UPS Freight acquisition, we expect our leverage to remain below two times next quarter and for the rest of 2021. Please note that this leverage calculation refers to the funded debt to EBITDA ratio as calculated in accordance with our debt covenants and as set forth in our quarterly MD&A. In summary, the past 12 months have been like no others. At TFI International, we stuck to our game plan throughout. We focused on the fundamentals of the business to maximize profitability and cash flow, and we carefully considered capital allocation to further enhance value. The economic outlook remains fluid, but you can rest assured that we will stick to our approach no matter what the future holds. Today, we're in the best position in our company's history, and the pending acquisition of UPS Freight will make us even stronger.
Together, we look to create additional shareholder value by constantly driving efficiencies and focusing on profitable growth. Ultimately, our goal is to create and unlock shareholder value, returning excess capital to our shareholders whenever possible. With that, operator, if you could please open up the lines for Q&A.
Ladies and gentlemen, to ask a question, you will need to press star one on your telephone keypad. To withdraw your question, please press the pound key or hash key. Calls will be limited to one question and a follow-up in order to get to as many callers as possible. Again, that's star one to ask a question. Please stand by while we compile the Q&A roster. Your first question is from the line of Scott Group with Wolfe Research.
Hey, thanks. Morning, Alain.
Morning.
Can you just walk us through some of the revenue and margin expectations for each of the segments within the guidance? Just clarify if you're including UPS Freight in that guidance or not.
Absolutely. For sure, UPS Freight is included in the guidance, let's say for about seven months. If you remember, I mean, the profitability of UPS Freight is very limited. Yes, it's in there. That's for sure. In terms of the rest of our, you know, business, I mean, what we see so far, if you look at our P&C, revenue is up, it was up about 20% in Q4, about the same thing in Q1. We anticipate the year to be probably in the same kind of fashion. Our P&C, we see a lot of organic growth there. As you could always take a look when you look at the results, it shows also on the operating earnings.
LTL, excluding the acquisition of UPS Freight, we believe that the revenue is gonna be flat, okay? The profitability will stay on the same kind of neighborhood profitability that you see now, because we're more about making money than chasing volume. You know, that's a religion at TFI. If you look at the USTL, we think that Q1 was a little bit of a disappointment, in a sense that, you know, February was tough for us. When we look at the rest of the year, we see that the situation should keep on improving. Same story for our Canadian truckload and our specialty truckload. On the logistics side, I mean, the acquisition of DLS last year was a major plus for us.
We're still working to unhook ourselves from the previous owner through the TSA that we have with them. Probably it should be done by the summer. We believe that the overhead should reflect a more better efficient cost basis, I could say. All in all, this is why we feel pretty good about the $3.80-$4.00 of EPS in the rest of, you know, for a total 2021 year. Again, this is based on what we know today about the UPS Freight contribution, which is minimal. Okay. It also reflects above a $325 million USD of CapEx, which is way more than we normally would do because there again, we're investing more dollars into the UPS fleet than would be normally done. Right?
It's still a conservative, I think, forecast that we have for the year on terms of EPS and free cash flow. Also, the important thing is our leverage will stay under two, even with the acquisition of UPS. When we say under two, it's probably like more like 1.75 to two, being two being maximum. We're not gonna get there to two. Right? We feel really good about 21, what we can do about that. There again, I mean, we still have to close this transaction with UPS, which we anticipate is gonna be really soon. You know, Paul and his team over there at UPS Freight, I mean, they're fully aware of the plan, what we wanna do, how we're gonna approach this.
I've said it many times, our first approach at UPS Freight is to work on the cost and to, you know, bring new trucks in will help us on maintenance costs, will help us on safety, because these equipment have the safety features of trucks that are built in 2022, you know, the forward-facing camera. Also the driver experience in driving a new truck versus an old one. I mean, it's day and night. All of this, we believe that our first step working with the team there to reduce costs and be more efficient. Then slowly, for sure, we'll address the situation of rates that maybe not reflect market rates today.
Okay. Yeah, that was my second question was about UPS Freight. You know, as you've done more work since three months ago, ahead of closing the deal, has anything changed in terms of your near and long-term margin expectations? Maybe have you had conversations with customers about revenue retention, things like that? Just any thoughts there? Thank you.
No, no change, really. I mean, it's just a confirmation. What we've been able to do over the last few months is just to confirm the plan that we have, and we feel very strongly that this is a great plan, and we have the support of the management team there. They understand, okay, where we wanna go. You know, this is why when we say that within a year, we believe that UPS could be a 97 OR, okay, we still very firmly believe that. Within three years, we don't see any reason why this company, with the potential, the customer base, the relationship that we have also with UPS, there's no way. I mean, we still feel very strongly that we could be a 90 OR within three years.
Your next question is from the line of Konark Gupta with Scotiabank.
Thanks, and, good morning, Alain.
Good morning, Konark.
Alain, maybe first on the CapEx clarification. You said $325, I guess. Is that a gross number, or is it net of any?
Yes.
-expected divestitures?
It's net. Yeah, it's net of disposal, Konark Gupta. Yeah.
Okay. Thank you.
U.S.
Right.
is about CAD 400, U.S. is about $325, something like that.
Great. Okay. No, thanks for that. My first question is on the UPS acquisition. UPS reported, obviously, this week, and I think they were saying the freight segment had a pretty good quarter. I think they had record profitability there for them. Just wondering your thoughts in the sense that, you know, how is the UPS Freight doing right now, where, you know, you saw them when you were acquiring them, and how does that kind of potentially push up your goals or aspirations with the margins?
Very good question, Konark. We're very conservative. I'm not going to say something different from the UPS management team. I mean, they still own the company. When they said that they had their best quarter, I mean, you know, they know what they're talking about. For sure the trend, okay, is improving over there. For sure, market condition is also improving. If you ask me the question, is the company today better, okay, in Q1 2021 than it was, let's say, in Q1 2020? For sure. Okay, we are buying a company right now that the trend is improving every day. Yeah. We're still coming up with something very conservative, right? This is the culture at TFI, has always been underpromise but overdeliver, right?
We're not gonna say, "Oh, we're gonna come up with $4.50," or whatever. No. $3.80-$4.00, and then, you know, we may revisit that after Q2, okay, or after Q3, after we have a little bit better, you know, control of the situation at UPS Freight. Don't forget, this is also based on a plan when we look at UPS Freight that we are not in control today. I mean, we're looking at the trend, we're looking at the plan. We think that, right now, probably, you know, the guys are doing a fantastic job. We'll just work with the team to improve that, right?
Yeah, that makes sense. That's great color, Alain. Secondly, if I can ask you on the pricing. You mentioned about the strong spot pricing in the truckload market, especially I think in the U.S.-
Yeah.
Which is no surprise to anyone here.
No.
Wondering what your thoughts are on the pricing going forward. I mean, what are you seeing with obviously fuel kind of rebounding, and I think the demand function remains pretty strong at this point. Curious for your thoughts into, you know, how pricing trends over time here and for the next few quarters in the U.S. in the truckload. As well as any of the segments, I think you mentioned about P&C, their yield was pretty strong in B2C and B2B both. What are you seeing in the pricing, on the pricing side in P&C as well?
On the P&C, I mean, our Q1, we saw price increase about 7%, okay? Volume increase about 15%, but price 7%. Like I said to our friends at UPS, those guys did a better job than us because their price was about 10%, the price increase, 10, 12, depending on if it's domestic or international. I mean, the leadership of UPS is helping everybody in the industry, okay? To adjust price to a level which makes way more sense. Okay? Pricing environment P&C, really good. Pricing environment in our USTL, for sure. I mean, there's Every morning, if you talk to our EVP responsible for USTL, he says, "I've got more freight than I can handle." Right? It's been going on like that for at least the last four months. For sure, this put pressures on rates.
I was just listening, in the U.S., they anticipate maybe fuel costs will go higher because they are short drivers, you know, fulfilling the service station with fuel. It's a global North American situation whereby we are short, not of freight, we are short of drivers, right. The rates are being pushed up, okay. At the same time, us also, we have, in the industry, we're also adjusting salaries to our drivers, right. It's just a normal phase. For sure, I mean, if you look at the freight environment right now in the US TL, there's more freight available that we could haul ourselves, right. Every morning we're overbooked by 10%, 15%, 20% of what we can handle. Customers are, you know, "Can you help us?" We're trying.
We're doing the best we can. You know, it's hard. I mean, the schools, okay, because of COVID, I mean, it was like a big issue to have a school, right? Trying to educate those people to be drivers. It's a sum of all this thing that happened over the last, say 12 months that create pressure. Now the U.S. economy is doing really well. I mean, we anticipate that the GDP will grow maybe 7% or 8%, okay, the numbers I'm looking at. For sure, we got huge demand. The same story is true also in Canada for our truckload division. I mean, Q1 was okay. Wait till you see Q2. I mean, oh yeah, sure. We have lockdowns right now in Canada. I mean, Ontario, big time, big lockdown there.
Quebec, not as bad, but very close. We have issues in the Maritimes and some, little bit also in B.C. Vaccination rollout is taking on more speed. We believe that Q2 is still going to be, you know, maybe a transitional quarter, but then three and four, our Canadian activity is going to be roaring really strong. The pricing environment, really good. I mean, we look at our logistics as same story. This is why, you know, when we come out with the guidance on EPS or free cash flow, as usual, I mean, we will try to beat the guidance, right?
Your next question is on the line of Allison Landry of Credit Suisse. Allison, your line is open.
Oh, thanks. Good morning. Sorry, just on another call this morning. Alain, obviously, you know, we talked about the UPS Freight acquisition, you know, sort of about to close shortly here, but presumably you're still evaluating small tuck-ins. Just could you give us a sense of the pipeline, and whether the opportunity set has changed over the last few months? Just sort of what types of businesses or end markets you're looking at.
Yeah. That's a very good question, Allison. Our pipeline's always full in terms of M&A, but these are small transactions. You know, we're looking at about three or four transaction in Canada. We're looking at maybe two or three smaller ones in the U.S. as well. Our pipeline is always full, but there again, nothing of the size of UPS for us in 2021 and probably not in 2022. You know, these are nice tuck-ins that we do, you know, small and highly profitable for our shareholders. We're gonna keep on doing that. Absolutely. Now, for sure, our big focus is gonna be on working with the UPS management team approaching the cost.
Like I said many times, we have to reduce the cost there to be a lean and mean carrier at UPS Freight and that will be a big priority of ours. Okay, small tuck-ins, M&A, it's in our blood. I mean, we do that all the time.
Okay. Just a follow-up, in terms of the free cash flow guide. You know, could you maybe just help us think through sort of the cadence over the next few quarters or, you know, do you expect it to be sort of relatively stable, or sort of any sort of difference in the second half versus the first half?
The only difference that we have between, let's say, the first three months and the next nine months of 2021 is the fact that Q1 2021 was affected by a lot of taxes that were paid by the company for a reason that we were allowed to delay some payment because of COVID, you know. We've remitted all those taxes that were have to be remitted in Q1. This is why our free cash flow has been a little bit affected by that, but we don't anticipate anything similar in the next nine months. The only major thing for us in the next nine months will be CapEx for sure.
Like I said on the call, we're gonna be investing this year, about $325 million-$350 million net CapEx USD, you know, depending on the timing because, you know, because of the chip situation and the shortage. I mean, we're not sure if everything's gonna come in on time, but, you know, that's a ballpark figure.
Okay. That's really helpful. Thank you, guys.
Thanks, Allison.
Your next question is from the line of Kevin Chiang with CIBC.
Hey, Alain. Thanks for taking my question here. I think the guidance is $500 million if I look at consensus revenue for this year, about $6 billion. You know, that's about 8% free cash flow margin. You know, you've highlighted, you know, elevated CapEx with UPS. You obviously have a target to improve the profitability in a number of your operations. You know, when you're kind of through a lot of this heavy lifting, do you have a sense of where your free cash flow margins could level out here? Is this like a low double-digit free cash flow margin business, mid double-digit free cash flow margin business, you know, looking out the next three-four years?
Absolutely, Kevin. I mean, $500, I mean, it's been handicapped a little bit this year, okay, on the exceptional CapEx that we have to do in 2021 with this acquisition. We'll also have to do a little bit also in 2022 of catch-up CapEx for this UPS Freight acquisition. I would say that normally in a normal environment, okay, with all the improvement that we see coming at UPS Freight down the road, okay, absolutely. I mean, this is should be a double-digit free cash flow company, right? Our capital intensity, okay, you'll see that change big time because of the mix that's going to change. Also, we believe that at UPS Freight, we could do more with less, okay.
We believe that in terms of the assets, in terms of the real estate, in terms of all kinds of stuff. I mean, we could do more with less. The business is quite stable right now at UPS Freight in terms of, you know, the volume. You know, things are going well, like the management team said on the UPS call. I think we believe that we could do more with less. Over time, I believe that we're gonna be absolutely, you know, a double-digit free cash flow as percentage revenue. Now, you know, also the important thing, Kevin, I'm sure that you guys will take a look at the return on invested capital.
Which is a first. We're looking at trailing 12 months. We're publishing that now. If you look at that, I mean, every division we have are all running double digit except our USTL operation, right?
I mean, if you look at our P&C, okay, I mean, P&C, wow, this is fantastic. I mean, our P&C is just above the 20, you know, 20. Our LTL is above 15. Our Logistics is 18.6. Our Specialized Truckload is close to 11, right? The combined is about 12.4, something like that. Return on invested capital after tax. Don't forget, this is also based on all assets, not just the hard assets. It includes all the intangible assets as well, right?
Right.
I mean, this is, this is a fantastic company when you look at And adding UPS Freight to the mix, okay, for sure, return on invested capital at UPS Freight is gonna be low, okay, year one. I'm telling you, I mean, there's too much asset, there's too much real estate, and we're gonna work on it.
That's a helpful color.
For the revenue, right?
For sure. That's a helpful color and I appreciate the ROIC disclosure this quarter. Maybe just to my second question, you know, one of your Canadian competitors is consolidating parts of the Canadian LTL market. I know in the past you've talked about this market being irrational. Just wondering if you're seeing anything at a high level in terms of any change in industry behavior that suggests maybe a little bit more rational behavior in this marketplace, just given what's happened with one of your competitors out there.
We believe that, finally it's, I'm happy to see that the other company is doing something, you know. We can't buy them all, right? It, you know, it's a good thing. It's a good thing for the industry, you know. You know, it We're really happy with that. I mean, we have a great relationship with the other company. We work together. I mean, we have a very high respect for the other group and it's fine. I mean, we can't buy them all, right?
it's good that somebody else is showing up and doing something about, you know. The Canadian LTL is day and night versus the U.S. LTL. Why is that? Well, first of all, because we don't have a lot of industrial LTL in Canada, so that's a, that's a big problem. It's mostly retail. Number two is that there's way too many small companies that are about making 1% or 2%. We're happy because the other company that's buying those two companies right now, their focus has never been to make two points, right?
For sure they will have a job to do over there and happy to see that two companies will be part of this group now, and the focus is gonna be to improve profitability. Absolutely. That's all good for the industry.
Excellent. I appreciate the color. Thank you very much.
Your next question is from the line of Fadi Chamoun with BMO Capital Markets.
Thank you. Good morning, Alain.
Fadi.
Question on, I mean, the ROIC you just talked about being pretty strong pretty much across all division except the West TL. I'm just wondering, where does the segment kinda sit in terms of the capital allocation priority? It's a very competitive segment obviously.
Yes
position is typically top player in most of the other segment, you know, LTL in U.S. and Canada obviously, and parcel and so on. Is this something you wanna put more capital in, you want to grow that business, U.S. conventional TL? Is this something potentially candidate for a divestiture? Just wondering where does that sit in the capital allocation priorities for you?
You know what, Fadi, I mean, this is a, this is a tricky question because, you know, everybody understand that if you generate less than 10 and you're part of TFI, for sure you're not gonna be the first in line to get capital, right? Our logistics and our P&C, you know, absolutely they come first. Our LTL as well, this is why we're buying UPS Freight. Now, what we have in the U.S. right now, okay, is to keep, and are we gonna grow it to M&A? Probably not, because our focus right now has always been to grow our specialty TL. If you look at our specialty TL return on invested capital, I mean, we're just above the 10 mark. I mean, we're 11.5, something like that.
I mean, this is fine because I think we could do better, and we'll do better over time. Now, in terms of the regular van, if you look at the best company in the U.S., okay? The best of the best, you look at the return on invested capital, it's less than seven. Us, we're at 5.5. It's not great, okay? We're not that far away from the best of the best. Our goal is slowly get closer to the best of the best. I believe strongly that we have the A team, okay, under Greg Orr. Also the acquisition of UPS Freight gives us another small truckload division that's not doing too good, okay? They probably run a 98 OR, okay?
Now we have a plan of working TCA, this UPS Truckload division, with our CFI management team, and we're gonna do a combination, okay, by the end of 2021 that should help us get closer to a six or 6.5 and be the best of the best. Now, don't forget that, you know, our introduction to the truckload market, okay, five years ago, six years ago, to the US TL market, there was a goal behind that, is to give us some size in the U.S. so that we could, you know, one day list it in the U.S. Now, with the UPS Freight acquisition, I mean, most of our revenue, okay, will be U.S. domestic. I mean, as a matter of fact, in Q1, we have more U.S. domestic revenue than Canadian, right? We'll be probably like 75, 25. 75 U.S.
Then we'll see over time. I mean, we're not in the business of selling companies, okay? We've done that before. We've done that with our waste division. But it's not in the cards for now. What we're trying to do, working with Greg and his team over there is to get closer to the best of the best in terms of the return on invested capital.
Okay, that's great. My follow-up just on the P&C network side. I mean, you know, you're seeing very significant organic growth, which you're signaling will continue. I mean, I don't recall having seen that kind of growth in this network, you know, in a long time, obviously, for you. I'm wondering, is this, Like, how is this sortation network handling this type of growth? Is this predominantly coming kinda from the asset light side of things? How are you handling, kinda this kind of environment we're in right now? If there's gonna be any need for capacity or expansion there?
Yeah, very good question, Fadi. I mean, for sure. I mean, our Toronto hub, okay, is very, very, very busy. It's never been that busy, okay? We're working on a plan right now to see what the next step is gonna be. We're getting close to capacity over there. This is why, you know, we're looking at what can we do more, okay, in Calgary? What can we do more in Vancouver? What can we do more in Montreal? You know, Calgary, we have a new sorting center. We just opened that up a year ago. There we're doing fine. In Toronto, for sure, we will have to do something there. The GC Center, we're really busy. I mean, we could do more.
For sure, this is why we're growing about 14%-15% in terms of volume right now. We were skeptical at first that changing the mix from B2B to B2C, you know, with the pandemic there, that would erode our margin. If you look at our Q4, it was great. If you look at our Q1 this year, again, we feel good. You know, we have some divisions that are not at capacity like ICS, like TFIS. We could also do more within our Loomis operation. I mean, we could still see a 20% or 15% growth in our e-commerce in 2021 and into 2022, but then we will, you know, get closer to a capacity crunch, right?
This is what we're working now to see how we're gonna resolve that.
Thank you.
Tim James, TD Securities.
Morning, Alain. I wonder if you could talk about how your progress is with the DLS acquisition, the integration of that, and maybe update us on the opportunity set, which I think is quite compelling, and how that's shaping up relative to your expectations when you acquired it.
Yeah. You know what? DLS, we're really happy about what's going on. In terms of the transition agreement, okay, we believe, like I said earlier in the call, that by the summer, I mean, we're gonna be a standalone, you know, with running our financial on Oracle instead of their SAP. In terms of revenue growth, I mean, we're quite surprised to see how this team is doing. I mean, I was looking, the last month that we closed in March. I mean, our revenue growth was pretty impressive, right? I mean, to me it's really a fantastic acquisition because it gives us market intelligence on the U.S. domestic LTL market so that we can understand, okay, what the rates are, what the value is, et cetera, et cetera. You know?
Over and above that, I mean, we have a fantastic team there based on an agent model and we feel that, you know, we're running about a $600 million-$650 million business right now. Is it possible that we could do a $1 billion within the next two, three years? Absolutely. The way we're growing right now, I feel pretty good about that. For sure, the margin is slim. We're running a 4.25% margin right now. The guys are working. We're going to be working on reducing our overhead costs as soon as we can unhook from R.R. Donnelley. Then work also on the margin with some of our customers and working with the transportation company and providing a great solution.
For example, DLS or what we call now TFWW, they were never involved in the transborder LTL. Right? They were just focusing on domestic shipment. With us, for us, the transborder LTL into Mexico or into Canada, it's very important to us. Now those guys have put a plan, and they're working on it now to see how they can grow that, right? Because to us, this is one of the greatest market of the LTL, is the transborder between U.S. and Canada and Mexico. Feel good about this acquisition. It's really strategic to us. Now with the UPS Freight acquisition, now it gives us asset on the ground, okay? Working with the team there, then we could I feel that we could grow this UPS Freight.
As soon as we have a very solid foundation, which will take us maybe a year, 18 months to be really, really solid in control there of all of our costs, I feel good that we could grow this company. We have the team there. We have the assets. We have the real estate to grow probably 40%, 50%. That's not the goal. Really, the first goal is to be lean and mean and very cost efficient. I'm just saying that we have the asset to do it if the market can bear it, but I feel really good about the future over there.
Thank you. Alain? Just one follow-up here on the return on capital in the business which as you pointed out is very strong really across most parts of the business. How do you think about, you know, in the future adding more capital versus increasing returns? I mean, are there any areas of the business now where you really don't I mean, it sounds odd to say it this way, but you don't want higher returns on capital or your preference is actually just to put more capital to work? Is your thought that it's still better off to kind of you know, squeeze the assets, get more or push your returns on capital higher?
Yeah. That's a very good question. If you look at our P&C, I think that a 20% return on cap-invested capital net of tax, okay, it's difficult to do better than that. I mean, if you look at, as an example, okay, if you look at the return on invested capital, the best LTL company in the U.S., the best, the one that trades at 35, 40 times earnings, okay, I mean, they're gonna be in that 20% neighborhood, right? To me, if you ask me, could you do better than 20% on your P&C? I would say, "It's gonna be difficult." I mean, we're working on it, but it's not gonna be easy.
On the LTL side, I believe that what we're doing in Canada, I mean, it's got to be at least that in the U.S. over a period of two - three years, right? Because, you know, you got the best of the best is at 20, you got another one at 15. We're about 15 ourselves in Canada, which is not as good of a market as the one in the U.S. We believe that LTL, we could do better because of this UPS Freight acquisition. In terms of the truckload, the idea is really to try again to do more with less. How do we do that? Well, we could do more with the owner-operator model. We could do more with our brokerage operation. This is the focus of ours.
This is why when we bought CFI, they had no brokerage operation whatsoever, right? It was Menlo. Menlo stayed with XPO. Us, we end up with no asset-light operation there. We've built CFI Logistics, okay? It's doing well, and it's growing. That's gonna help, again, get a better return on invested capital because it's all organic. It's always a balance, okay? Me working with the team, it's always, you know, where should we invest our capital? This is why a lot of times we say, "Okay, well, guys, M&A is gonna be our first priority." Buying back the stock, if we feel that the stock is under pressure and we see an opportunity, yes, we'll do that, right? To improve, again, our return, we'll invest on assets as well.
It's a balance, guys.
Great. Thank you very much, Alain.
Pleasure.
Our next question is from the line of Jason Seidl with Cowen.
Thanks, operator. Good morning, Alain Bédard. Hope all is well.
Morning, Jason.
Wanted to touch back on P&C and how you see your margins over time as some of your B2B business actually does start coming back. Historically, that was, you know, good margin business because.
Yes.
You guys have a lot more packages to drop than the.
Yes.
-consumer market.
Yes. Yes. Yes. Absolutely, Jason. For sure, our B2B is still affected because Ontario and Quebec are under, you know, some major lockdown right now. We've started to see some improvement at ICS, which is mostly B2B, but then it fell through again just lately, about two, three weeks ago. We believe that probably by the end of Q2, things should be back to normal. We have two divisions within our P&C that are not running, you know, on all cylinders right now. It's ICS and TFIS. Why? Because they're mostly dependent on B2B. You're absolutely right. Down the road, let's say in Q3, we're more closer to normal situation in Canada, Ontario, Quebec, which is the, you know, the largest provinces in terms of population.
Yes, our margin would probably help us in Q3 and in Q4 with the right mix also of balance between B2C and B2B at our Loomis Express operation. You know, don't forget, we did about, what, 19% in Q4 in terms of OE at our P&C operation. We did about 19% on P&C. Can we do better than that? Let's say if things are back to normal in Q4 of 2021, probably. You know, the same story with LTL.
Okay. That's great. I also wanted to focus a little on the Package and Courier operations. Can you give us an update about some of your market and initiatives that
Where is that, Jason? At, are you talking about UPS Freight?
Logistics.
Logistics. Okay. Yeah. Logistics. Well, in logistics, you got the two sectors. Our last mile operation in Canada is doing really well. Our U.S. operation, in terms of top line, I mean, we're basically flat. We're just starting to see some growth opportunities. We're working on a few projects, our bottom line is definitely improving there. We're getting closer to a double-digit EBIT there, okay, which is, it's gotta be our goal, within, let's say, the next 12 months- 18 months. Our operation is really humming. Our guys are working on all the costs and being more efficient, our sales team is also working on adding more business to our network.
In terms of our DLS or, you know, our WW company, I mean, those guys are organically, they're growing quite well. The margin is still, you know, we look at 4% U.S. and we say why are we at 4%? We look at some of the other players in the industry and, you know, one of the best guys are also at 4%. We say, "You know what, guys, we have to work on the overhead." I mean, for sure we have to do more with less there as well. Over time, our logistics sector, you'll see because of this acquisition, a lot of growth, but at the same time also, overall our EBIT there is running between 7% and 8%.
Over time, we believe that we could get closer to 10%, okay, with some organic growth as well. Let's say we're at 7% to 8% right now. Over time, within 12 months- 24 months, can we get closer to 10%? We believe so.
Okay. Really appreciate everything and, all the best to you guys with your schedule.
Thank you, Jason.
Your next question is the line of Cameron Doerksen with National Financial. National Bank Financial, I apologize.
Thanks. Good morning.
Hey, good morning, Cameron.
Just a clarification on the expected CapEx, the net CapEx.
Yes.
-2021. If correct me if I'm wrong, but I think it's you're indicating that $325 million U.S. is higher.
Yes.
-than what was the case a quarter of ago. I'm just wondering if that implies that there's some pull forward of spending from 2022 into 2021, 'cause I think that maybe a lot of the sort of significant UPS CapEx was originally gonna be planned for 2022. Just if you could just clarify what that means for, I guess, CapEx over the next, you know, 18 months as opposed to just 2021.
You see, Cameron, what we were able to do with the supplier is to get 1,150 trucks into 2021. We put a lot of pressure on those guys, the supplier, to make sure that we get all these trucks into 2021. You are right. At first, we were saying that within 12 months, we should get 1,150 trucks. Now we put pressure on these guys, it's gonna be instead of being 12 months, over 12 months, it's gonna be over the next seven months. Let's say we take over in May, sometime in May, we only have seven months. We believe, according to the builder, is they're starting building for us in July, right? Because the order is already out, I mean, everything is out.
We know how much it's gonna cost us, et cetera, et cetera. It's ongoing. We believe that we should get all those 1,150 trucks before the end of 2021. This is why you're right. It's a little bit of a change versus going over 12 months now it's gonna be over seven months. Yes.
Okay. What does that imply, I guess, for 2022? I mean, I guess maybe the question is what's a kind of more normalized run rate CapEx in 2022, if you're making this huge investment in 2021?
I think, Cameron, it's gonna be more the same in 2022 because we cannot do the catch-up CapEx only in one year. I think in your model you should expect that 2022 is gonna be the same as 2021, okay, because we want to bring the age of this fleet closer to 4% - 5% than 7.5% - 8% right now, right? 2021 and 2022 are probably exceptional years of catch-up, and normal should be more like, normally like 2023.
Okay. Got it. No, that makes sense. Just if I could just squeeze in a question about the I guess driver issues. I mean, I think it's well known what's going on, but I'm wondering if you can maybe comment on what your expectation is for the ability to kinda keep and hire drivers in the U.S. LTL. Obviously, that's gonna become more important for you. I'm just wondering is it less challenging or more challenging in LTL in the U.S. to find drivers?
LTL, I mean, U.S. and Canada, I mean, the turnover is not, absolutely not the same. I mean, we have no issues whatsoever in Canada with our LTL or Package and Courier guys finding drivers and replacing the ones that are retiring. In the U.S., I mean, we look at the statistics, for LTL. I mean, it's not an issue. It's not an issue. I mean, it's Truckload, it's a big issue, but not LTL.
Okay. That's what I thought. Appreciate the time. Thanks very much.
Thank you, Cameron.
Your next question is from the line of Benoit Poirier with Desjardins Capital.
Hey, good morning, Alain.
Morning, Benoit.
Yes. Just to come back on the previous question, obviously very strong fundamentals, but question on the driver shortage. What can you say about the wage inflation and the ability to pass through those wage inflation on pricing and potentially direction on the margin, whether it's impacting your margin?
I mean, right now the pass-through is easy because there's more freight than drivers. We are adjusting salaries to the drivers over the course of 2021 and the spot rate is just through the roof and the contract raise has been renewed with 7%, 8%, 9%, 10%, 12% right now. It's not an issue. If you look at, you know, we just bought six months ago MCT, okay, which is, you know, a reefer division, and we add about 200 drivers, and we're doing really well with this division right now. I mean, this division operated in sub 85 OR in Q1 of 2021.
We believe that those 900, 800 to 900 drivers in the truckload division of UPS that Greg Orr and his team will take over soon. Those guys are running a 98 OR right now. I mean, we firmly believe that this is gonna be a huge asset because we're adding, those 800, 900 drivers, in a market that is a fairly great market for the truckers. We believe that we could use this, these drivers in a better way than they're being used today, if I can say that. Because the freight is abundant and those guys are hauling freight, probably at rates that don't reflect the market.
On the truckload world, we believe that we can turn this truckload division around much faster than we can turn around, okay, the LTL division because truckload is more of a reaction faster than the LTL. LTL, our focus is gonna be more on cost, and yes, pricing too, but the big focus is mostly on the cost side.
Okay
Is on cost, but also market pricing very fast there.
Okay. That's great color, Alain. With respect to your leverage ratio 1.75:2, does it take into account the cash and given it's pretty healthy, any color about the capital envelope for the tuck-in M&A for the remainder of 2021 and maybe the opportunity to pursue share buyback?
Right now, when I say our leverage is gonna be between 1.75: 2, there's minimal M&A in there except the UPS thing there. Right now there's no share buyback, okay. We did some in Q1, okay. We may do some in Q2, three and four, depending on the valuation of the stock. For sure, we have a target in mind. We know I mean, I've been involved with this company for more than 25 years, we know where we're going. If we see weakness in the stock, absolutely. I mean, we'll be active on the buyback. I mean, we bought back what. I think 642,000 shares in Q1, which is minimal, okay. Can we buy another 1 million shares in between now and the rest of the year? Absolutely.
I mean, our leverage is gonna, in our plan, is gonna be much closer to 1.75 than two anyway.
That's great color. Thank you, Alain.
You're welcome.
Your next question is from the line of Walter Spracklin with RBC.
Hi.
Morning, Walter.
I'd just like to come back to P&C, and I think your strategy is a good one in the sense that it, you know, you've got capacity. You're gonna grow into that capacity at a fairly healthy clip in the near term. You mentioned in an answer to a prior question that you start to get up to your capacity limits perhaps next year. Obviously, you'll have higher EBITDA once there. My question is more longer term. I know, Alain Bédard, you've indicated longer term some challenges with regards to growth after we're through this systemic growth period, you know, driven by the lack of acquisition opportunity. How has your thinking changed around that division longer term?
Do you double down and invest heavily in adding capacity after you hit it next year, or do you look at other alternatives for that division?
You know what, Walter? That's a very good strategic question. You know, if you go back in time, the reason we sold our waste division is it was because we could not grow it anymore, right? Because our valuation was so low and buying assets, it was diluted to us. Finally we didn't wanna do that, but we had to do it, so we sold our waste management company at the time. Okay, you look at our P&C, we're really doing really, really well. As you just said, I mean, we'll come to a point in 2023 where, okay, and we're already looking at the possibility, what do we do in Toronto, right? This is Toronto is the big hub for us and this is why we're looking at the question right now.
For sure, we have capacity in other markets, but we're getting tight in Toronto. We'll come to a point, is there some M&A possible? Is there something that you could do on M&A? Is there a partnership that you could do with somebody else, right? If you take, for example, some of our competition at major hubs, okay. Is there any way that we could do a deal with them and help them and help us at the same time? Don't forget that this discussion that we're having with our friend in Atlanta, I think it could be way more than just this transaction that we should be closing on, you know, soon.
I think that, you know, because we have a relationship with those guys, can we expand more of this relationship in Canada working with them? Is there anything that we could do? You know, time will tell. We're looking at every opportunities of what we can do, okay? I'm not a big fan of investing, you know, $100 million to $200 million and with low returns, right? We could do it. We could invest $200 million, no question, but I need the returns. We're not very patient. If the guy tells me, "Well, the return is gonna take 15 years," we're gonna try to find other issues, other opportunities, right?
Absolutely. That makes a lot of sense. Just administrative here, the effective tax rate, I know you mentioned there was some movement in your tax rates there quickly, but going forward, what effective tax rate should we build in? Is most of that cash taxes or should we look at a cash tax rate that's somewhat lower than your effective?
Yeah. I would say I'm not a big specialist, Walter, on cash or tax. I would say that what you see right now, around the 25% mark, we don't know what's gonna happen with the tax rate in the U.S. There's some discussion there with.
Right.
Mr. Biden's that they may change that. Right now, I think that if you work with a 25%, I think it's reasonable. That may change. You know, we don't even know what Mr. Trudeau could do in Canada, I mean, because they have huge deficit there. Maybe there's gonna be some changes there, but I don't anticipate anything major for 2021. We'll have to see for 2022.
Okay. Appreciate the time as always, Alain. Thank you.
Pleasure, Walter.
Your last question will come from the line of Sanjay Ramaswamy of Bank of America.
Great. Thanks for squeezing me in. Just with regards to U.S. Truckload, I mean.
Yes.
Alain mentioned that obviously Q1 was a bit of a disappointment, so revenue per total mile up around about 8%. Some of your peers, you know, up in the double-digit ranges and the mid-teen. Like, we're just asking, is this more of a function of, you know, the more contract business that you guys have and less of a spot market exposure? Maybe some color there would be helpful.
I think what happened in Q1 is that in one of our division, TCA, there was some issues with some dedicated work that we've lost, and we weren't able to replace quite fast enough, right. If you look at going forward, if we look at April into Q2 and into three and four, we believe that this was just a one-time event for us in Q1. Also the fact that we're getting about 900 drivers through the UPS acquisition in our truckload division and also the demand is really there.
In the consolidation that we're gonna go through in 2021, we believe that this will also have an effect of reducing our overhead or the overhead that we get from the UPS Truckload division on top of the TFI overhead and on top of the TCA. If you sum that up, for sure there's gonna be some saving there to bring us back to more of a sub 90 OR or around 90 than being a 92, 93, 94 guy.
Yeah. That's really helpful. Just for my follow-up, in terms of the employee count that you guys have, you know, it was down around that 1,600 year-on-year, I think about 360 sequentially, noting that was mainly in the LTL businesses. I mean, how do we think about that kind of moving through 2021 ex kind of the UPS Freight acquisition and the employees coming on there? Is there room to are we gonna see that employee count continually come down despite the volume environment or how are we thinking about that?
Well, it's too early to say, what we can do over there. One thing is for sure is we believe that, we have to do more with less. That's what we've been doing all the time. It's a, it's a religion at TFI. Every day you ask yourself, how can you do more with less? Less means less asset, means less people, better technology, better tools, okay? Because we're competing, okay, in Canada with some very fierce competition, both in the P&C, LTL, and truckload. We look at the LTL market in the U.S. and there are some very, very good transportation company over there. We have to compete with these guys.
Right now, I mean, although, like UPS management said on the call yesterday that the division did better in Q1, we're still a far cry from where we should be. I mean, the trend is good, okay, fine, but probably, once we take over the company, we're gonna have to accelerate, okay, the change and the improvement that's been taking place right now.
Right. Thanks.
That does conclude our Q&A session. I'll turn the call back over to Alain Bédard for any closing remarks.
Okay. Well, thank you, operator, I want to thank everyone for joining us, on this morning's call. On behalf of the team at TFI International, we appreciate your support, and we're working hard on your behalf each and every day. I look forward to updating you on our progress next quarter and hope that, you remain safe in the months ahead. As always, please don't hesitate to reach out with additional questions. Thank you again, and I hope that you enjoy the rest of your day. Thanks. Bye.
Thank you. This does conclude today's conference call. You may now disconnect.