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Operator: 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 a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Callers will be limited to one question and a follow-up. Again, that’s one question and a follow-up, so that we can get to as many callers as possible. Further instruction for entering the queue will be provided at that 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 06, 2023. I will now turn the call over to Alain Bedard, Chairman, President and Chief Executive Officer of TFI International. Please go ahead, sir.

Alain Bedard: Well, thank you, operator, for the introduction, and thank you, everyone, for joining us this afternoon. Today, after the market close, we released our fourth quarter 2022 results, which capped a successful year for TFI International. Despite obvious macro-related topline headwinds, we generated increased operating income versus the year-ago quarter. We expanded our overall operating margin by more than 200 basis points. And we produced free cash flow of $188 million, which is 56% higher than the year-ago quarter. For the full-year, we produced adjusted diluted earnings per share of just over $8, an increase of 53% over the prior year. We also generated full-year free cash flow of $881 million, up 26%, despite our calculation fully reflecting higher working capital on the order of $147 million associated with higher fuel costs.

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 the 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 from $121 million 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 segments, 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 P&C. 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 a 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%. But with the margin up by only 40 basis points despite the deleveraging caused by lower revenue. Again, deeper on the LTL, Canadian revenue before fuel surcharge was up 15%, and yet we achieved a notable improvement in adjusted operating ratio, which came in at 75.3%.

This was 300 basis point 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 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. However, I’m pleased to report that as of last week, the finance module of the transition agreement is behind us, with the financial system migration completed successfully as of last week.

More broadly, the stability in margin in the face of volume pressure across the industry reflects our focus and the real progress we are 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 on the CFI business. I mentioned earlier, our focus quarter 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 the 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 battery 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 nature of our opportunity is readily apparent. As for our Canadian-based conventional truckload, we are able to catalyze 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.

So our return on invested capital was 21.3%. Wrapping up our review of business segment. Logistics represent 23% of segment revenue before fuel surcharge. Revenue before fuel surcharge at $376 million was up 12% year-over-year, which was slightly impacted by foreign exchange as much as our revenue this quarter. However, our operating income climbed 4% to $34 million as we successfully contained operating expenses. That equates to an operating margin of 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 one, 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, and 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 approved a US$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 new year. We currently expect $7.50 to $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 to $275 million.

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

Operator: The first question comes from Scott Group from Wolfe Research. Please go ahead.

Scott Group: Hey. Thanks. Good afternoon.

Alain Bedard: Good afternoon.

Scott Group: So Alain, I just want to follow-up on the guidance. I think you said $7.50 to $7.60, so a pretty tight range. But maybe if you can just walk us through the different businesses and thoughts on revenue and margins for the businesses within the guidance, that would be great.

Alain Bedard: Yes. Yes, that’s a very good question. So what we’re seeing so far is that 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 €“ using CP. Us, we’re mostly CN, and this guy is very aggressive. So 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 going to go through a soft patch Q1, Q2. Now the benefit of that is that gives us a chance to be more focused on our cost, reducing our cost with the renewal of our fleet, reducing the number of miles, et cetera, et cetera.

So 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 costs. So that should also be a tailwind for TForce Freight going forward into 2023. So U.S., Canadian LTL, about stable, right? P&C, 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, okay, has dropped, okay, with the e-commerce, I mean, we’re having a tough time competing with the competition that’s owned by the Canadian government there in Canada. So really, our goal there is to keep some organic growth because like you said, 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, so 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 going to be some major improvement. The fact that now TA, our dedicated business is now much better run that has ever been run. I mean, I was just looking at our month of January, and we’re heading in the right direction. So I believe that our truckload. And even if you look at our Q4, you see some improvement, slight improvement year-over-year. And there I continue to think that we’re going to do way better than last year. Logistics, I mean, the market fell out for us on the logistics side, but we protect our margins.

So our margin is about 9%. So when you do all this sum up, okay, like always, Scott, we’re very conservative. We could have said, guys, maybe we’ll beat $8, but we’re not going to say that. Now, I mean, we have only one-month down, right? So this is why we’re coming out with something that, I think, is conservative and reasonable. And if things get better after Q1, for sure, we’ll update you guys on the guidance.

Scott Group: Okay. And then just on the guidance, can you just clarify, is there anything in there for buybacks or M&A in the guide? And how you’re thinking about the M&A environment right now?

Alain Bedard: No. There’s nothing there in terms of M&A or buyback. So we believe that we will close about $300 million of M&A deals between now and the end of June, okay? So our guys have been very active, okay, in all sectors, I would say. And I’ve always said, you’re buying bad news, you’re selling good news. And right now, for the last, I would say, eight, nine months, about trade recession and all this, it’s been bad news. And you’ve got a lot of guys that are tired, right. So it creates an opportunity for us. Our leverage is less than one, like I said on the tax there. So we are very well positioned. So for us, nice tuck-in, US$300 million to US$400 million. For sure, that’s going to get done in 2023. But this is not part of that guidance.

Scott Group: Okay. Thank you. I’ll pass it on.

Operator: The next question comes from Ken Hoexter from Bank of America. Please go ahead.

Kenneth Hoexter: 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.

Alain Bedard: Yes. So 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. So we got rid of a lot of that. But we’re not done, right? Now if you look year-over-year, we’re down about 19%, 20% in volume now. Some of that is market. 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%. So the reason being is that we had a lot of freight that did not fit the operation. So during the course of 2023, the plan is that we’re going to grow up organically slowly, okay, by about 5% versus where we’re at today. So let’s say, today, we’re doing about 23,000, 24,000 shipments a day in first month of the year, January.

The plan right now sits at about 25,000 by the end of the year, okay? So 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. So now we’re down to 23,000, 22,000, 23,000, 24,000. So it’s €“ we took a hell of a beating, but we had to. We had to get rid of that freight that didn’t fit. And we also lost some business because of the softness of the market, right. But we believe that the first six months are going to be maybe soft, but things will start to get better in Q3 than Q4. So it’s not a big improvement in terms of volume, but it takes time. It takes time. And we’re really busy working on our costs. We we’re getting €“ all of the trucks that we’ve ordered that were always late, late, late, now, I would say, since the end of November, I mean, we’re just getting flooded with all these new trucks that we have to get in the network, sell the old one, improve the MPG, save money on the maintenance and all that.

So this is going to come, okay, towards 2023. But in terms of volume, I mean, our sales team have a lot of work to do there.

Kenneth Hoexter: Just 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. And then my follow-up question was on truckload. It sounded like you might have mentioned freight heading in the right direction. Maybe just expand on that if this is chewing up inventories and we’re starting to see a turn? Or maybe is there any sign of a floor?

Alain Bedard: Yes. So to answer your first part of the question, I mean, we had 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. So I would say that probably Q3 and into Q4, all these transition costs, you’re talking maybe $15 million in there of additional cost to do all this transition. Now we still have to do the transition of the HR, okay, which is April, May. We still have to transition the fleet, okay. Sometimes in the fall of 2023. And then we’re just going to be left with the IT late into 2023, early into 2024.

So all these costs will €“ because we have like double cost right now because we have to do it ourselves. They are still doing it for us. And so that’s why we feel pretty good that even with 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. Now in terms of the truckload, again, my comment is really because now we are exposed in the U.S. in the dedicated truckload, okay. So with all 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. So for sure, revenue has dropped okay. But now we make money on every account. If you remember, when we bought UPS, their 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. And now that’s not the case at all. I mean, this company, if you look at what we know, so far, in 2023, it is going to run better than a 90 OR. We’re going to be the 90 OR in that U.S. truckload dedicated specialized business that we own now.

Kenneth Hoexter: Great. Very helpful. Thanks, Alain.

Alain Bedard: Thank you.

Operator: The next question comes from Walter Spracklin from RBC Capital Markets. Please go ahead.

Walter Spracklin: Thank you very much, operator. Good evening, Alain. How are you doing?

Alain Bedard: Hey, pretty good. How about you, Walter?

Walter Spracklin: Good. I just want to 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 color on what your intentions are with regards to that investment?

Alain Bedard: Well, we really like this company. So when we talk about the investment that we’ve done is we believe that now just to talk about it, so it was the right thing to do for us to really disclose that, okay. Now in terms of what do we want to do, we would like 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 are some things that we could 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 companies.

So we’re having discussions with other peers in terms of the real estate, what kind of discussion we can have. 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? That is really the intention behind all of that.

Walter Spracklin: Okay. A lot of follow-ups I could do on that one, but let’s put that one on hold for now. And just on €“ in terms of your outlook now. And you mentioned 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? And I get the sense that you’re assuming based on what you said in your divisional response, some weakness in the first half and perhaps some strength in the back half. So are you price €“ is there a recession in those numbers, and that’s what we should frame that disclosure around? Or yes, just a little bit of color on the outlook?

Alain Bedard: Yes. Well, Walter, I mean, I’m listening to all the different players in our industry, and I think that everybody has the same kind of feeling, which may be wrong, right? But what we believe is that Q1 and Q2 is going to be soft, and then things will get better. This is based on what we’re hearing from the economy, the economy et cetera, et cetera. But who knows, right? So this is why we’re going ahead with a very conservative, okay, kind of forecast, right. Now if I look at my month of January, okay, I feel pretty good versus our forecast. So I mean, one month is not a year, okay. But I think that we’re on the right track. We’re very well positioned. I think we’re going to 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. But now once that we do all of these transition in 2023, we should see a major reduction in our costs over there. So we feel that it’s reasonable. It’s fair. It’s a little bit less than what we’ve accomplished in 2022. We did $8. We think that now CFI has gone, CFI was contributing about, I don’t know, like $40 million of net earnings last year, okay, so they’re gone. But we have a lot of M&A on the go. All these guys slowly should replace the CFI investment that we have there and probably do better than when we used to own CFI in terms of return on invested capital and profitability.

So we’re conservative, Walter. We’ve always been like that. We’d like to under promise and over deliver, right?

Walter Spracklin: Makes a lot of sense. Appreciate the time, Alain.

Alain Bedard: Pleasure, Walter.

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

Ravi Shanker: Thanks. Good evening, Alain. Alain, can I just €“ I mean, you gave us a little bit of detail on the kind of what you’re thinking of ArcBest. But can you confirm that if you had any discussions with them or had any engagement with the Board anything on them?

Alain Bedard: No, no, no engagement whatsoever. I mean, it’s just €“ 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 because we have a lot of expenses that we could reduce if we would work together with them. And also with the other unionized carrier, right, another of our peers. So 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.

Ravi Shanker: Got it. Understood. And 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 a headwind. I’m just trying to get a sense of, when you kind of put these two things together, kind of do you feel like you’ve said its not comfortable bar here and kind of what are the moving parts like? Or do you feel like the macro really needs to come your way in the back half of the year to kind of drop this guide?

Alain Bedard: Ravi, we’re very early in the game. We have only one, one down. So this is why what we look at right now is that competition, volume, I mean it’s not as good as it was in 2022. So this is why we’re cautious, okay? We believe that things will get better, okay, during the course of the year. But so far, I mean, we see in some market, some of our peers panicking, lowering rate. Like if you look at our P&C, 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. So this is why we’re looking at that. I would say things will get better. But right now, I think that we have to be conservative. That’s the way we look at it.

Ravi Shanker: Very good. Thank you.

Alain Bedard: Welcome.

Operator: The next question comes from Jordan Alliger from Goldman Sachs. Please go ahead.

Jordan Alliger: Yes. Hi. I just wanted to get back to the LTL. A couple of things on volumes but down 19%. How much of that €“ is there a way to get a sense of how much of that is macro versus the ongoing culling because I thought you were sort of winding down on that? And then 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? Because I think yields ex-fuel were perhaps not quite as high as some of your peers. So I’m just sort of curious what’s going on with core LTL U.S. pricing? Thanks.

Alain Bedard: Yes. So in terms of pricing, I mean, for sure, some of my peers are ex-fuel plus 5, plus 6. We’re plus 4, okay. So we’re not doing as well as the other guys. But 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 difficulties some time to get more money from the customer. The service also is €“ when we took on the company, I mean, the service was maybe not AAA. So we’re still working on improving our service. So in terms of pricing, I don’t see too big of an issue. In terms of volume, okay, I said it earlier. When we bought this company, a third of the volume did not fit at all. I mean it was €“ so we would have to go from, let’s say, 32,000 shipments down to 20,000 shipments.

I mean, we can’t do that. I mean, so we went down big time, like 19%, okay. Some of it is the softness of the market, okay, like everybody else of my peers, except maybe for one that I’ve seen so far, everybody is 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 going to get back on average, okay, in the latter part of the year, towards the 25,000 shipments, maybe 26,000 shipments, whereas right now, we sit at 23,000 shipments, okay. Now 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?

So we’re still lapping freight that we were hauling last year that did not fit that we got rid of was a little bit of the softness in the market like all of our peers.

Jordan Alliger: Great. Thanks for the color.

Alain Bedard: Pleasure.

Operator: The next question comes from Konark Gupta from Scotiabank. Please go ahead.

Konark Gupta: Thanks, operator. Good afternoon, Alain.

Alain Bedard: Good afternoon.

Konark Gupta: 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?

Alain Bedard: It’s very simple. I mean, this peer, okay, has got a sweet deal with one railroad, which us, we don’t have, right? And now this guy is taking advantage of that to be more aggressive in the market. So us, we’re protecting our margins. So we have to let go some volume. Plus also, like in the U.S., there’s also a little bit of a softness in the market, right?

Konark Gupta: Okay. That makes sense. So just leveraging that kind of deal and protection they have, okay. Now with respect to 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 the U.S. marketplace today, clearly, the U.S. consumer spending has taken a hit and the rates are still going up. There the Bank of Canada is talking about slowing down here in Canada. Is there any major difference you are noticing in the freight trends or the volume trends, especially between Canada and the U.S.?

Alain Bedard: Yes. That’s €“ if we look at our Canadian operation, the big difference is probably the Canadian economy could do whatever it wants. We don’t control that. But one thing we control is our costs, and we’re very efficient, lean and mean 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. We’re beefing up the team. We’re investing a lot in information, tools and all of that. But this is why we’re not as good as some of my peers, okay. So if there’s a fluctuation in the market, sometimes in Canada, we’re very, very active, okay. In the U.S., we’re still too slow, in my mind. So if you look at my Q3 and my Q4, I’m disappointed a little bit in a 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.

Now 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. So it’s the terminal managers that manage the labor force, not the guy at that office. So it’s a change in culture that we’re doing over there. And that helps you when the market is getting to a soft patch that you can react way faster. So if you look at one of my peers in the U.S. LTL, the volume was down, let’s say, 8%, but EPS was up 9%. So that’s the kind of company that is really sharp and the guy hand’s on and fast. If you look at what we’re doing in Canada, so 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.

So this is 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.

Konark Gupta: Okay. That makes sense, Alain. Thanks so much. All the best for this year.

Alain Bedard: Thank you.

Operator: Our next question comes from Brian Ossenbeck from JPMorgan. Please go ahead.

Brian Ossenbeck: Hey, good afternoon, Alain. Thanks for taking the question.

Alain Bedard: Pleasure, Brian.

Brian Ossenbeck: Just to go back to TForce Freight, you mentioned all the initiatives that you’ve laid out in terms of the system migration. But maybe you can talk about the workforce productivity because it sounded like it was being put into place last quarter, maybe it didn’t come through this quarter as well as you might have hoped. But when you get out three or four quarters from now, would you think the run rate OR margin is going to be €“ as you have visibility to a lot of the self-help even if the macro doesn’t come through as you might hope?

Alain Bedard: Yes. Well, our goal, Brian, is to get to an 80 OR right. And we said it from day one. We believe that this company could get there. Now listen, 2023, start is difficult. We’re investing in equipment and technology and all that. But it’s also a big question about the style, the management style. Like I was just explaining, how fast can you start moving and make the decision. So 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. Now that being said, we’ve implemented the new tools, new information so that the guys could start doing a job much faster, but that will take time and that takes education.

So can we do better than a 90 OR in, let’s say, in Q4 of 2023? I think so. I think that with all the cars that we’re going to be shedding, okay, will help us get closer to maybe a 87 in 2023, maybe an 88, all the admin cars that we have to get rid of because we have way too many cost right now because we’re going to a transition agreement and all that. So we’re paying on one side with the transition agreement, and we’re paying on the other side because we had to hire people and train them that for them to be able to do the job once we run away from UPS. So this is all going on into 2023. So that’s why we feel good that by the end of this year, the contribution of TForce Freight is going to be better than just a 10-point of OE.

Brian Ossenbeck: Okay. Thank you for all that. And as a follow-up, I know you said you can’t give too much information on ArcBest and what we might do it at this point. But maybe you can just maybe put some general thoughts around that? Would that be some sort of joint venture in the U.S.? It’s a little hard to figure out what that might be. So any thoughts on your actions or potential there would be helpful?

Alain Bedard: Yes. Well, Brian, I think I’ve said enough on that. I don’t want to say more. It’s very early in this kind of process right now, right. So I think that I’ve said probably even more than I should have said on that. We believe that this is a good company, okay. And if we work together, like we do with a lot of our peers because we make some deals, Brian, with nonunion carriers on the real estate side, okay. We’re having some discussion with nonunion carrier with on different aspects of business. Us, what we’re trying to do is what we’re doing in Canada. So as an example, in Canada, I work with €“ we work with Mullen, one of my peers. So it’s not €“ oh, no, no, no, you can’t work with this guys company. No. So 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.

Brian Ossenbeck: Okay. Thank you very much, Alain. Appreciate it.

Alain Bedard: Pleasure.

Operator: The next question comes from Jason Seidl from Cowen. Please go ahead.

Jason Seidl: Thank you, operator. Hey Alain, good afternoon.

Alain Bedard: Good afternoon, Jason.

Jason Seidl: I wanted to talk a little bit about what your customers are telling you about inventory levels? And when do you think that they’re going to be sort of appropriately rightsized to start seeing some more growth going forward?

Alain Bedard: Still high. It’s still high. I mean because of all this mess in the supply chain, so what do you do? I mean, you need two, you order four because you’re afraid that you’ll get only one. So I mean €“ and then whoops, stuff starts to come in, everybody is busy, but then everybody has got too much. So that takes time, okay, to go through all this supply that there’s too many. Now depending on who you talk to, it’s the end of Q1, it could be the end of Q2. But for sure, it’s going to happen in 2023.

Jason Seidl: Okay. That’s good color. I wanted to talk a little bit about the P&C side. Could you break down what’s going on between B2C and B2B? And where you think the trends are going to run as we move throughout 2023?

Alain Bedard: Yes. So 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. And then things start to slow down in 2022 early in the year. And now our B2C is really like probably like more 15% to 20%. So 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, one stop is one package. So this is what we’re going through right now. But we could do, I think, a better job in terms of organic growth. So this is why our focus over the last, I would say, six months, six months of 2022 and into 2023, Bob and the team, their goal is really to start growing organically again.

Now we’re fighting competition there. And some of my peers are not about making money. So that is a little bit the difficulty that Bob and his team have is that we’re competing with 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.

Jason Seidl: Understood. Alain, appreciate the color and time as always.

Alain Bedard: Thank you, Jason.

Operator: The next question comes from Tom Wadewitz from UBS. Please go ahead.

Thomas Wadewitz: Yes. Thanks, Alain. I 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, but I didn’t know if that was a view on full-year 2023, what would be thinking about? You also kind of mentioned sub-90 for 4Q. So just wanted to see if you could revisit that and make sure I understand what the comment was?

Alain Bedard: Yes. Very good, Tom. So what I’m saying is that I think that by the end, okay, of 2023 Q4, okay, hopefully, we get to an 87 or an 88 OR TForce Freight. Why is that? Because our volumes should start to pick up again, okay, number one. Number two is we’re shedding a lot of cost through the TSA. TSA, day one was costing us on a yearly basis, $72 million, okay. So just the finance portion was about $7 million or $8 million. But over and above that cost is we’re stuck with trying to build a team that’s going to replace what UPS is doing, right? So it’s €“ all these costs are slowly getting rid of. And now that’s why I believe that 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.

Thomas Wadewitz: And so should we think about €“ like seasonality would suggest, normally, 4Q is not as good as 2Q, 3Q, but it sounds like you have things that might kind of overcome the seasonality. Should we think about kind of sequential improvement 2Q, 3Q, 4Q? Or is that the wrong way to look at it?

Alain Bedard: Well, I think 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.

Thomas Wadewitz: In 4Q 2023?

Alain Bedard: A 300 basis point improvement year-over-year in Q4.

Thomas Wadewitz: In Q4?

Alain Bedard: Yes.

Thomas Wadewitz: Yes. Okay. That’s great. Thank you for that. I guess going back to the topic of acquisitions, you’ve got a lot of visibility and conviction on small carrier acquisitions, the 300 million tuck-ins you mentioned. And you said you want to kind of buy when things are bad. Are things bad for big targets as well? Like do you think you €“ are you optimistic about larger acquisition potential? Or is that tougher to say?

Alain Bedard: You know what, Tom, the problem with something big, it takes a long, long time. You do something small, let’s say, $100 million, $200 million, $300 million revenue, you could do that fast, let’s say, within three 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. And like I said, the first answer from the target, my experience always, no. No, we don’t do that. Why would you do that? I mean, so it takes time. It takes a lot of discussion. So this is why, as I said, on average, we do something upsize every three years, three, four years, right. So last time we did something upsize was year and a half ago with UPS.

So maybe we could get something done in late 2023, but I think it’s going to be more like in 2024. So are things going to get better in 2024? Probably, right? So you’re buying bad news, you’re selling good news. So this is not going to apply in 2024, but that takes so long to do something upsize, my experience.

Thomas Wadewitz: Okay. Yes. Great. That’s very helpful. Thank you, Alain.

Alain Bedard: Pleasure, Tom.

Operator: The next question comes from Kevin Chiang from CIBC. Please go ahead.

Kevin Chiang: Good evening, Alain. Thanks for taking my question.

Alain Bedard: My pleasure, Kevin.

Kevin Chiang: If I could just go back to €“ I mean you talked about maybe your U.S. LTL segment, maybe just reacting slower than what you typically see in Canada. You talked about some of the system transitions. The one that you just completed a week ago, like is that enough for them to tighten up that feedback loop? Or would you need to get to that HR rollover before you start driving better productivity.

Alain Bedard: 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 of that, I mean, we’re well positioned now to start doing what we’re supposed to do is manage costs at the terminal level, right. So in Canada, every terminal that we manage has a P&L. So we know what’s going on. We don’t have that at TForce Freight today, right. So the manager is not responsible for all the costs. He doesn’t know. He’s got no financial information. So now that we are running on TFI 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 cost 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. So we manage dollars. We don’t manage stop per hours or pounds on the dock or things like that. We educate our guys to manage dollars because that’s what we bring to the bank.

Kevin Chiang: Right. That makes a ton of sense, and it sounds like maybe harvesting those benefits in the near future here. Maybe just on the longer-term U.S. LTL OR target, let’s say 80% to 85% in the next couple of years here. Does that require you to get back to 30,000 shipments a day? I understand the need to kind of find the freight that fits. But do you need to get back to the absolute volume numbers that you inherited when you acquired this business to hit the margin targets or 25,000 shipments a day, you can hit the margins you need to hit?

Alain Bedard: Yes, yes. No, No, the OR €“ I mean, we have a lot of fixed costs, okay, Kevin, I agree with you. But we’re going to start shedding those fixed costs to bring this company lean and mean. That will take time. I mean, it’s not going to happen. Now we could get to an 80%, 85% OR within two years at 25,000 shipments. Why? Because we’re working at the same time on fixed costs. So 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, 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. So we’re doing more with less slowly. And like I was explaining, the day we started moving the management of cost at the terminal level.

I mean we will see a major, major improvement in terms of cost because that’s the role of this manager. He’s got to manage his people, he’s going to manage his cost. And he’s going to manage his equipment. One of the first thing that we’ve done in 2022 is all the real estate has been leased right now to the operating company. And in 2023, all the truck and trailers in 2023 are being leased to the operating company now. So the manager now sees a rent cost for his real estate. He see a rent cost €“ or he will see a rent cost for his fleet equipment. And we know by experience that this is really a major high opener for a manager that’s qualified. Now if you have a manager, that’s not good, well, he’s not going to be able to do the job and we’ll just have to replace this guy over time.

Kevin Chiang: Right, right. No, that’s great color. Thanks for taking my questions. And best of luck in 2023.

Alain Bedard: Thank you.

Operator: The next question comes from Ari Rosa from Credit Suisse. Please go ahead.

Ariel Rosa: Great. Good afternoon, Alain.

Alain Bedard: Hi, Ari.

Ariel Rosa: Hey, how you doing? So I wanted to ask you about the €“ I wanted to ask you about the $800 million free cash flow target. How do you think about the resiliency of that figure? So it’s obviously a pretty material step up from a couple of years ago. I think in a softer environment, it’s certainly a good €“ a very good result, I think we would characterize it as. And especially given some of the investments that you’re talking about, whether it’s kind of the working capital drag that you saw last year or some of these investments that you’re making on the 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 kind of where do you get confidence in that number?

Alain Bedard: Yes. 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. And by the end of 2023, the average age of our fleet in the U.S. LTL is going to be normal. So we’re going to be running like a 4-year old fleet versus a 7.5-year-old fleet like when we bought the company. So this takes that into account, okay. So by the end of 2023, we should be probably more into a normal kind of environment. So if you remember what I’ve said in the tax is we’re going to do net CapEx of between 250 to 275. So we feel about that this 800 is still very conservative, based on what we know so far.

Ariel Rosa: Got it. So 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 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?

Alain Bedard: Between $800 million and $1 billion should be the normal. Now you got to be careful about inflation on the cost of CapEx. So if inflation kills me by about 10%, so on $300 million, that’s $30 million. But this is €“ I would say that between $800 million to $1 billion is the normal range of free cash flow for TFI going forward.

Ariel Rosa: Got it. That’s super helpful. And then I wanted to ask, obviously, especially in Canada, it was a little bit of a challenging winter in terms of December in Q4. 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?

Alain Bedard: Yes. Yes. Well, we had some issues also with the weather in January. I mean we had a major storm in Toronto, a major storm in the U.S., too. But this is winter. I mean it happens every year. Now one of the good thing, though, is that it’s been a warm winter so far, right? If you look at January and December, to a certain degree, December wasn’t so bad. But even January was very warm, warmer than normal, right. So that helps us a little bit. Now I feel good when I look at our actual results for the month of January is that a lot of what we anticipated as being dark and very soft is not happening. So I would say that we’re probably a little bit ahead of the plan so far. So far, so good. So it’s normal. We should be ahead of the plan because every year, we have to beat the plan, right?

Ariel Rosa: Got it. Absolutely. That’s very helpful. Thanks for the thoughts there, Alain

Alain Bedard: Pleasure.

Operator: The next question comes from Cameron Doerksen from National Bank Financial. Please go ahead.

Cameron Doerksen: Thanks very much. Good afternoon.

Alain Bedard: Good afternoon, Cameron.

Cameron Doerksen: So 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?

Alain Bedard: Last mile, Cameron, in Canada are doing really, really well. I mean our operation is second to none. We are €“ we went through a soft patch in 2022 because we’ve lost the largest E-tailer in North America, our friend at Amazon, I would say that. But so we had to recoup all that volume with other customers. So we are starting to see some organic growth in 2023 in our Canadian operation. On our U.S. operation, our revenue is about flat, okay. So 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. So that’s going to €“ with this M&A, we are now organically, including this M&A, ahead of last year. And we’re going in the U.S. to a transition again, okay. That’s been going on for years and years where we’re replacing average account by better account, right.

So we’ve not been growing the topline that much, but we’ve been growing the bottom line every year-over-year. So that will continue. So we feel pretty good. Now the big hit that we had in our logistics in Q4 is really coming from TFWW, which is our logistics arm in the U.S. And that was because the LTL really dropped like a rock in, I would say, November and December with these guys. And if you look at one of my peers that came out with their numbers, I mean, it was like a very difficult quarters for them, right? So if you look at another of my peers that came out, I mean, last week, their logistics also is a 2% bottom line operation. So I mean, as we’re coming out with a nine, so there’s not that many guys that can run a logistics operation with a 9 or a 91 OR.

Cameron Doerksen: Okay. And have you seen any, I guess, trends on that business change in Q1 so far?

Alain Bedard: No, no. So Q1, I think that it’s going to be an uphill battle on the revenue side, okay. But we’re holding firm on our profitability. And 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 dollars of OE for the logistics.

Cameron Doerksen: Perfect. I appreciate the color. Thanks very much.

Alain Bedard: Pleasure, Cameron.

Operator: The next question comes from Benoit Poirier from Desjardin. Please go ahead.

Benoit Poirier: Hey, good afternoon, Alain.

Alain Bedard: Good afternoon, Benoit.

Benoit Poirier: Yes. 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. But would you be willing to increase significantly the size of your logistics business, Alain?

Alain Bedard: Well, it depends, right. It depends. So 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. So that was a nice acquisition for us. It really was a good fit. So I’m not saying no to something of size, but we’re always very careful about what we do in the logistics sector because we don’t want to 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.

Benoit Poirier: Okay. And 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?

Alain Bedard: Well, 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 a 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 stand-alone 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. Now I mean, every situation has got to be looked at. Us, we like to do a deal friendly. We don’t €“ we’re not a big fan of doing a enough style kind of transaction. So every time we do a deal is always €“ I’ve never done a deal style anyway because I mean €“ so these kinds of discussions, like I was saying, with a target of size, this 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 lose revenue, you lose some profit, and then you have to find something else to do. So us like, for example, we sold CFI to Heartland. Great transaction for the buyer. But now us, okay, fine, we got cash in the bank, but we got to find something. What are we going to do with this capital down? Well, the idea is to do better than the CFI asset when we used to own it, but we have to find it. So we’re doing a lot of these small tuck-ins right now. But the big whale, okay, is €“ it’s in sight, we’re trying, but we didn’t catch it yet.

Benoit Poirier: Okay. Thank you very much for the time, Alain.

Alain Bedard: Pleasure, Benoit.

Operator: The next question comes from Tim James from TD Securities. Please go ahead.

Tim James: Thank you. Thanks for taking my question, Alain. I’m going to turn to P&C for a minute. You’ve talked about having to face a not-for-profit competitor there and the challenges that, that brings. And yet that business, I mean, you’ve done great things with that business. I mean, really growth maybe has been challenging, but the returns have actually been very good. What does stepping up or putting your foot on the gas for growth, what does that look like then given this environment? And I guess, given that competitor, sort of how should that look? And what’s the execution required there?

Alain Bedard: Yes. Well, that’s a very good question. When I’m talking to Bob and the team there, I mean, our focus is we’re having our team focus on try to get more business from existing customers because some customers they split the business between, let’s say, us and one of my peers, right? So it could be 50-50. It could be €“ let’s say, us, we have 70, and some of our peers have 30. But sometimes, we have 20% and my peers have 80%. So can you guys sit down with this customer and try to get the 20 up to 50, right? So that’s what we’re trying to do, not necessarily try to get new customers in the door. Yes, if we could find a good one, so be it. But what the focus has always been, guys, in order to create more density, you need more freight per stop, right?

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. So this is the €“ the mission that we have with our team there in Canada is that, guys, we’re running a fantastic operation. I mean 20, 20, 20 OE, 20% OE, who’s doing that? I mean Wow, this is great. Well, we just have to do more, right. So let’s grow with our existing customers. The ones that are giving us only 20% of the business, can we get 40%? Can we get 50%? That’s going to be really the goal for us. Now for sure, we have some capacity issue. Like, for example, we’re building a new hub in Edmonton. I mean this is going to start this summer. So Edmonton, for us, even if we want to grow Edmonton, it’s going to be difficult, but we opened up Calgary, new hub in Calgary two years ago.

We just opened up Winnipeg last fall. So that helps us creating or getting rid of a bottleneck, okay, or old terminals with old technology, okay, where you bring more volume in, but you don’t have good costs, but now with new terminal, new technology, new conveyors, you can bring more volume in. So this is what the goal is, to keep polishing that diamond and try to get the diamond a little bit bigger.

Tim James: Okay. 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, is the potential for a migration of some of the over-the-road volume back towards intermodal, is that a challenge for TFI as you look at over the next couple of years? Or could that be an opportunity for you?

Alain Bedard: It’s really a challenge because what we put on the rail is it’s always a relationship between cost and service. So I mean, you can’t really €“ when you have a customer that wants really a AAA kind of service, you can’t take the risk of the rail because rail service is €“ it seems okay, but even more so in the winter, there’s always 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. So 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. And then when a customer wants to have a better deal, wants to save money, okay, not so picky about service then, okay, we’ll fight and we’ll bring this guy to our rail operation, our intermodal operation.

That is really the play, okay, that we have on the Canadian side. So it’s really a two split kind of an operation. So you got TST Overland that runs road. You got TForce Freight Canada that runs road, but then you got Vitran and Clarke that runs rail.

Tim James: Okay. Thank you very much for the time. That’s great.

Alain Bedard: Pleasure.

Operator: This concludes the question-and-answer session. I would like to turn the conference over to Mr. Bedard for any closing remarks.

Alain Bedard: 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, and we appreciate your interest in TFI International. So thank you again, and have a great evening. Bye.

Operator: This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.