TFI International - Q2 2023
August 1, 2023
Transcript
Operator (participant)
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to TFI International Q2 2023 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 instructions for entering the queue will be provided at the time. Please be advised that this conference call will contain statements that are forward-looking in nature and subject to a number of risks and uncertainties that could cause actual results to differ materially. Also, I would like to remind everyone that this conference call is being recorded on Tuesday, August 1, 2023. I will now turn the call over to Alain Bédard, Chairman, President, and Chief Executive Officer of TFI International.
Please go ahead, sir.
Alain Bédard (Chairman, President and CEO)
Well, thank you very much, operator, and thank you everyone for joining us this morning. Yesterday, after market close, we released our Q2 2023 results. During these tough times for the freight market with lower volumes industry-wide, it was critical that we abide by our long-term operating principles. We did just that. We again demonstrated the quality of our operation and our team's ability to quickly react to changing market conditions by focusing intensely on the fundamentals of the business at all times. Speaking of our team, I'm pleased to announce that just yesterday, our Teamsters Freight unionized employees ratified a new agreement with an 81% vote in favor, which we view as favorable outcome for everyone involved. Throughout our organization, we recognize the importance of profitability and cash flow.
This is what allowed us to produce solid results during a difficult quarter, with solid operating ratio across all four of our business segments. In turn, this focus on profitability and cash flow, as I've mentioned many times, allows us to steadily, steadily invest in the business, take a disciplined and strategic approach to M&A, and as always, return excess capital to shareholders whenever possible.
We produced just over $200 million in net cash from operating activities during the Q2, with free cash flow of $138 million, despite the industry-wide weaker freight environment and other factors I'll outline in a moment. Our operating income during the Q2 was $192 million, reflecting an operating margin of 20.4%. This compares to the prior year's quarter of $391 million with a margin of 19.7%.
Our adjusted net income of $139 million compares to $241 million, our adjusted EPS is $1.59 compared to $2.61. We view these as solid results under the circumstances, supported by our team's ability to protect margin by quickly reacting to changing market conditions, changing market dynamics. Our success in this regard is best reflected by the strong returns on invested capital across our organization. When comparing to prior year, I point out that our results reflect not only our sales of CFI last August, but last year's sizable gain on the sales of real estate in both LTL and truckload segments. In addition, similar to last quarter, foreign exchange fluctuation hamper the year-over-year comparison.
Similar to last quarter, we incurred costs associated with the transitioning of our IT system from UPS to help enhance efficiency going forward, while providing better controls and insight and allowing us to exit our TSA with UPS. TFI reported results are fully burdened, as we are not adjusting this year, nor did we in the Q2 of 2022, for any of these items that worked against our year-over-year comparison.
Let's turn to the performance of each of our business segments, starting with our P&C, which represents 7% of our segment revenue before fuel surcharge. We saw an 8% decline in both the numbers of package and revenue before fuel surcharge. Our operating income came in at $27 million, relative to $37 million the prior year, with a margin of 23% relative to 29%.
Our return on invested capital actually improved to 28.8% from 27.6% a year earlier. Next up is our LTL, which is 43% of segmented revenue before fuel surcharge. Shipments were down 18% and our revenue before fuel surcharge was down 23%, also reflecting the unfavorable FX impact. Operating income of $81 million compares to $187 million in the year ago period, again, we do not adjust for the IT system transition, nor our sales of real estate at a gain in a year to go period. Digging deeper within LTL, Canadian revenue before fuel surcharge was down 14%, our operating ratio remains strong at 73.7%, compared to 69.1% the prior year.
At the same time, our return on invested capital for Canadian LTL actually improved to 21.1, up 70 basis point versus a year earlier. Turning to US LTL. Revenue before fuel surcharge of $550 million, compares to $725 million the prior year, due to volume pressure. Reflecting our continued progress with our turnaround plan to streamline the operation of TForce Freight, our adjusted operating ratio of 91.5 reflects relative stability versus 88%, reported a year earlier. Importantly, our work is not done enhancing the efficiency of acquired operation. Return on invested capital for US LTL was 16% compared to the prior year's quarter at 24.5. Let's move on to truckload, which represent 26% of our segment revenue before fuel surcharge.
Revenue before fuel surcharge was down 26%, reflecting not only weaker volumes, but our sales of CFI last year and unfavorable foreign exchange translation. Operating income was $66 million relative to $127 million last year, reflecting the same factor, plus our sales of real estate in the prior year period, and our margin of 16.1 was down from 22.9. Within truckload, revenue before fuel surcharge for our specialized operations, which benefit from our diversity and exposure to niche market, performed relatively well at $335 million versus $353 million the year prior, despite FX. Our operating ratio also held under the condition at 83.9 versus 77.1 the year prior, and our return on invested capital actually improved to 12.7, up 150 basis point over the past year.
This is yet another business where TFI has what we refer to as self-help opportunity, regardless of the macro environment. The Canadian-based conventional truckload, which produced revenue before fuel surcharge of $77 million, down from $88 million. A comparison that would have been stronger on a constant currency basis. Our 84.3 adjusted operating ratio, which compares to 73.4 a year earlier, is impressive under the circumstances, benefiting from our continuing focus on network density and cost control. Our return on invested capital once again showed improvement despite industry headwinds coming in at 17%, up 30 basis points. Let's discuss our logistics segment, which represents 23% of segment revenue before fuel surcharge.
We've produced $362 million of revenue before fuel surcharge, reflecting both volume declines and foreign exchange when compared to the year ago, $454 million. Logistics operating income of $33 million compares to $42 million a year earlier, and our operating margin actually held nearly flat at just above 9%, reflecting our team's success in reacting to market condition, as well as the relative strength of our same-day package delivery operation. Rounding up our logistics discussion, our return on invested capital was 17.9 versus 11.1 a year ago. Shifting gears. Strong free cash flow across our business, totaling $138 million, I mentioned, continues to benefit TFI International balance sheet. We ended June, okay, with a funded debt to EBITDA ratio of 1.11, at 1.11.
As a reminder, our debt is almost entirely at fixed rate, at a weighted average cost of just under 3.5%. This financial strength is an important pillar to, of our strategy, allowing for smart investment in the business regardless of the cycle, while continuing to return capital to our shareholder whenever possible. During 2023, we have now completed 7 small tuck-ins acquisition, including one completed subsequent to the Q2. Our ability to take a disciplined approach to M&A stems directly from our strong balance sheet and the patience it allows. We also announced on June 15th that our board of directors approved another $0.35 quarterly dividend, which is 30% higher than the year ago quarter.
Turning to our updated full year outlook, we are updating our guidance provided in April to a range of $6-$6.50 for 2023 EPS. We maintain our free cash flow at $700 million-$800 million, which is based on net CapEx of between $200 million-$225 million. In terms of capital allocation, given the strength of our current M&A pipeline, we expect that for the full year, we will now allocate a total of approximately $500 million to a combination of acquisition and share repurchases. With that, operator, we're now ready to move into Q&A. If you could please open the lines.
Operator (participant)
Excuse me, ladies and gentlemen. To ask a question, you will need to press star one on your telephone keypad. To withdraw your question, please press star two. Callers will be limited to one question and one follow-up in order to get to as many callers as possible. Again, that's star one to ask questions. Please stand by while we compile the Q&A holster. Our first question comes from Ravi Shanker with Morgan Stanley.
Ravi Shanker (Managing Director)
Morning, Alain. Thanks so much. Thanks for the update on, on the numbers. Would love to get your thoughts on some of the strategic changes taking place in the U.S. LTL industry. Obviously, one of your large peers has kind of temporarily stopped taking on new business. What do you think the near-term implications are for TFI? Kind of, are you seeing that, seeing some of the benefits of that already? How do you think this industry evolves in the coming days and also the coming years?
Alain Bédard (Chairman, President and CEO)
Well, thank you, Ravi, for the question. I mean, I think this is a very good question, you know, first thing that was important to us is to get a, a long-term agreement with our employees, okay, which we did very successfully. You know, they just ended voting on the weekend, and we got the result, and it was very well accepted, okay, this, this plan for the next five years. Now, in terms of what's going on in the industry, you know, we're looking at, you know, it's a very special situation. You know, a few months ago, we, we were looking at it and saying, "Hmm, don't know. Don't know what's gonna happen there." Over the weekend, we were updated.
Now, what I could say is that for sure, if I look at the average volume of TFI, TForce Freight division, okay, in the US LTL, prior to all these things going on right now, you know, we were doing about 23,000 shipments a day, very steady since January of 2023. Then, whoops, now we're running more like a 26,000 shipments a day, lately, right? More importantly, is the quality of revenue, okay? If we look at the improvement of quality of revenue, you know, we're doing better, better. If you look at my Q2 year-over-year, my quality of revenue is down a little bit, like 2.5% down.
Now, if I'm looking at, let's say, the last shipments of July versus the earlier shipments in July, my average revenue per shipment is up about 3.5%. I think that this is gonna be really, really good for the industry in general. But for sure, like, our team is really looking into, deep into this. We need the freight that fits our, our system. Now, the good thing at TForce Freight is that I've got 4,000 doors too many, right? We could run a 40,000-45,000 shipments of the operation within TForce Freight. Real estate is not an issue. The other thing also that's not an issue is our drivers and our dock workers, because a year ago, we were running about 28,000-30,000 shipments a day.
Now, before all these changes in the industry, we were down to 23,000. We had a lot of people on layoff. Now we're calling back these people slowly, okay? We have the capital, we have the equipment, we have the employees, we have the real estate to benefit whatever we can get from this major changes in the market. Now, if you also look at, you know, our Q2 numbers in terms of OR year-over-year, last year was our best quarter ever at 88 OR. Now, in a very difficult environment, with 18% less volume, with price pressure a little bit like to 2.5, we were able, with our team, okay, that are doing a fantastic job, slowly, okay, to get to a 91.5 OR, which is not great, okay?
Under the circumstances, I, I think that the guys did a fantastic job. The other very important point to notice on that is that slowly, for the first time, we're gonna be moving with P&L by terminal before year-end, okay? Our, our terminal managers now will be able to manage dollars, which they've never done in their life, right? This is the key, if you compare that with our Canadian LTL, is in a very difficult market. If you look at our Canadian LTL OR, last year, we were sub 70, we're 69. Now, this year, we're at 73.7. Not great, but I mean, it's a very difficult market in Canada. And, you know, the, the reason, the main reason, okay, why we're doing so well in Canada is because our guys have the financial information. They can't sit on their hands, okay?
They have the tools, they have the info, and, and they take action. In the U.S., okay, slowly, now that we've moved away from the UPS financial system, now it's on the TFI financial system. Slowly, we're gonna be moving financial information to those managers, those RDOs, those regional directors of operations, so that they can, you know, take action and reduce costs and do more with less. To me.
Ravi Shanker (Managing Director)
Very helpful, yeah.
Alain Bédard (Chairman, President and CEO)
It, it, it's fantastic, what's going on right now.
Ravi Shanker (Managing Director)
Wonderful. Thank you, sir.
Alain Bédard (Chairman, President and CEO)
Pleasure, Ravi.
Operator (participant)
Our next question comes from Walter Spracklin with RBC. Please go ahead.
Walter Spracklin (Head of Canadian Equity Research and Co-Head of Global Industrial Research)
Thanks very much. Good morning, Alain.
Alain Bédard (Chairman, President and CEO)
Good morning.
Walter Spracklin (Head of Canadian Equity Research and Co-Head of Global Industrial Research)
Congratulations on the, on the union deal. Certainly, that's a, that's a, that's an important milestone, given everything, going on. I was wondering if you might be able to give us any, any, any terms of the deal, so we can look at how that figures into our OR forecasts for, for, for your LTL division going forward.
Alain Bédard (Chairman, President and CEO)
Yeah. In general, Walter, this is about a 3% increase to our costs on every year, okay? On this global deal. If you look at year 1 of our contract, which starts August 6th, right? August 6th, our employees in general, okay, will get $1.70 an hour more, okay? That was difficult to explain to our employees, because if you remember, one of our peers just signed a contract with them, with the Teamsters and their employees a month ago. Day 1, the employees got $3.50.
Now, what we have to explain to our employees is that, "Yeah, yeah, guys, okay, $350 is not the same as $170." Don't forget that at the peers, these guys are getting, on average, about $4 less an hour versus us. Our peers is catching up to us. At the end of our contract, the delta salary, base salary between us and the peers will still be about $1.75-$2 an hours difference. We are paying more base salary than our peers five years from now. On average, okay, Walter, to put in your model, I mean, the inflation on salary is gonna be about 3% on average for five years, every year for five years.
Walter Spracklin (Head of Canadian Equity Research and Co-Head of Global Industrial Research)
That's great. That's great color, and I appreciate that. Next question's on, just on M&A in general. I know you said $500 million combined M&A buyback. I don't know if you have any, is that something that you just are holding on to see how M&A develops, and you'll adjust-
Alain Bédard (Chairman, President and CEO)
Yeah.
Walter Spracklin (Head of Canadian Equity Research and Co-Head of Global Industrial Research)
As you go through the year, and, and perhaps any commentary on the ArcBest divestiture of that stock and what it means.
Alain Bédard (Chairman, President and CEO)
Yeah.
Walter Spracklin (Head of Canadian Equity Research and Co-Head of Global Industrial Research)
for any, any large deal, timeline.
Alain Bédard (Chairman, President and CEO)
Yeah.
Walter Spracklin (Head of Canadian Equity Research and Co-Head of Global Industrial Research)
into next year?
Alain Bédard (Chairman, President and CEO)
Yeah. Yeah, yeah. Very good question, Walter. You know what? Let's start with the divestiture of, of ArcBest. I mean, we looked at the situation, okay? We had to go through our contract, and then we saw what was going on with some of our... One of our peers that was going through a very difficult period. We said: If this happens, I mean, we're gonna be too busy. We're gonna be way too busy, us and them, okay, to go through all these changes in the industry. The timing is wrong, so that's why we sold our position, right? Then we'll see in 2024.
In terms of M&A, for sure, Walter, I mean, I think that pretty soon we'll be announcing a fantastic transaction, and that's the reason why we sold our position, okay, so that we don't leverage our balance sheet more than... Because right now we're at 1.11. You know, we think that by the end of next quarter, Q3, with a transaction that we think that's gonna happen very soon, our leverage is gonna go all the way up to 1.25, right? Not at nothing major, but thanks to the, to the sale of our investment in ArcBest, I mean, we're able to get this leverage keep really, really low. This is not gonna be a major year for M&A, okay, in 2023, but we're getting ready for 2024.
Walter Spracklin (Head of Canadian Equity Research and Co-Head of Global Industrial Research)
Got it. Okay. Last question here on coming back to the Yellow. Do you think that the opportunities might present themselves for you to go into new markets through the purchase of terminals or assets, or is densification and repricing your main objective? And a little bit more of a longer-term question, investors are starting to change their view on LTL and to the positive and, you know, many compare even to the railroad pricing.
Is that something that you think is going to develop, and, and would you look at LTL longer term as something we, we can price, whereas we haven't in the past in our models, but we can, with, with good comfort, put in some, some notional pricing increases because of the added, the, the added quality and, and fundamentals of that, of that sector?
Alain Bédard (Chairman, President and CEO)
I think you're right, Walter. I mean, us, our goal number 1, okay, with everything that's going on right now, is to increase our density, not to grow our network. I mean, like I said, we, we got 4,000 too many doors to today, right?
Walter Spracklin (Head of Canadian Equity Research and Co-Head of Global Industrial Research)
Yeah.
Alain Bédard (Chairman, President and CEO)
We could haul a lot more freight, really, what we're gonna be really strategic in what we take on as customers. That has to fit our network and increase our density, because that's the name of the game. If you want to reduce your costs, okay, per shipment, I mean, you can't drive 10 miles between each and every stop. I mean, in Canada, we drive about 5 miles between each and every stop, and in the U.S., we drive 10. It doesn't make any sense, right? That's our focus, and, you know, we're lucky. I mean, you know, sometimes you need to be lucky, and with the, the demise of one of our peers, I mean, this is really a lucky event for us. It helps us build density and, and that's gonna be great.
In terms of the industry, I think that the U.S. LTL is day and night versus the Canadian ones. I mean, in Canada, we have lots of competition, okay. You know, we have one smart competitor, yes, okay, but, you know, we just acquired an LTL company in Saskatchewan, and let me tell you, those guys are not running at a 75 OR or, or a 90 OR, right? Okay. We'll, we'll, we'll change that. In the U.S., it's a very different story because one of the weakest player, now is gone, right? That's gonna change, and already you can see over the last 10 years, you know, if you look at the superstar of LTL in the U.S., okay, I was looking at the results.
Their volumes were down more than 10%, but their pricing year over year was up 7%. That tells you that these guys are really smart, right? The industry in general also, if you look at another of our peers in the US, their, their volume was down, like, 3% or 4%, okay, but they did well. Just a few guys sometimes, you know, chasing volume. Volume is up 4%, OE is down 40%. Well, that's not us, right? I think that the US LTL industry is really getting closer and closer. Okay, to what you could compare to the rail. Absolutely. I mean, we have one player, as the, the best LTL guy in the US. He's running a 7 EOR or in that neighborhood, right?
You know, I think that the industry will benefit from all that, and, you know, so it, it's the place to be. This is why, you know, with everything that's going on right now, we think that from 23,000 shipments, we get to 25, 26, 27, hopefully by the end of the year, this is gonna be great. More importantly, like I said to my guys, guys, we got to work on the cost. We have to be closer to the tiger in the jungle, not the big, fat elephant, right?
Walter Spracklin (Head of Canadian Equity Research and Co-Head of Global Industrial Research)
Okay, leave it there. Thank you very much, Alain.
Alain Bédard (Chairman, President and CEO)
Pleasure, Walter.
Operator (participant)
Excuse me. As a reminder, please limit it to one question and a follow-up in order to get to as many callers as possible. Our next question comes from Jordan Alliger with Goldman Sachs.
Jordan Alliger (VP and Equity Research Analyst)
Yeah, hi, morning. with the-
Alain Bédard (Chairman, President and CEO)
Morning.
Jordan Alliger (VP and Equity Research Analyst)
Morning. The, the fairly, rapid, I guess, pickup in volumes here in the near term, with Yellow in the U.S. LTL business, is that enough to mitigate the cost of your new contract and, and perhaps do an OR better than, I think, the 92 you talked about in the last call?
Alain Bédard (Chairman, President and CEO)
Well, I think so, Jordan, I think that, you know, what, what's gonna help for sure, for me, running a 23,000 shipments a day, when you have a network that could do 40,000 shipments a day, right? I mean, 26 is better than 23, but at the end of the day, with the new contract, okay, where it provides us inflation to our costs, we have to, to be more strategic and work with our employees in a, in a way that reduces our cost per shipment. What I could tell you is that, right now, our average cost per shipment, year-over-year, okay, versus 2022, a year ago. I mean, our average cost per shipment is down about 15%.
We did really well in Q2 last year with an 88 OR, with less volume, we have a less cost per labor cost per shipment this year versus last year. For sure, we have all these other costs, really the main costs in an LTL operation is your labor and your fuel, and your fuel? Yes, I think that even with this inflation on our labor costs, our OR will keep improving. Don't forget that, you know, slowly we build a 23,000 shipment base. That is quite solid, now we're building on top of that. You know, at 26, we're not at 30, we're not at 35, slowly we'll get there.
In the meantime, like I said, on, on the first analyst question, is that by moving financial information to our terminal manager, this is gonna be, you know, a fantastic tool for those guys to do more with less. That is the key success for TFI in its Canadian LTL division. We have managers that manage people, manage costs, manage service, not just manage service.
Jordan Alliger (VP and Equity Research Analyst)
Great, just as a follow-up, you know, the new earnings guide, I think $6.00-$6.50 is less than the other one.
Alain Bédard (Chairman, President and CEO)
Yes.
Jordan Alliger (VP and Equity Research Analyst)
the previous guide. Obviously, you know, I'm just trying to understand, is it, is it the non-LTL businesses? I'm just trying to get a sense for what sort of..
-directionally is why the new range is where it's at. Thank you.
Alain Bédard (Chairman, President and CEO)
Well, you know, a year ago, our friends at FreightWaves said, "Oh, there's a freight recession in, in April of 2022." I mean, I think these guys were right, but not 2022, it was really 2023. You know, if you look at all of our sectors, right, our Canadian LTL, I mean, revenue is down big time. Our specialty truckload down 5%, our Canadian truckload down 12%, our logistics down 20% on, on the revenue side I'm talking about. Our P&C, down about 6%, 7% on the revenue. We never anticipated such a, a major, major disruption in the market in Q2. This is why we're going ahead and reducing again, because this is the second time we do that, right?
We're reducing that again, okay, but we feel pretty good that this is attainable, and, and this is a major disruption in this market in Q2. If you look at all of our peers that came out, okay, in the U.S., or in Canada, I mean, everybody's going through some very tough, soft patch in the freight environment. Now, when we look at the summer of 2023, it's still quite soft, okay? When we talk to our customers and they say, "You know what? Inventory are starting to get low. We're starting to get, you know, some, some issues here and there." Then we got a, a stupid strike in the port of Vancouver. That affects our Canadian operation big time.
You know, there's always something that happens, you know, the flood, the this, the that. I don't wanna give any excuse, but, you know, 2023 was really a year of a lot of things that were a lot of headwinds, Canadian dollars being, you know, you know, to, to buy U.S. dollar now costs CAD 1.32 Canadian. That affects our, you know, our profitability as well. To me, I think $6.00-$6.50 is now attainable, okay? Sad to say that we were doing $8.00, okay, in 2022, down to $6.00-$6.50. It's a huge drop, but this is reflecting the market condition. Don't forget that at TFI, the culture is we protect the margin. Okay, you got two options when you have a soft market.
You could chase volume, to us, this is a chase to the bottom, and some, some of my peers are doing that. You know, I've seen that. Revenue is up, but profit is down 40%-50%. We're not that. I mean, us, we're, we're more like, okay, guys, okay, we'll, we'll, you know, we'll have less revenue, but we protect the margin because, you know, every $1 of revenue, there's a risk. A risk that you can get involved into an accident, a risk that your employee can get hurt, a risk that, you know, you're not being paid because this customer could be, you know, having some tough times, too. We, we don't like taking stupid risks like that.
This is why our revenue is down, okay, you know, when market condition changes, we'll be there, our base rate is solid, we're not gonna have to be chasing customers all over the place. No, I mean, we're, we're ready.
James Monigan (VP and Equity Research Analyst)
Thank you so much.
Alain Bédard (Chairman, President and CEO)
Pleasure.
Operator (participant)
Our next question comes from Cameron Doerksen, National Bank Financial. Please go ahead.
Cameron Doerksen (Managing Director and Senior Equity Analyst)
Thanks very much. Good morning.
Alain Bédard (Chairman, President and CEO)
Morning, Cameron.
Cameron Doerksen (Managing Director and Senior Equity Analyst)
Just, just a question on, on Canadian LTL. Like, I know Yellow had some operations in Canada. I don't think they were that large, but just wondering if there's any impact, you think, positively on, on the Canadian LTL operations?
Alain Bédard (Chairman, President and CEO)
Yes. I mean, the Yellow operation in Canada was mostly transporter freight from U.S. to Canada or Canada to the U.S. For sure, all the shippers that were using Yellow, from U.S. to Canada, now they have to find a different provider. If you look at, at our transporter, okay, business between TSD and Saia, okay, Saia is our U.S. partner with TSD. I mean, the volumes are up, like, 15% to 20%. That freight that used to be serviced by Yellow Canada, now, Yellow being out, okay, has to go through some of my peers or some of my partners, and that's the way it's gonna be fed into the Canadian market.
They were also doing a little bit of domestic freight, okay, in Canada, so that will probably go to, to us or to some of our peers.
Cameron Doerksen (Managing Director and Senior Equity Analyst)
Okay, that, that's helpful. Second question, I guess, sort of related to the, to the LTL segment, just on the ground with freight pricing, I mean, a pretty, you know, significant drop year-over-year.
Alain Bédard (Chairman, President and CEO)
Yes.
Cameron Doerksen (Managing Director and Senior Equity Analyst)
in, in that business.
Alain Bédard (Chairman, President and CEO)
Yes.
Cameron Doerksen (Managing Director and Senior Equity Analyst)
Can you, can you just talk a bit about that, you know, why was it, you know, so down so much, and what's the future of that, of that product?
Alain Bédard (Chairman, President and CEO)
You know what, Cameron? That's a very good question. Yeah, we're down big time on that. There was an issue with some customers, okay, that were cheating the system at UPS, right? This is why UPS took action. I don't want to go into the, all the technical details, but this was a few customers, four or five customers, that were a reseller, okay, that were cheating the system. You know, the UPS reaction was: No, we can't deal with those guys, right? That's why our revenue dropped like a rock, okay, in that sector. Absolutely. Now, we are rebuilding that as we speak, but that is really one of our diamond that got cut in half.
Cameron Doerksen (Managing Director and Senior Equity Analyst)
Okay, you, you still have a, a, you know, a belief that's gonna be a good long-term business for you?
Alain Bédard (Chairman, President and CEO)
Oh, yeah, absolutely.
Cameron Doerksen (Managing Director and Senior Equity Analyst)
Okay. That's great. I appreciate the color. Thank you very much.
Alain Bédard (Chairman, President and CEO)
Thank you. Thank you, Cameron.
Operator (participant)
Our next question comes from Tom Wadewitz with UBS.
Tom Wadewitz (Senior Equity Research Analyst)
yes, good morning. Alain-
Alain Bédard (Chairman, President and CEO)
Hi.
Tom Wadewitz (Senior Equity Research Analyst)
I wanted to ask you a little bit about the guidance. I know you talked about it before. I'm wondering if you're factoring into that $6-$6.50 improvement in U.S. LTL, or, you know, if that guidance reflects more what the run rate was in 2Q for U.S. LTL. It does sound like, you know, the recent kind of end of, end of July trend in both shipments and in price is pretty favorable.
Alain Bédard (Chairman, President and CEO)
Yeah
Tom Wadewitz (Senior Equity Research Analyst)
... just wanna, you know, get a sense of what your assumption is for, that business in the guide.
Alain Bédard (Chairman, President and CEO)
No, no, no. All the changes in the last week of July are not reflecting in the guidance because it's so, it's so new, right? That's why we, we went very conservative, so it's not included. Whatever benefit we get from the 23,000 shipment, if 26 or 27 sticks, 25, 26, 27 sticks with us, okay, over the long term, it's not in there.
Tom Wadewitz (Senior Equity Research Analyst)
Right. Okay, that, that would be upside to, to what you've set for the guidance.
Alain Bédard (Chairman, President and CEO)
Yes.
Tom Wadewitz (Senior Equity Research Analyst)
Great. Thank you for that. I want to ask a little bit about 2024 view on US LTL. You know, when the, I guess using your words, when the elephant becomes a tiger, you know, could run a lot faster. I think that was referenced to the cost side, you got a number of cost drivers. Obviously it looks like the revenue side is, you know, really stepping up nicely too. How do you think about where the US LTL operating ratio could potentially go in 2024? I mean, I think the obvious macro assumption, assume that you get some modest improvement in the freight backdrop. You know, can we see-
Alain Bédard (Chairman, President and CEO)
Yeah
Tom Wadewitz (Senior Equity Research Analyst)
... a really big change, 300 or 400 basis points, or would you keep it more moderate-
Alain Bédard (Chairman, President and CEO)
Yeah
Tom Wadewitz (Senior Equity Research Analyst)
... 100 to 200?
Alain Bédard (Chairman, President and CEO)
Yeah, yeah, you know what, Tom Wadewitz? I would be very, very disappointed if in 2024, we're not running a sub-90 OR operation in our US LTL. Now, one thing that's also very important to mention is, I was talking to our board yesterday about a, a little bit of a change in our structuring in our executive team. One of the changes that will be happening for 2024 is that one of our EVP, Bob McGonigal, okay, that takes care today of the package, our package business in Canada, which is only 7% of our revenue. My friend Bob, now will take over the responsibility of the US LTL, working with Keith. Keith is the president of TForce Freight. I'm still gonna be involved, okay, but to a lesser degree.
His package business will be taken over by another one of our EVP, Chris Straker. There's other changes also that's going on. We're gonna be putting even more effort, okay, from some of our Canadian team players supporting our U.S. team. You know, at the end of the day, Tom, my philosophy has always been, if you can't measure it, you can't manage it. By providing financial information to, to our terminal managers, I think that that's been the success of our business in Canada. Those poor guys right now at TForce Freight terminal managers, they have no clue, they have no financial information. We're just providing them for the last few months, okay, their average labor cost per shipment, okay?
That's how we were able to improve that by about 15% year-over-year. This is not over. I mean, we got a lot of work to do on fuel management, okay, MPG on the trucks, idling time on the trucks. I mean, there's so many leverage that we could, you know, tweak and reduce this cost. I'm very confident, okay? I would be very disappointed if that 2024, we're not a sub 90 OR. I mean, if you look at some of my peers, okay, non-union, okay, they're running an 85 OR in a tough environment, okay, like we are now. These guys will probably do better than that. We should be doing better than 91 or 92 OR in like we have now in Q2.
I think that with a little bit of a weak player gone, okay, the market probably will start to recover. I think that the pricing also will improve with everything that's going on. I would be so... Will fall off my chair if we're not running a, like, something like an 85 to an 88 OR in 2024.
Tom Wadewitz (Senior Equity Research Analyst)
Okay, great. Yeah, that's very helpful. Thank you, Alain.
Alain Bédard (Chairman, President and CEO)
Pleasure, Tom.
Operator (participant)
Our next question comes from James Monigan with Wells Fargo. Please go ahead.
James Monigan (VP and Equity Research Analyst)
Hey, good morning.
Alain Bédard (Chairman, President and CEO)
Good morning, James.
James Monigan (VP and Equity Research Analyst)
Follow up on some of the U.S. LTL questions. I guess, what's the right amount of capacity to actually release out into the market? I understand you have a lot available, but what's the right sort of amount that you can release without sort of disrupting the OR plans that you have, just, I guess I'll just leave it at that.
Alain Bédard (Chairman, President and CEO)
You know, we have the team, we have the equipment, we have the infrastructure to do easily 30,000 shipments a day. Like I said, over the last few days, we're running 25,000 to 26,000 shipments. When we bought the company, James, we were the company at the time, okay, was doing 32,000 shipments a day, right? The network that we have, okay, can support easily 40,000 shipments a day, 40,000 to 45,000. That's real estate. In terms of people, we could easily do 30,000 shipments a day, 30,000 to 32,000. This is what the company was doing two years ago. Then we went from 32 down to 23, like I said. Now we're back up to 25, maybe 25, 26, 27. Okay, we'll see where we end up.
you know, we still have lots of capacity within our system, and we have also the people to do the job. Because, you know, when we start to reduce the volume, we also lay off a lot of people, right? we also, what we did in Q1, we retired also about 150 people that were, you know, good for retirement. I think that we could do very well, but we're gonna be smart in terms of the volume that we're gonna get from our customer, because our rule number 1 is to increase our density, not to enlarge our network or add routes and this and that. No, no, let's increase our density, because I've said it many times, we can't run a P&D operation in the U.S. with 10 miles between each and every stop.
I mean, it, it doesn't make any sense. That is what we're doing now. And I use the Canadian comparison in our business. We do 5 miles between each and every stop in Canada. Canada is not U.S. I mean, the density is not the same. If, you know, dense areas, we have Vancouver, Toronto, Montreal. That's it. The rest is, there's no, there's no density in Canada.
James Monigan (VP and Equity Research Analyst)
Got it. And then... Well, I understand that, like the year-over-year, on a year-over-year basis, the everything is down quite substantially, and U.S. LTL does have a catalytic environment, but some of your peers did call out some sort of green shoots there, across sort of freight generally. Just wondering to see if you were seeing any sort of similar trends in the business, like apart from U.S. LTL, a positive trend, sort of sequentially?
Alain Bédard (Chairman, President and CEO)
Well, absolutely. I, I think that, I think that what we're seeing now is, you know, with the fact that Yellow is not gonna be there tomorrow, right? I think that this is a huge benefit for the industry in terms of... I think Yellow was doing 40,000 shipments a day, maybe not last week, but, you know, normally, two, three months ago. This is really a huge benefit for the industry. I think that everybody knows that, Yellow was a very, low cost, not low cost, but low revenue, you know, provider of service, right? It was like, you know, very cheap pricing compared to the average, compared to the market. Those guys, you know, being gone, that's gonna help the industry overall.
James Monigan (VP and Equity Research Analyst)
Thank you.
Alain Bédard (Chairman, President and CEO)
You're welcome.
Operator (participant)
Our next question comes from Ken Hoexter, Bank of America. Please go ahead.
Ken Hoexter (Managing Director)
Hey, great. Good morning, Alain.
Alain Bédard (Chairman, President and CEO)
Morning, Ken.
Ken Hoexter (Managing Director)
Hey, good morning. Can you talk a bit about the, the passing process to remove some of the UPS costs, so the timing and, and scale of those duplicate costs? I, I just want to understand your, your goal of 85, 88 OR next year, how much of that is, is the Yellow benefit of, of scaling up your network from 23 up to 26 or wherever it settles in, and, and then how much of it is, is self-help? Then are you done getting rid of, of the lower profit business? Obviously, that gets paused now as you take on a lot of business in this interim. Was, was that process complete?
Alain Bédard (Chairman, President and CEO)
Yeah. Okay. So in terms of the, the freight that don't fit the network, I mean, Ken, we've done everything except rural, you know? We still deliver freight that is way too far from our terminal, terminal, okay? That is still an issue. We still have that, okay? We don't have the freight that doesn't fit in the high-density areas, but in rural, rural freight, we still have that. Okay, we're, we're not gonna address that right now in 2023. We may address that in 2024. In terms of, you know, what's gonna be the leverage that we're gonna use, our TSA with UPS, we're gonna be done by the end of 2023.
Coming into 2024, okay, all the duplication that we're going through now, okay, all the professional fees that we have to pay, et cetera, et cetera. What's left, okay, is our fleet management today, okay? That is really the big issue, and our, our platform, okay? We're still running edge onto the UPS platform. We're gonna migrate that before the end of the year. Fleet is done in the fall. We just finished the HR platform. We went from Workday UPS to Oracle HR, TFI Oracle HR, like just a few weeks ago. All this is going... Into 2024, okay, all these duplicate costs, all these professionals fees will disappear. For sure, that's gonna help our OR. Absolutely.
More importantly, Ken, is I think that the self-help that we're gonna bring to that business is providing financial information to our terminal managers. I mean, this, this is not the decision. The improvement are not gonna happen overnight once we provide them the information, but over the period of 6 to 12 to 18 months, I mean, we anticipate that these guys will be able to do more with less. Because, you know, you can't fix something that you don't know, right? That's always the excuse that we get from, from when we talk to those guys that, "Oh, I didn't know." Well, okay, you didn't know. Fine. Okay, so we'll provide you the information. Now that you know, you're not gonna sit on your hands, right? "No, no, no, no, I'm not gonna sit on my hands.
I'm gonna take action." Okay, good. What we've done so far, okay, with those terminal managers, as an example, Ken, we, we said, "You know what?" Day one, when we acquired the company, we said, "Grievances, it's your responsibility now." Now, in the old days, you used to send that to lawyers. No, no, no, no, this is over. You fix it yourself. We, labor relation, TForce Freight, will help you fix the issue with the, with the employee, with the grievance and all that, but it's your action, okay? You have to fix it. Claims, okay? Again, "Oh, claims not me." No, no, claim is you, okay? If you look at dollars claims per dollars revenue, I mean, we were at 1.5% of revenue.
You know, then they say, "Well, we're well because we used to be 2." Well, no, no, no, you guys have to be 0.5% of revenue. Now we're getting very close to the 0.5, and this is the terminal managers, because now we're getting them involved, they have the information, et cetera, et cetera. All the financial system that we've put in place with TFI Oracle, okay, slowly we're moving all this information to them, and then we'll see, because we'll have managers that will perform really well with all this information. Some, you know, may be not able to perform well because they're used just to service rate. Because us, we want them to manage costs, manage people, you know, manage the relationship with customer, you know, et cetera, et cetera.
Be a real manager, not just a, a guy that's making sure that the freight gets delivered.
Ken Hoexter (Managing Director)
Thanks, Alain. Just to clarify, you mentioned the M&A before. Is that, I presume now, not LTL, just given you were talking about maybe come back, revisit ArcBest at another point? Is that a different sector you're focused on?
Alain Bédard (Chairman, President and CEO)
Well, you know what, Ken, we've, we said many times, in the U.S., okay, our focus is gonna be LTL and logistics. But in logistics, we have to be very careful because we don't want logistics at 2%. If you look at our logistics, our revenue is down big time, right? Because of the market, like, TFWW, we're down like Q2 this year versus last year, we're down, like, 20% revenue, but our margins is still 9%. If we buy a logistics business at 2%, that's not us. We're, we're not in, in the business to buy a logistics company for big dollars and 2%. Because 2%, you know what? We'll buy shares of, of Canadian banks or U.S. bank, and we'll get 4% dividend.
So there's two major sector that we're focused in the U.S., LTL and logistics. Logistics that makes money, not logistics at 2%.
Ken Hoexter (Managing Director)
Wonderful. Thanks for the timeline. Appreciate it. Thanks.
Alain Bédard (Chairman, President and CEO)
Okay.
Operator (participant)
Our next question comes from Jason Seidl with TD Cowen. Please go ahead.
Jason Seidl (Managing Director)
Hey, thank you, operator. Good morning, Alain.
Alain Bédard (Chairman, President and CEO)
Hey, good morning, Jason.
Jason Seidl (Managing Director)
wanted to focus a little bit on TForce Freight some more here. Could you talk about the potential for a GRI in the back half of the year as capacity starts filling up in existing networks?
Alain Bédard (Chairman, President and CEO)
Yeah, very good question. I could tell you that Keith and Bob are already working on it right now. The discussion that we're having is that this will probably take place in September, okay? you know, for sure, we're not leaders in the U.S., okay? Probably we'll have to wait and see what the leaders are doing, okay. Leaders, we know leaders in the U.S. is FedEx Freight and OD, but, you know, OD, those guys are very smart. I think that, you know, those smart players will address the GRI, not in January of 2024, but I think it's gonna get addressed right now.
Jason Seidl (Managing Director)
Okay, that's good color. The other thing, you know, you, you talked a little bit about some of your customers seeing some low inventories. I wonder if you could add a little more meat on that bone and then maybe talk some peak season for sure.
Alain Bédard (Chairman, President and CEO)
Yeah, well, you see, 2022 was, was like, in, in my mind, a party, because all the supply chain mess, I mean, then the supply chain mess was fixed, and then the guys got lots of stuff coming in, and, you know, sometimes they, they order once, then they order twice, they don't get the stuff. Now, everybody got the stuff late 2022, and in 2023, we're stuck with, "Oh, nobody's ordering anything because the inventory are too high." When we're talking to our customers right now, okay, inflation is coming down slowly, okay, not bad. Interest rates are going up. Disposable income, okay, is, is okay, you know, labor situation is okay. The problem is that, most of the consumer are saying: "You know what?
We've been tied up, because of COVID, now we want to travel." This is what we're seeing now, is that a lot of people are traveling, they're not spending as much on the home, or buying a TV or, or patio furniture, whatever. This is why we still believe that 2023 is gonna be a little bit difficult for us, okay, because of. It's slowly getting, you know, cleaned up, all this excess inventory. It's not gonna probably help us in 2023, in general, okay? Coming into 2024, I think we have a better feeling now. The Fed, say the US Fed is now saying: "You know what? The risk of recession is becoming less and less in the US." Okay, fine. Consumer confidence, you know, is, is okay.
To me, I feel pretty good, not so much in 2023, but going into 2024, that the, the market slowly, for freight, will start to come back to normal. You know, those guys at FreightWaves said, there's a freight recession a year ago. We didn't feel it a year ago. We didn't feel it in Q2. We start to feel it a little bit in Three and four of 2022, one, but big into Q2. I mean, Q2 was, was terrible for us. Very tough.
Jason Seidl (Managing Director)
Alain, appreciate the call, as always.
Alain Bédard (Chairman, President and CEO)
Thank you. Thank you, Jason.
Operator (participant)
Our next question comes from Jack Atkins with Stephens Inc. Please go ahead.
Jack Atkins (Research Analyst)
Okay, great. Good morning. Thanks, Alain, for taking my questions.
Alain Bédard (Chairman, President and CEO)
My pleasure, Jack.
Jack Atkins (Research Analyst)
If I could maybe kinda start with service. You know, obviously, that's critically important in the U.S. LTL market, as I'm sure it is in other parts of the business as well.
Alain Bédard (Chairman, President and CEO)
Yes.
Jack Atkins (Research Analyst)
You know, how are you protecting the network? I know there's probably plenty of freight to be had, but how are you protecting the network so that, you know, you don't encounter any service issues as you're onboarding this incremental freight here that's kinda coming at you pretty quickly?
Alain Bédard (Chairman, President and CEO)
Well, you know what, Jack, like I said earlier, I mean, we've, we've got capacity, we've got people, we've got equipment, we got everything. It's just a matter of, of our sales team and our leadership in the operation to really say: "Well, this is the freight that we want. This is the freight, okay, that, you know, we have and we keep." Because don't forget that, until just two months ago, we had customers saying: "You know what? You got to lower your rate because I've got a, a carrier here that says, I'm, I'm gonna have to move with this guy." Now, whoops, "You know what? I'm gonna stay with you now," right? You've got that going on, plus you've got the new freight coming in.
For sure, what we're trying to do, us, is to protect our existing customer by adding new lanes, lanes that were with the competition, and now the competition is, is gone. We're saying, you know, instead of going with new customers all the time, what we're trying to do is increase our volume of business with existing customer that we already have, but we were doing only 10% of their business or 15%. Okay, that's our focus so that we provide, you know, a good level of service. The other thing also, Jack, that's very important to mention is the atmosphere at TForce Freight, okay. If you think about our labor force accepting a new deal at 81%-...
the fact that we've invested in equipment, the fact that we are investing millions of dollars in the real estate that was abandoned, okay? I mean, Our employees, how would you say that? I mean, their, their morale, okay, it is great. I mean, they're seeing that, okay, the owner of the company is investing. Now, okay, we have a better deal for them and for the next five years , everybody's happy about that. I would tell you that if you look at the morale of our team two years ago, one year ago, today, and one year from now, okay, that morale, that, that, you know, pride of being part of TForce Freight is like changing like there's no tomorrow. You know, if you look at, the pride of our guys in Canada is second to none.
In the U.S., we were not there, okay. If you look at some of my peers, okay, the best, the best of my peers, you, you see a lot of pride. You know, their terminal is spick and span, okay? Ours were just abandoned terminals, right. Our trucks were terrible. The morale of our guys, and, and we're saying: "Guys, we got to do more. We, we got to pick up more freight. You know, we got to stop driving all the way around, okay, and spend money driving a truck. We have to pick up more freight." All this culture is taking place. This is why, going back to your question, that's our focus.
Our focus, for sure, is not to go up to 26,000 to 27,000 right now and then back down to 24,000 because, you know, all the freight that we picked up didn't make any sense, didn't fit, or, you know, we didn't provide the, the right service to the customer.
Jack Atkins (Research Analyst)
That, that makes a lot of sense, and it's helpful. I guess for my follow-up question, I'd like to go back to your comments on the improvement in, in revenue per shipment that you have observed in the U.S. LTL business from the beginning of July to the end of July. I think you said it's 3.5% better.
Alain Bédard (Chairman, President and CEO)
Yep.
Jack Atkins (Research Analyst)
Could you talk about... Is that from the higher weight per shipment? Is that from improved sort of core pricing? What's driving that? I'd just love a little, some more detail around that, if possible.
Alain Bédard (Chairman, President and CEO)
Yeah. You're, you're absolutely right. Weight per shipment is up. Absolutely. Weight per shipment is up. The quality of revenue has also improved a little bit, right? I haven't seen my cost per shipment of, because today is Tuesday, I get that on a Wednesday of last week, but I'm anticipating that my cost per shipment, okay, because, you know, my salary increases August 6th, so I'm still with the old salary scale for last week of July. I'm anticipating that my, you know, my labor cost per shipment is gonna be down, okay? I haven't seen it yet. It's a combination of more weight, a little bit improve in the quality of per hundred weight. It's a combination of, of, of all this.
The fact that I think that now moving from 2023 to 2026, 2025, 2026, I think my labor cost per shipment is gonna come down, too. It's gonna be a, a double whammy, if you want to say.
Jack Atkins (Research Analyst)
Okay, absolutely. That's great to hear. Thanks again.
Alain Bédard (Chairman, President and CEO)
Thank you, Jack.
Operator (participant)
Our next question comes from Kevin Chiang with CIBC. Please go ahead.
Kevin Chiang (Director of Institutional Equity Research)
Thanks for taking my question, Alain.
Alain Bédard (Chairman, President and CEO)
Hi, Kevin.
Kevin Chiang (Director of Institutional Equity Research)
If I go back to your last call, I think you talked about, you know, normalized earnings for your portfolio of businesses around $8-$9. I'm just wondering, you know, as, as you look at the M&A you've done, I, I know a lot of them are tuck-ins, but you've done quite a few, you know, 7 already this year, more to do later this year, plus maybe the accelerated benefits within your US LTL from, from the demise of Yellow. Just wondering how you think about that $8-$9, you know, moving forward. Should we think of that being a, like being a higher number, just because given some of these tailwinds and recent acquisition activity and buyback activity?
Alain Bédard (Chairman, President and CEO)
I think it's a little bit too early, Kevin, to talk about that now, because when I said 8-9, I think that this is the capacity of T- TFI in a normal environment. Right now, we're not in a normal environment. All the small tuck-ins that we've done so far are really, really small, right? We anticipate that between now and the end of the year, we'll do at least two of, you know, a normal size, you know, with revenue of more than $150 million each, right?
Kevin Chiang (Director of Institutional Equity Research)
Mm-hmm.
Alain Bédard (Chairman, President and CEO)
That, that really is gonna help us, okay, into the end of 2023 and into 2024. The other one that we've done so far is just some small tuck-ins that we've done, small truckload guys in Ontario and Quebec. I mean, this is not gonna move the needle. Okay, it's good when the market gets better, absolutely. In a depressed environment like we're, you know, going through right now, You know, it's, it's not really a big help. I'm still convinced, you know, with by the end of 2023, okay, we'll have a clearer picture of where we're at for 2024, but I still believe that TFI has got the capacity, okay, to be between an, an $8 EPS, okay, minimum to $10 with what we're going-
Kevin Chiang (Director of Institutional Equity Research)
Mm-hmm.
Alain Bédard (Chairman, President and CEO)
with, with what we're doing, right? Now, for sure, the demise of, of one of my peers is gonna help us. Absolutely, it's gonna help us. If we could, you know, get this volume steady at 26,000 to 27,000, by providing financial information to our guys, they'll be in a position to make better decision, reduce costs, being more efficient, et cetera, et cetera. I think that this is really gonna help us into 2024.
Kevin Chiang (Director of Institutional Equity Research)
Right. you know, I'll leave it there. Thank you very much for taking my question, Alain.
Alain Bédard (Chairman, President and CEO)
Pleasure, Kevin.
Operator (participant)
Our next question comes from Konark Gupta with Scotiabank. Please go ahead.
Konark Gupta (Equity Research Analyst)
Morning, Alain. How are you?
Alain Bédard (Chairman, President and CEO)
Hey, I'm good. How about you, Konark?
Konark Gupta (Equity Research Analyst)
Great. Thanks, Alain. Just wanted to understand, Alain, you know, pretty good margin progression at TForce and, you know, given the situation in the U.S. LTL market, certainly things like, seems like, you know, the volume and rate environment is getting better for you guys here in the second half. Can you talk about how you are ensuring the pricing discipline and onboarding this new LTL volume so that, you know, your efforts are not diluted to get to the 20%-
Alain Bédard (Chairman, President and CEO)
Yeah.
Konark Gupta (Equity Research Analyst)
margin that you have sort of aimed for the next two years?
Alain Bédard (Chairman, President and CEO)
Yeah. Yeah. Yeah, very good question. I mean, that's for sure. This is why, you know, like I said earlier in the call, I mean, we're moving one of our EVP, Mr. Bob McGonigal, okay, working day, day, day in, day out with Keith and the rest of the team there is, you know, we're not in the business of practicing delivery freight and, and not making any money.
No, absolutely, you're right. We're taking, you know, very important measures, and every week, we also get the I get the reporting on, on the pricing and what's going on with the average, revenue per shipment, right? It's, it's very important to us that we're not just taking freight just to match the other guy's rate. Because the other guy's rate, the guy went belly up.
I mean, why would we do it the same, same rate? No, the rate is 30% less than the market. Mr. Customer, sorry to say, but we have to adjust the rate to the market, right? That is what we're doing, Konark.
Konark Gupta (Equity Research Analyst)
Okay, that's great, Alain. Good to hear. If I can just follow up, you know, I think the industry you are in, in the U.S., you know, it's very concentrated, very few unionized players, and like with Yellow's exit, you'll be one of the few unionized companies there. Is there any main lessons learned for you guys from Yellow's, you know, repeated bankruptcy process, considering, you know, their exit would leave you
as one of the only few unionized players, and then hopefully you will see more sort of employees adding up there, right? What do you learn from that process? You know, like, how, how is the unionized business, you know, doing in the U.S.? Is, is it a good business to be in? Is, is it something that concerns you? You know, like, any thoughts there.
Alain Bédard (Chairman, President and CEO)
Hey, listen, I mean, the, the benefit of a unionized environment is you have a contract that you have to abide by, okay. It also could be an excuse, okay, for poor results by the management or the executive team. If you look at what we're doing in Canada, in a unionized environment, we're doing really, really well because we have managers that are managing everything, except, you know, cost, service, et cetera, et cetera. I, I think that the perception, okay, in the U.S. has always been that, "Oh, it's a unionized operation. It, it must be bad," right.
I, I think that we're trying to work, us as TFI and TForce Freight, to change that perception, okay, that, you know, if you manage the business, for sure, I mean, the base salary of a union and non-union environment are about the same, okay. Maybe 1five years ago, it was different, but today, the base salary of a guy that works at, let's say, on the West Coast of the U.S., union or non-union, base salary is about the same. Where the big difference is, is on the fringe benefits, okay. Pension, for example, which is, you know, a huge cost for us. If we're competing with a non-union guy, and he's got no pension, for sure, there's that, that is a disadvantage, okay, for a, a unionized environment.
The fact also that the turnover normally is less in a, a unionized environment because, you know, those guys understand that they are very well cared for, okay? If you look at TForce Freight, it was partly true because the trucks were bad, the environment was bad, the terminals were bad, so that was not the case. You- we're changing that. At the end of the day, there could be a few points of OR that could explain, okay, if you got the superstar in the U.S. at a 70 OR, okay, or 75 OR. If you're a unionized guys, you could say, "Well, you know, because of pension, because of this, because of that, ba, ba, bi, ba, I cannot be as good as the superstar." Okay, maybe. The delta cannot be 20 points.
The delta cannot be 15 or 10 points. The delta could be four, five, six, seven, eight points, but no more than that. If the superstar in the U.S. is a 75 or 70, okay, and, and for sure, the superstar is gonna be much closer to 70 now that one of our peers is gone, okay? Okay, fine. So us, our goal is to get closer to the top guys in the U.S., okay? We'll get there. We'll never be as good as a non-union superstar, okay, but we could be really, really good. If you look at our unionized environment in Canada, which is a depressed market compared to the U.S., a depressed market, if you look at the quality of revenue. I mean, we're running mostly unionized operation with a 74 OR in Q2 in Canada.
To me, union, it's sad to say that, over the last 20 years, they went from 60% or 65% of the market. Now, with Yellow being gone, probably the union will be 15% of the market. It's, it's a I would say it's sad to see, but it's a reality. It's our goal, us, to make sure that we can grow in a unionized environment by paying our employees well, but also by making sure that they are efficient at what they do and productive. That's our job as management, to make sure that they don't drive the trucks 10 miles between each and every stop. We have to change, okay, and that is our job as management.
Konark Gupta (Equity Research Analyst)
That's a, that's a very good perspective, Alain. Thanks so much. I appreciate the time.
Alain Bédard (Chairman, President and CEO)
Pleasure, Konark.
Operator (participant)
Our next question comes from Brian Ossenbeck with JPMorgan. Please go ahead.
Brian Ossenbeck (Managing Director and Senior Equity Research Analyst)
Hey, good morning, Alain. Thanks for taking the questions.
Alain Bédard (Chairman, President and CEO)
Morning, Brian.
Brian Ossenbeck (Managing Director and Senior Equity Research Analyst)
Just wanted to come back to your comments on cost per shipment trends within TForce Freight. I know it's probably some fuel impact in there, but you also mentioned unit costs were down pretty notably on the labor side. Maybe you can expand on that and then also touch on the benefits of the new trucks you're getting. It looks like you actually shed a few trucks sequentially, but I'm assuming they're all getting newer. Maybe you can elaborate on how that's impacting the cost structure there.
Alain Bédard (Chairman, President and CEO)
Yeah. Yeah. On the truck side, I mean, we're getting. By the end of October, our 23 order is going to be completely done, okay? The average age of our fleet will come down to about just shy of four years old, okay? Which is now going to improve our MPG. The only thing we haven't really worked on, on the trucks is the idling, okay? The idling, this has never been managed. It's still not managed today, okay? That's something that we have to work on, okay? For sure, the fuel management, okay, we could do a little bit better job. We're working on it right now. In terms of the cost per shipment, this is labor cost per shipment that I'm talking about, Brian. Our labor cost per shipment is down year-over-year, okay?
With volume down like 17%-18% before what happened last week of July, right? What have we done, okay? First of all, in the fall of 2022, we provide them the information of, "Hey, listen, this is your labor cost per shipment for P&D and dock." The guy said at first: "Is that, is that real? We've never saw that." "Yeah, it is real." Okay, then we identify, you know, the stars and the dogs, and right now we're working on the dogs. This is why by improving the dogs, okay, our labor cost per shipment, now we're able to look at what happened in 2022, okay? Now I compare that, and my labor cost per shipment for P&D and dock is down by about 15%.
I'm paying my employees a little bit better this year than last year. Now, for sure, when August 6th hits, okay, now I'm gonna be paying $1.70 more an hour, okay? We're working on what is this gonna be the effect, okay, on my labor cost per shipment. This is... Now, this is where we have to be very aggressive and even more aggressive now with what's happening with Yellow, okay? That, "Guys, we need to drive less miles and pick up more freight," because now our labor cost per hour is even more. It's just normal because inflation, okay, as we all know, got all the way to 6% to 7% or 8%, now down to 3%, 4%, okay? But it's still. Average contract, like I said earlier on the call, is about 3% a year, okay?
Average, okay? It's, it's reasonable, it's fair. It was very well-received by employees. As a matter of fact, like I said, 81% said yes to this new contract. I mean, this is an ongoing thing, but this is just labor cost per shipment, because now we're gonna be working on everything else, maintenance cost per shipment, okay? Everything, and now we're because we're gonna be providing all this financial information to our terminal manager, they're supposed not just to work on labor. They have to work on every, every cost that we have in our business to reduce that, because that's the only way, in my mind... The market will help us. The volume will help us. Yes, the improved pricing in the industry will help us.
At the end of the day, us, we have to reduce our costs because we're like, I would say, the elephant right now on the US LTL. We're big, we're fat, okay, but we have to trim down. We, you know, we, we've done some good stuff so far in two years that we own the company, but on the cost side, we haven't done enough. No way.
Brian Ossenbeck (Managing Director and Senior Equity Research Analyst)
Just to follow up on that, sounds like perhaps you get more benefits in later this year and into 2024 from the fleet and from fuel efficiency and maintenance and service reliability. Is that how to think about the?
Alain Bédard (Chairman, President and CEO)
That's, that's absolutely right.
Brian Ossenbeck (Managing Director and Senior Equity Research Analyst)
Have you seen some of that already?
Alain Bédard (Chairman, President and CEO)
No. You know, the fleet side, the MPG, we're getting it. That's not an issue. Idling, we're not. The other thing, too, is that we had to shut down about 80 shops. Don't forget that in the old days, these guys used to manage 120 shops with 300 mechanics. Think about, this is a nightmare. By the end of August, okay, we're gonna be down to 16 shops and 200 mechanics because the age of our fleet went from 7 years old on average, down to less than 4 right now. Our, our fleet guy, the guy in charge of our fleet, Eric, you know, he's been tied up for 2022 because he was hired in the fall of 2022. Fall of 2022, all the way to 2023 now.
The guy has been stuck with shutting down shops and letting go staff and people and all that. We're still not doing a, a good job on our maintenance cost per shipment, okay? We're still not doing the job there, but we have the excuse, ALA, we had to do this, we had to do that. Okay, fine. At the end of August, we're all done by cleaning up the mess of the past. We had a ton of spare parts that were obsolete, related to the old trucks. Okay, we're cleaning that mess right now as we speak. It's costing me about $400,000 a month to clean up, you know, all this obsolete stuff that was there. Okay, fine. That, that's gonna be done, okay, by, let's say, September, we're done. Okay.
Now, fuel economy, okay, we're not doing bad because we have the new trucks. Idling, we have to improve that big time. We're doing about 35%-40% idling. Nobody knows exactly how much, I mean, so because we don't track it, right? Now we're gonna start tracking that. Maintenance cost per shipment is too high, right? The warranty, we have new trucks, but, you know, you have to claim the warranty. If you do the work, you have to claim it. We hired a warranty manager just a month ago, right? You know, in the past, warranty, oh, what's that? I mean, we buy trucks with no warranty, so we don't have to worry about warranty. No, no, we buy trucks with warranty. We have to claim, right?
I mean, you'll see us improving on all aspect of our costs slowly into 2024.
Konark Gupta (Equity Research Analyst)
I appreciate the details. Thanks, Alain.
Alain Bédard (Chairman, President and CEO)
Right. Pleasure.
Operator (participant)
Our next question comes from Benoit Poirier with Desjardins. Please go ahead.
Benoit Poirier (VP and Industrial Products Analyst)
Yes. Good morning, Alain.
Alain Bédard (Chairman, President and CEO)
Morning, Benoit.
Benoit Poirier (VP and Industrial Products Analyst)
Yeah, you provide great color about 2023. I was wondering what kind of market condition do you foresee so far in 2024? Is it kind of overall major rebound or slight improvement? Is the $8 still achievable, given what you foresee, the positive impact from Yellow and all the actions taken to improve the OR at TForce Freight?
Alain Bédard (Chairman, President and CEO)
You know what, Benoit, I think that, you know, if market in 2024 comes back like normal, okay, not, not like great 2022, okay? We believe that 2023 was a terrible, very tough year for us, okay, for the industry in general. 2022 was the party, 2023 was the afterparty, okay? You know, we had some headaches and all that. I, I think that 2024 will probably be slowly going back to normal.
Now, in a normal environment, can we do $8? Okay, with everything that's going on at TForce Freight, everything that's going on with our later M&A in 2023, I think that, going back to $8 in 2024, I would say it's very early to say, but, you know, I would tend to agree that I think $8 for 2024 should be attainable with everything that we're doing.
If our guys at TForce Freight are able, with the new volume coming in, okay, the focus on reducing their costs with all this financial information and getting closer in 2024 to an 85-88 OR as a first step, sub 90 OR, okay, I think $8, we should be back on track for $8 into 2024. That's very early, okay? We're just in August right now, okay? My feeling, because our guys will start working on the budget in September, my feeling is, that would be really, really, really nice. Don't forget, every part of our business has been affected in 2023. We were able to protect our margin, yes, okay, in general, but the revenue is down big time, right? We need the revenue to come back.
Then our logistics, think about that, our logistics, we're able to protect the margin at 9%, but the revenue is down, like, 20%, right? This is tough, right? If revenue is not down 20%, but let's say down only 5% versus 2022, I mean, the bottom line will follow. Our P&C, the same. You know, our Canadian LTL is the same story, but TForce Freight is really the key, and our specialty truckload as well, to get back to $8 and above into 2024 and
going into 2025. I, I still say that this company today, okay, with the M&A that we're gonna do between now and the end of the year, I mean, in a normal environment, it's between $8 and $10. $10 being, you know, a great environment like a 2022, okay, and $8 being a minimum-
Benoit Poirier (VP and Industrial Products Analyst)
Okay.
Alain Bédard (Chairman, President and CEO)
In a normal environment.
Benoit Poirier (VP and Industrial Products Analyst)
That, that's really great color, Alain. Just in terms of follow-up, obviously, you mentioned good details about the M&A strategy, obviously focused on U.S. LTL and logistics. When looking at valuation multiple, even on the logistics side, we've seen an extension in valuation multiple. I was curious, given your discipline, you're a discipline acquirer, what kind of valuation multiples do you see these days, and whether transformative deal, is there still two or three opportunities out there, as you discussed in the past?
Alain Bédard (Chairman, President and CEO)
Well, you know, Benoit, I've, I've been saying that all the time, is you always make your money on the buying, never on the selling. You got to buy, right? You have to buy at a valuation that makes sense for your shareholders. And, and, and you'll see, I mean, hopefully, we can announce something in the next few days, next few weeks, about a transaction that is gonna be really, really, very interesting for, for all parties involved.
I really like this company. I like the management team. It's not a fixer-upper. I mean, those guys are doing a very good job, and, you know, we'll just work with them and, and, and, you know, it, it's gonna be really fantastic. No, I mean, we have to be cautious for sure.
Valuation is always important when you do a deal. You know, we've always been very cautious with that, because, you know, if you overpay, I mean, you're stuck with that rock in your shoe for a long time.
Benoit Poirier (VP and Industrial Products Analyst)
Okay. Okay. That, that's great color. I assume given the robust M&A environment, buyback might be less a priority in the short to medium term, given the M&A environment.
Alain Bédard (Chairman, President and CEO)
You know, it always depends on the opportunity. If our stock goes back down to, I don't know, CAD 140, CAD 130, I mean, we're gonna be active. Canadian dollars, I'm talking here. For sure, we'll be back on the M&A of our stock, right?
Benoit Poirier (VP and Industrial Products Analyst)
Good.
Alain Bédard (Chairman, President and CEO)
Our leverage is still very low. It's at 1.1, you know, so I mean, we could do 1 million to 2 million shares easily, if we want. If we see the price being very, very low, okay, we'll be opportunistic and we'll be, again, active on the buyback. I mean, it's not because, you know, we're doing some nice M&A in the latter part of 2023, that this will, you know, impede our, you know, our possibility to do, to do buyback.
Benoit Poirier (VP and Industrial Products Analyst)
Got it.
Alain Bédard (Chairman, President and CEO)
I think that by the end of this year, you know, with all the M&A, everything that we're looking at doing, our leverage is gonna be about 1.26 at the end of Q3, and 1.05 at the end of the year. I mean, this is chicken shit in a sense that we could buy back at least 1 or 2 million shares if the price is right.
Benoit Poirier (VP and Industrial Products Analyst)
Okay, perfect. Thanks very much for the time, Alain.
Alain Bédard (Chairman, President and CEO)
Okay. Pleasure, Benoit.
Operator (participant)
Our next question comes from Scott Group with Wolfe Research. Please go ahead.
Scott Group (Managing Director)
Hey, thanks, Alain. You've said the word fantastic now twice with respect to near-term M&A. I just want to understand, are we talking about a major transaction or just something that's, you know, bigger than-
Alain Bédard (Chairman, President and CEO)
Something of good size.
Scott Group (Managing Director)
Okay.
Alain Bédard (Chairman, President and CEO)
No, something of good size, because what we've done so far this year, Scott, is, is very small transaction, right? Small deals. I think the latter part of 2023 is gonna be more like medium-sized deals, you know? When I say fantastic is, you know, the, the company that we're looking at acquiring, to me, it's a fantastic transaction, for, for many reasons. Reason number one is, is the market that these guys serve is really second to none.
Their market share is what we like, is, is really interesting. I say fantastic because the valuation is also very accretive for our shareholders. I say fantastic because with these guys, we're gonna learn something that, you know, will help us in all of our business segment. I say fantastic, because I really like the management team over there.
I, I can see that we could help them on a few aspect of their business, saving costs. That's why I'm saying in, in a difficult environment like that, I mean, this is one of a, of a gem that we're able to pick up, hopefully. And that's why I'm saying fantastic, Scott.
Scott Group (Managing Director)
Okay. Then someone asked you earlier about buying terminals from Yellow. I'm wondering if-
Alain Bédard (Chairman, President and CEO)
Mm-hmm.
Scott Group (Managing Director)
if they were trying to sell, one of the, the regional brands or the regional brands in total, maybe even the whole thing, is that something you'd ever have interested in- interest in?
Alain Bédard (Chairman, President and CEO)
Well, for sure, we're having discussion with the people in charge of the process. There, there's some areas that, you know, as a matter of fact, if you look at Florida as an example, I mean, we are tenant in 1 areas. They own 1 terminal that could make sense for us. For sure, we'll have some discussion, okay, with those guys. To say that anything big will come out of on the real estate side or employees or equipment, I, I don't think so.
Scott Group (Managing Director)
Okay. All right. Thank you, Alain. Appreciate it. Helpful call.
Alain Bédard (Chairman, President and CEO)
Pleasure, Scott. Yep.
Operator (participant)
Our next question comes from Bascome Majors with Susquehanna. Please go ahead.
Bascome Majors (Senior Equity Research Analyst of Industrials)
Following up on that last question, I believe at the Investor Day, you talked about maybe 1 to 2 points of long-term opportunity from real estate in the U.S. LTL business.
Alain Bédard (Chairman, President and CEO)
Yep. Mm-hmm.
Bascome Majors (Senior Equity Research Analyst of Industrials)
As you know, if we look to next year, it's pretty clear that there's gonna be more real estate available than...
Alain Bédard (Chairman, President and CEO)
Oh, yeah.
Bascome Majors (Senior Equity Research Analyst of Industrials)
-maybe had been anticipated at that point, as well as-
Alain Bédard (Chairman, President and CEO)
Yep
Bascome Majors (Senior Equity Research Analyst of Industrials)
more freight available near term.
Alain Bédard (Chairman, President and CEO)
Yep.
Bascome Majors (Senior Equity Research Analyst of Industrials)
I'm just curious how your calculus may change, where there's more freight and more supply of industrial real estate and how you play that to best drive value for your shareholders longer term. Thank you.
Alain Bédard (Chairman, President and CEO)
Yeah. Yeah, that's a very good question. What we've done in 2023 so far is, we've done deals with other carriers, okay? Where it made a lot of sense for them and a lot of sense for us. We still have some, some deals that are going on into 2023. Now, like I said, we've got lots of capacity within the TForce Freight network. For sure, by moving from 23 to 25,000 or 26,000, that's gonna take a little bit of capacity, but still, we have a lots to do. In terms of shedding this capacity or finding tenants or, or doing some M&A, that's gonna help us, okay, fill, fill those, those terminals that are costing us a fortune. They are, some of our terminals are running half-empties, right?
Now, the fact that YRC is, is gonna be liquidating their assets or something like that, I guess, that's gonna bring a lot of real estate to the market. Agreed, okay? I don't know exactly. I mean, some of the real estate that YRC was using, utilizing was a lot of that was leased. We'll see. I mean, that may affect the market, okay? Really for us is, most of the transaction that need to happen within, you know, what we had to get rid of or sell, okay, it,
it's ongoing right now, so I don't think it's gonna affect us in 2023. Could that change in 2024? I think that the cleanup of, of the real estate for us at TForce Freight, I would say, is mostly done, okay? What's left is our 3,000-4,000 doors.
Okay, we're gonna have to fix that over time with volume through M&A or through organic growth, slow, slow organic growth.
Bascome Majors (Senior Equity Research Analyst of Industrials)
Thank you.
Alain Bédard (Chairman, President and CEO)
You're welcome.
Operator (participant)
Excuse me. There are no further questions at this time. I would like to turn the floor back over to Alain Bédard for closing comments. Please go ahead.
Alain Bédard (Chairman, President and CEO)
All right. Thank you, operator. I want to thank everyone for being with us. If you have any follow-up questions, please don't hesitate to reach out. I hope you enjoy the rest of your day. We very much appreciate your interest in TFI International. Thank you again. We'll speak soon. Thank you. Bye.
Operator (participant)
This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation, and have a great day.