TFI International - Q3 2024

Transcript

Operator (participant)

Good day, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's third quarter twenty twenty-four 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 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 can cause actual results to differ materially. Also, I would like to remind everyone that this conference call is being recorded on Tuesday, October twenty-second, twenty twenty-four.

I will now turn the conference call over to Alain Bédard, Chairman, President, and Chief Executive Officer of TFI International. Please go ahead, sir.

Alain Bédard (CEO)

Thank you, operator, and thank you everyone for joining today's call. Yesterday, after market close, we reported quarterly results that reflect industry-wide challenging conditions. We generated strong free cash flow, which has always been one of our primary areas of focus, with a year-over-year increase of 37% to more than $270 million. This continued strong cash flow, as I've said many times, allows us to opportunistically consider strategic M&A, intelligently invest in the business, and return excess capital to shareholders. We do this while maintaining a conservative balance sheet, and indeed, during the quarter, we were able to significantly pay down debt, as I'll discuss later on. Let's begin with a review of our consolidated results, which as always, reflect the skill and hard work of our team members, especially during cyclical challenges for the industry.

During these times, we collectively redouble our focus on the important details of the business, striving for added efficiencies through quality of freight, optimizing weight and revenue per shipment, and other important operating fundamentals that have served us well over time. For the third quarter of 2024, our overall revenue before fuel surcharge was up 17% year over year to $1.9 billion, benefiting from the April acquisition of Daseke. Operating income of $203 million was up slightly from $201 in the prior year quarter, and this equate to an operating margin of 10.7% versus 12.3% a year earlier. Note that last year's operating income include higher net gains on sales of assets held for sales of $15 million.

We generated adjusted net income of $137 million, up slightly from $136 million a year earlier, along with adjusted EPS of $1.60, up slightly relative to $1.57. In addition, as referenced, we have strong cash flow with $351 million of cash from operating activity, well above the $279 million in the year-ago quarter, and free cash flow of $273 million, also well above $198 million of the previous year. Big picture, on the quarter, our logistics segment performed really well, and our truckload operation held their own, as did our Canadian, LTL and P&C operation. Going forward, the hardworking men and women of TFI International will continue to focus on improving operating performance while working to get the most out on recent acquisition.

This will be our focus regardless of broader market condition as we see long-term opportunities ahead. So with that, let's discuss LTL, which was 40% of segmented revenue before fuel surcharge during the quarter. Relative to a year ago, revenue before fuel surcharge was off 7% and operating income was down 24%, although this was largely due to higher gains on last year on asset held for sale. In addition, in the year ago quarter, we had benefited from an early spike in freight from Yellow, which also weighed on a year-over-year quarterly performance. For U.S. LTL, our revenue before fuel surcharge was $531 million, relative to $581 million the prior year, and operating income was $40 million, down from $68 million.

This performance reflected a 2% drop in tonnage, a 3% increase in revenue per shipment, excluding fuel, and a 35% decline on GFP revenue. Our operating ratio for U.S. LTL was a 92.2, compared to a 90.8 a year earlier, and our return on invested capital was 15.4%. Turning to our Canadian LTL, our revenue before fuel surcharge of 138 million was down 2%, while our operating income rose slightly to 33 million. Our number of shipments was up 3%, although our weight per shipment decreased 7% and revenue per shipment decreased 5%. Our Canadian LTL OR came in at a 76.3, an improvement relative to 77.2 a year ago, while our return invested capital was 17.6.

Wrapping up our LTL discussion, P&C operation also saw a slight decline in revenue before fuel surcharge to $109 million from $112 million, with operating income up slightly as well at $24 million versus $25 million. Our P&C OR was 78.2, which was up 80 basis points, while our return on invested capital was 22.2. Moving on to truckload. This business segment was 38% of segment revenue before fuel surcharge at $723 million, as compared to $402 million a year earlier, reflecting the April acquisition of Daseke. Truckload operating income of $72 million was up from $50 million, and our OR was 90.3, compared to 87.7 in the third quarter of last year.

Taking a look within truckload, specialized operation generated revenue before fuel surcharge of $648 million, up from $325 million, and our operating income of $64 million was up from $40 million a year earlier. In terms of performance metric for specialized truckload, our revenue before fuel surcharge per truck per week was up 5% over the prior year at $4,453, and brokerage revenue more than doubled to $94 million. Our operating ratio was 90.4, compared to 87.8 the prior year, and our return on invested capital was 7.9%. Overall, we see room for operational improvement within specialized truckload following the Daseke acquisition.

Switching to Canadian-based conventional, conventional truckload, we produced revenue before fuel surcharge of $77 million, down slightly from $79 million a year earlier, with the brokerage portion increasing 20% to $30 million. Our operating income of $8 million compares to $10 million, as mileage and revenue per miles were under pressure. Our OR for Canadian truckload was 89.9%, and our return on invested capital was 7.7%. Lastly, in our review by business segment, logistics was 22% of segmented revenue before fuel surcharge and continues to perform. While revenue before fuel surcharge was up just 2%, operating income was up 19%. Our third quarter logistics operating margin was 11.4%, which was up from 9.8% the prior year, and return on invested capital was 17.4%.

With that review by segment, I'll next provide an update on our balance sheet. As I referenced earlier, we had a very strong free cash flow of $273 million during the quarter, well above the $198 million a year ago. We used our strong liquidity to pay down $130 million of debt during the quarter and ended September with an improved funded debt to EBITDA ratio of 2.77 versus 2.15 as of the end of June. Our solid financial footing is an important aspect of our approach to the business, allowing us to strategically invest regardless of the economic cycle, with Daseke as a good example, while returning significant capital to shareholders whenever possible, which has long been one of our guiding principles.

In terms of capital allocation during the quarter, in addition to debt reduction, we completed two small bolt-on acquisition, and last month our board declared a quarterly dividend of $0.40 per share, paid on October 15. I'm also pleased to announce that just yesterday, our board of directors both raised our quarterly dividend by 13% and authorized a renewal of our share repurchase program, the NCIB, for an additional year, subject to the approval of the Toronto Stock Exchange. I'll wrap up with an update on our full-year outlook that reflects the continuing challenging market condition. Year to date, in 2024, our performance has been largely consistent with the prior year, and we expect this trend to continue throughout the year-end. As a result, we also expect our full-year performance to be largely similar to 2023.

And now, operator, if you could please open the line. I'll be happy to take questions, please.

Operator (participant)

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. And just a reminder, callers will be limited to one question and a follow-up. Our first question comes from the line of Ravi Shanker from Morgan Stanley. Go ahead, please.

Ravi Shanker (Analyst)

Thank you. Morning, Alain. So obviously, interesting times in the industry. Just on U.S. LTL, are you able to distinguish how much of the earnings pressure there is purely cyclical and will snap back with more reordering and stuff, versus maybe some evolving industry dynamics in a post-Yellow world with new capacity coming in and players jockeying for share, et cetera?

Alain Bédard (CEO)

Yeah, that, that's a difficult question, Ravi. So, you know, our focus is really to improve our cost basis. So the market condition, we know, it's been challenging for the last probably like 18 months. So we don't control market conditions. So our focus is really to improve our cost base and also improve our service. If you look at the last report from Mastio, I mean, our service, according to this survey, is the worst of the top 7 carriers in the U.S. So it, it's really a focus of ours. For sure, what we're proposing to our customer is, okay, we probably... Our proposal is good in the sense that, okay, there's a match between the service that we provide, which has to improve, okay?

The rate also is still a good proposal for our customer because our rates are, on average, much lower than our peers. This is why our focus is, notwithstanding the market condition, we have to improve our service, which, as a matter of fact, we've started to move more freight away from rail onto the road. We also have to improve our missed pickup. We have. You know, if you look at our claim ratio, we were going in the right direction, but then, whoops, comes a Q3, we dropped the ball. Right? Our claims ratio is at 0.8% of revenue. Our Canadian LTL, our claim ratio is 0.2%, which is like best in class. We used to be at 0.4%, 0.5%. Now we're at 0.8%. Guys, let's not drop the ball.

Let's focus on service. Let's not miss any pickup. Let's be on time with our deliveries, et cetera, et cetera. Now, if you look at this purchase that we did three years ago, three and a half years ago, okay, and you asked me the question, "Hey, Alain, do you think that you made a mistake with this purchase?" Not at all. I mean, the only mistake is that we probably underestimated the time it will take us to turn this thing around, the culture. Now we're improving the management skill of our guys by training, by providing them financial information that we could, you know, continue to improve our cost basis, following metrics of service, et cetera, et cetera. Things that probably in the past were not a big focus of the management team at the time.

Ravi Shanker (Analyst)

Understood. That's really helpful. Maybe for a follow-up, I just want to clarify: did you say that twenty twenty-four is now looking like twenty twenty-three level of EPS? If you can just kind of clarify the twenty twenty-four guide, that would be great. Thank you.

Alain Bédard (CEO)

Yeah, Ravi, that's what we're saying. I mean, if you look at where we are, I mean, we're basically flat year over year, okay, as of Q3. So we believe that... You know, we thought that we would do a better job in 2024 than 2023, but with market condition, with what we're looking at, when we look at Q4, the first forecast that we're looking at, I mean, we believe that, you know, 2024, sadly, will be a repetition of 2023.

Ravi Shanker (Analyst)

Great. Thanks a lot.

Alain Bédard (CEO)

EPS. Yep.

Operator (participant)

Thank you. Our next question comes from the line of Walter Spracklen from RBC. Go ahead, please.

Walter Spracklin (Analyst)

Yeah, thank you very much, operator. Good morning, Alain.

Alain Bédard (CEO)

Good morning, Walter.

Walter Spracklin (Analyst)

Yeah, just on that guidance, you know, looking out to next year now, if I look at consensus is up at, you know, it's come down a bit, but it's still at $850, which is almost 40% above your new guide-

Alain Bédard (CEO)

Yeah

Walter Spracklin (Analyst)

... for 2024. I'm just curious if you're comfortable with that. I know there's a lot of operating leverage in your company, so when we do... you know, I know a lot of what to do with that question is dependent on how the economy does, but to the extent that, you know, from your outlook right now and where consensus sits, how do you feel about the consensus level of $8.50 for next year?

Alain Bédard (CEO)

Yeah, very good question, Walter. It's too early for us to really talk about twenty-five. I mean, we're going through our budget season right now. But what I could say, though, is that, we've been under some kind of a freight recession for close to two years now.

Walter Spracklin (Analyst)

Mm-hmm.

Alain Bédard (CEO)

Right? Normally, the cycle is between, I don't know, eighteen months to twenty-four months. We don't see some major improvements so far in twenty-five. We believe that at some point it will happen, right? So if we have a normal environment in twenty twenty-five, not twenty twenty-two, but just a normal and trade environment, okay, I think that you know getting close to $8 a share, EPS, like we did in 2022, is normal. Because in twenty twenty-two, that was a great year, but we didn't have Daseke, we didn't have JHT. There's a few assets that we didn't have at the time.

So to say that around $8 in 2025 in a normal environment, I think it's attainable, you know, which is about the same as what we've done in 2022 in a great environment, but now we have assets that we didn't have at the time, right? The other thing also to consider, Walter, is that we will be reducing our debt like there's no tomorrow, right? So our debt, in Q3, we've reduced it by $130 million. In Q4, we will reduce that again, by at least another $250-$300 million to get close to our target of reducing our debt since the acquisition of Daseke, for about $500 million.

And then, if we don't do anything major until the end of 2025, I mean, our debt will be reduced another $500 million during, let's say, Q1, Q2, by the end of Q3 in 2025. So our interest costs, okay, will reduce dramatically, because if you look at Q3, our cost of financing is like double what it was last year, right? And that will continue to come down as we pay down debt, which is our focus. And also, hopefully, you know, the interest rate will start to drop a little bit, and that should help us reduce again. So we said Daseke, 2025, in our mind, will contribute at least $0.50 a share, okay? And if we have a normal environment, our U.S. LTL should perform better. Our specialty truckload as overall should perform better.

Canadian LTL and P&C will perform a little bit better. I mean, we're running 77-78 OR right now. It's just the top line that we're missing, right?

Walter Spracklin (Analyst)

Yeah.

Alain Bédard (CEO)

On the lower activity.

Walter Spracklin (Analyst)

Okay. And looking out to 2024, outside of... Just in terms of capital allocation, when you look at that debt reduction level, you're creating a lot of dry powder for acquisitions and/or a buyback. Do you have in your mind how much you would allocate in 2025 to buyback and how much you're keeping of that powder dry for? I know you just alluded to a larger acquisition, potentially at the end of 2025, how much you'd be allocating to M&A in 2025?

Alain Bédard (CEO)

The usual thing that we do, Walter, every year, we always invest $200 million-$300 million on tuck-ins, M&A, et cetera, et cetera. You'll see us doing the same thing in 2025, okay? So that's why I'm saying that our debt will reduce only by so much. Now, in terms of buying back the stock, now we're just waiting to see the reaction, okay, to our Q3 results, you know, the reaction over the next few months. And for sure, if we see an opportunity, I mean, so far this year, our buyback was really, really low. I think we bought back only 250,000 shares in 2023 so far. We're ready, depending on where the stock price goes. We know what the value of TFI is down the road.

We know that this, freight recession is gonna end at one point. We just don't know when, but we know it's got to stop at one point, and we will be very well-positioned with all these assets that we've added, like the JHT, like the Daseke, et cetera, et cetera. We're also reducing, our costs, both at the Daseke level, at the TForce Freight level. So, you know, if there's an opportunity to buy back the stock, absolutely. But this is all based on price. Depending on the stock price, I mean, we'll be active or we won't be active. But in 2025, for sure, we will always invest between $200-300 million on tuck-ins of some kind.

Mostly, we're trying to invest in logistics sector in the U.S., where, you know, we like to make 10% like we're doing now, right? We're not gonna invest in logistics business that makes 2%. That's not for us. We'll leave that to the others. So logistics and LTL, if we could find, you know, the right target in the US that makes sense for us, we'll jump on it in 2025.

Walter Spracklin (Analyst)

Appreciate the time as always, Alain. Thank you.

Alain Bédard (CEO)

Thank you, Walter.

Operator (participant)

Our next question comes from the line of Scott Group from Wolfe Research. Go ahead, please.

Scott Group (Analyst)

Hey, thanks, Elaine. I know I get the focus on service and costs on the LTL side. Maybe just... Can you touch on the pricing backdrop, right? If I look at just yields, revenue per shipment, both down a little bit from-

Alain Bédard (CEO)

Yeah.

Scott Group (Analyst)

Second quarter to third quarter, what's the pricing environment right now? I know you announced the GRI, just, you know, talk about pricing broadly.

Alain Bédard (CEO)

Absolutely. So for sure, we're feeling a little bit of pressure on the pricing right now. Although our proposal to customer, you know, if you look at pricing versus service according to the Mastio report, I mean, our proposal is really fair. But you know, you're absolutely right. We're feeling a little bit of pressure right now because don't forget, some of our peers have invested a lot on real estate, okay? So for sure, there's a little bit of fight. Don't forget that we have a lot of shipments that are moving to truckload right now, larger shipments because the truckload guys are, you know, looking for freight big time. They're not that busy.

We'll see our peers in Q3 coming out very soon, but we know that the market for truckload is very light, right? The demand. So we are losing that. So for sure, we have a little bit of pressure, so this is why our focus is, guys, we cannot continue to have service that is subpar, okay? So we have to improve that. And like I said, on Q2, we still have our costs that are not as good as they should be, so that's got to be our focus. And, you know, we don't control the market. You know, we're just a small player. You know, we're probably number five, number six, in terms of volume at 22,000 shipments.

We're not big, but we know one thing is that this market, at one point, will start to turn, and us, we have to be ready with our service and our cost improvement.

Scott Group (Analyst)

Makes sense and then just to follow up on Walter's question about M&A, you know, what are the sizes of deals you're looking at as you think about 2025? And then, I feel like it's been a while since you've given us any update on the potential to separate the business and the spin. Maybe just any thoughts or color there as well.

Alain Bédard (CEO)

Yeah, yeah. Yeah, very good question. Listen, in terms of M&A size, if we look at TFI at the end of 2025, okay, in a normal environment, okay, without issuing any paper, right? No stock, no paper. You know, when we talk to our board, we could look into a $4 billion-$5 billion deal in the U.S., right? On a target. And if the deal is more than that, then we have to resort to paper, which we don't like to do, right? But, you know, it depends on the target, depends on the transaction.

In terms of, you know, not mixing, a return on invested capital between 15 and 25 versus a return on invested capital of 8 to 15, the truckload and the rest, for sure, the discussion we're having with the board is that right now, TFI's market cap is too small to do some kind of a split, okay? So let's say our market cap is 12, you do a split, 6, 6, 6 is too small, right? So that's why the discussion that, I'm having with, our board is, "Alain, you got to do this next transaction, and then let's say that you do a $4 or $5 billion dollar deal, the market cap changed from 12 to 15 or 18, whatever it is, you know, you got to get closer to 20 to start thinking about, splitting into two."...

But it makes sense, okay, not to have, you know, return on invested capital of eight to 15 mixed up with return on invested capital of 15-25. So it's just a matter of time. We have to get to a certain size, Scott, and well, once we get to that size, I mean, you know, I think that, this is where we're gonna go. We're getting ready, you know, we're getting ready. I mean, Steve Brookshire, that runs our truckload operation, I mean, he knows where we're going. So, you know, as much as we can right now, we are splitting the real estate, okay? We're splitting the assets. So because that takes time, so we're getting ready. Is this something that's gonna happen in 2025? I don't think so. Is this something potential, the end of 2026 into 2027?

You know, first, we have to do this deal that makes sense for our shareholders, probably late 2025 into 2026, maybe, and then, okay, then we'll be ready to go to the next step.

Scott Group (Analyst)

Thank you, Alain.

Alain Bédard (CEO)

Pleasure. Pleasure, Scott.

Operator (participant)

Our next question comes from the line of Kunal Gupta from Scotia Capital. Go ahead, please.

Konark Gupta (Analyst)

Morning, Alain. How are you?

Alain Bédard (CEO)

I'm good. I'm good, Kunal. How about you?

Konark Gupta (Analyst)

Thank you. Thanks for taking my question. I just wanted to verify on the TForce, so Alain. You know, if we look back in the first few years of the acquisition, you started to reprice the book, which happened, you know, decently well. Then you started to optimize the cost, obviously, and I think you still kind of, you know, looking at the costs here. I'm just trying to figure out, you know, like, with the Mastio survey and obviously the service focus and the cost focus you have, what's really required here to move the operating ratio in the U.S. LTL business to 85% or so?

I mean, do you need the volumes only, or do you need the volume service cost and all those things come together, and how, how should we kind of lay that roadmap in the next couple of years?

Alain Bédard (CEO)

Yeah. You know, Kunal, absolutely. If we would, you know, get from 22,000-25,000 shipments a day, for sure, that would help our cost basis. But the problem that we have within TForce Freight today is that our business is too fixed, is not variable enough, okay? So this is why we have to work with our team, our terminal managers, to really adjust on a daily basis, our costs versus the volume that we have, okay? That's number one. And for sure, down the road, if we can hit the 23, 24, 25,000 shipments, for sure, that's gonna help us. But, you know, this is where it's the chicken and the egg.

So if you talk to our sales guy, they say, "Well, you know, it's tough for us to get more business because the service is maybe not up to par to some of our peers," right? So when we talk to our operation guys, "Guys, you know, we got to fix the service. We have to improve the service." Now, you say, "Yeah, well, if we improve the service, maybe there's a cost to that." No, no, no, no. You have to improve the service and reduce the cost at the same time. So this is quite a challenge, and this is where the talent of your management team comes to play. If you look at our management team in Canada, I mean, this is a team that's been educated, trained, focused, et cetera, for years and years and years.

And if you look at the results, okay, in Canada, we're doing very, very well. Even with the Kindersley acquisition, that was not a star, okay? I mean, our Canadian operation is still running sub-90 OR in a difficult environment. Why? Because we have a very, very educated talented team to manage our business. And this is the key for us in the US, where the terminal management team lack this training, lack this education. Now, they have the tool, now they have the financial information. So now they have to act according to it so that our cost is less fixed and more variable according to the volume. That's number one. Number two, in order to bring our costs down, we need our sales team to understand the mission of trying to get more freight per stop.

I mean, I've been, like, preaching that for three years now, and so far, it's like I'm preaching to a desert, right? So we haven't done anything good on that. We've done... The only thing good we've done with the sales team so far is we moved the average weight per shipment from 1,075 to 1,200. So we have a little bit more dollars per shipment. Okay, that's good. Well, 1,200 is not the optimal, it's not the top where we should be, but at least it's a move in the right direction. But by having more freight per stop, at the same time, okay, you split the cost of that stop over two shipments or three shipments instead of one or two shipments. So that helps you with your cost basis, and you become more competitive.

So this is a mission that we've been saying and repeating, but it seems to be difficult to accomplish. So this is why, you know, we're continuing to educate these guys to go. Our GFP is down like there's no tomorrow. This is dying away in TForce Freight. Now, for sure, we've lost all the revenue from the reseller because most of these resellers were cheating our partner. So now we have to rebuild that business with our own account. We cannot deal with the resellers that are cheating, okay? Because our partner, you know, does not accept that anymore, right? So let's have the sales team focus on growing our GFP and also growing the number of shipments per stop. So that's gonna help our cost basis. So it's not just the market that is, you know, maybe not the strongest today.

Us, we have a lot of work to do ourselves, okay? I mean, the market is difficult in Canada, okay? It's probably even more difficult in Canada than in the U.S. And if you look at what we do over there, I mean, we do pretty good. Why? Because we've got the real strong management team. This is what we're trying to build in the U.S. right now.

Konark Gupta (Analyst)

Okay, that, that's great, Alain. Thanks so much. And if I can follow up on Daseke. You talk about $0.50 accretion next year. I just want to clarify, this $0.50 accretion next year is incremental to what, whatever cost improvements you have achieved at the closing of the acquisition. And, do you expect another upside to that $0.50 from the debt you are paying, or that's included in $0.50?

Alain Bédard (CEO)

No, no. $0.50, that is based on operation of Daseke only. It's got nothing to do with our interest costs, okay? So the deal we have with the Daseke team there, and I've been seeing the plan for 2025, but I would be very disappointed if those guys don't come up with the $0.50 based on the operation. Because, you know, we are making some major improvement right now on the Daseke finance team. You know, we, we'll be moving all this financial system away from our Dallas headquarters into Toronto. We're gonna be moving that to Infinium. So by the summer of 2025, everything's gonna be run like at the Contrans style operation, right? So that represents huge savings for us.

I mean, the two Canadian company that used to be managed by Daseke, by the end of 2024, will be managed by our Canadian team. Those two companies, one is in Toronto, one is in Winnipeg, will be managed by our Canadian team now, which our Canadian team knows more about the Canadian market than the U.S. team in Dallas. So now we have a lot of good things that we're... Steve Brookshire and his team are working. And for sure, you know, you look at Daseke with TFI legacy business, we come up in Q3 with a disappointing 90 OR or 89 something, 90 OR. It's because the Daseke group is still running at like a 96-97 OR or 95-97, depending on the division.

I mean, our legacy business is running more like an 80, 83, 84 OR in a difficult environment, right? So what we have to do is, we have to bring those Daseke operating metrics closer to our own, and this is gonna be happening during the course of, you know, what's left of 2024 and into 2025. For sure, if you look at the revenue per mile that we have in Q3 versus Q2 on the U.S. flatbed market, I mean, the rates per mile have dropped again, right? So the market is weaker in Q3 than they were in Q2. Now, so there's so many storms right now that the U.S. had to go through lately.

So for sure, that probably is gonna help us in Q1 of twenty-five because they will have to start rebuilding, but we'll have to see. But on the cost basis, on the Daseke operation, we have a lot of work to do with the team there.

Konark Gupta (Analyst)

That's great. Thanks for the time and all the best for the winter season. Thank you.

Alain Bédard (CEO)

Thank you, Kennard.

Operator (participant)

Our next question comes from the line of Jordan Alliger from Goldman Sachs. Go ahead, please.

Jordan Alliger (Analyst)

Hi, good morning. This is Paul Stoddard on for Jordan Alliger. I guess the question that we have is: where can we expect U.S. LTL to go, for the remainder of twenty twenty-four, and how can we expect this for the fourth quarter, just given the previous guidance around ninety for the year?

Alain Bédard (CEO)

Yeah. I think, Paul, that is, we'll probably show up Q4, basically an improvement of Q3 and probably closer to a Q2. So we won't break the 90 OR in 2024, Q4 2024.

Jordan Alliger (Analyst)

Got it. Thanks. And I guess to follow up on that, when we think about the cost takeout in the U.S. LTL business, I know that service has been a big focus, but there's also been a lot of different initiatives, such as getting in the financial management systems to the terminal managers-

Alain Bédard (CEO)

Yep, yep.

Jordan Alliger (Analyst)

trying to take out, improve the different systems, investing in the different assets.

Alain Bédard (CEO)

Yep.

Jordan Alliger (Analyst)

So I guess, are there other things aside from service that you can be doing to take out that cost?

Alain Bédard (CEO)

There's one thing that I mean, we're implementing early 2025 is the master file and the billing. Because one major problem that we have with our customer is, we can't bill customer properly, right? And this goes back a long time. We've been looking at all kinds of system to help us, and finally, we found the right one, which is the one that's being used by one of our peers that we'll be implementing early 2025. For sure, that should improve customer satisfaction, because now we should be in a position to bill customer properly, okay, number one. And number two, it should also help us with our bad debt or our revenue adjustment, or you know, all this bad experience that we are providing to our customer because we cannot bill customer properly.

It's unimaginable that, you know, in 2024, we still have issues billing customer, but it's a fact, right? So we're changing that. So that's the... Additionally to what you just said, that's another thing that we're fixing in 2025. Also, the other major improvement that we see in 2025 is the fact that our fleet maintenance, okay, we went from 100 shops to about 15 shops now. Now we are really in control of warranty claims. We don't have 100 shops that were completely out of control. So we should see some major improvement, with also the CapEx that we've done over the last two or three years, in terms of the age of our fleet.

Right now, we're running a fleet that's about four years old, compared to when we bought the company; it was seven years old. Based on that, and with better management and better software that we've implemented also into 2024, we should see some improvement on fuel and on maintenance. That's something that hopefully we'll be able to accomplish in 2025. I'm really comfortable with the management, the fleet management team that we have now, and we should see some major improvements. It's a lot of small things, okay? But there again, I mean, we have to invest in our team, invest in our talent, okay? Because we got to deliver that for our customers and our shareholders.

Jordan Alliger (Analyst)

Great. Thank you.

Alain Bédard (CEO)

Pleasure.

Operator (participant)

Our next question comes from the line of Ken Hoexter from Bank of America. Go ahead, please.

Adam Roszkowski (Analyst)

Hi, good morning. This is Adam Roszkowski-

Alain Bédard (CEO)

Morning, Ken.

Adam Roszkowski (Analyst)

Ken Hexter.

Alain Bédard (CEO)

Oh, okay.

Adam Roszkowski (Analyst)

All good. I just want to drill in first on the LTL, U.S. LTL pricing. So I think you'd previously noted that contract renewals had decelerated to the low single digits.

Alain Bédard (CEO)

Yep.

Adam Roszkowski (Analyst)

Is that about still the case?

Alain Bédard (CEO)

It is

Adam Roszkowski (Analyst)

... in three Q? Okay.

Alain Bédard (CEO)

Yes.

Adam Roszkowski (Analyst)

Got it. And also just, you know, sequentially from a, I mean, you spoke about the kind of four Q OR impact sequentially. You know, and last year there was even into October, some impact from a cyber outage.

Alain Bédard (CEO)

Yeah.

Adam Roszkowski (Analyst)

How are you thinking, I guess, just tonnage shipments at these depressed levels? Is it fair to still see a, you know, reasonable seasonal step down into four Q?

Alain Bédard (CEO)

Well, you know, I think Q4 should be, like I just said, better than three and probably something like a line with two for U.S. LTL. But we had a difficult start of October because of all the storm that hit the East Coast. Now, that's behind us, okay, so I haven't seen too much, okay, but it's still if I look at October, the start of October was a little bit depressed in terms of volume. And the reason being is that, you know, we had issues in the Carolinas, we had issues in Georgia, we had some issues in Florida, et cetera, et cetera.

So, but that notwithstanding, I'm going back to the earlier comment, is that we will do better in four than in three on our U.S. LTL in terms of operating ratio, and probably closer to two, right? But we won't break the 90 in 2024 like we thought we would. Okay? No.

Then I guess, is there a baseline way that you're thinking about potential OR improvement in U.S. LTL next year? I mean, you spoke about some of the focus on service, some of those-

Yeah

Adam Roszkowski (Analyst)

... costs, you know, maybe lower hanging fruit, you know-

Alain Bédard (CEO)

Yeah

Adam Roszkowski (Analyst)

... impacts.

Alain Bédard (CEO)

Yeah.

Adam Roszkowski (Analyst)

I- is it-

Alain Bédard (CEO)

Yeah

Adam Roszkowski (Analyst)

... reasonable 250? What's the kind of steady run rate once you can get some of these issues under control?

Alain Bédard (CEO)

Yeah, I haven't seen the plan of our guys for 2025, but I would be really disappointed if we don't break the 90 OR in 2025. I mean, with everything that I just said, you know, on the fleet cost, on the labor cost per shipment, that the guys are working hard on, on improving our service. You know, a big help that we're not getting is from our sales team, that, they don't seem to understand, and we've been trying to educate them to get more freight per stop. This would be a tremendous help for our costs per shipping, right? So if we can accomplish that, to educate those guys to, "Hey, we get on average two shipment per stop, so we have to move to three, right?

On average. So by doing that, I mean it immediately; it's accretive to your cost. It reduces your cost per shipping like crazy. But the focus has never been there, and the mission, probably these guys never understood it, but we've been preaching that for a long time, and so far we've not been successful. So that's a key for us of our success in 2025, okay? And, you know, the excuse that we get sometimes from the sales team is, well, service. Okay, guys, we must not provide excuse to our sales team, okay? That's why we'll be correcting, once and for all, all this mess around our billing and master file of customers in 2025 to eliminate another excuse, okay, for not growing the business.

Adam Roszkowski (Analyst)

... Thank you.

Alain Bédard (CEO)

You're welcome.

Operator (participant)

Our next question comes from the line of Kevin Chiang from CIBC. Go ahead, please.

Kevin Chiang (Analyst)

Hi. Good morning, Alain. Thanks for taking my question this morning.

Alain Bédard (CEO)

Morning, Kevin.

Kevin Chiang (Analyst)

Maybe just on the P&C front. If I look at revenue per shipment, it's moved up, I guess, sequentially, three quarters in a row now. You know, weights have been. Our average weight per shipment has also been trending in the right direction the past couple of quarters.

Alain Bédard (CEO)

Yeah.

Kevin Chiang (Analyst)

Any color or any comments on what you're seeing in P&C, just given it, it feels like the underlying backdrop is still pretty challenging, but it looks like you're-

Alain Bédard (CEO)

Yes.

Kevin Chiang (Analyst)

You're seeing some improvement in your own operations.

Alain Bédard (CEO)

Yes. Yes, yes. So what happened, Kevin, in our P&C, in the summer of 2023, you know, the management team at P&C made some mistakes, right? Because the market was very weak, okay? And we were trying to hold the line, and we lost a lot of business, okay? But that is the summer of 2023. So the effect of that shows up in Q1 of 2024, right? So if you look at our Q1 of 2024, a major disappointment. So with new leadership there, okay, with Chris taking over and makeover, okay, that we moved up in terms of taking care of our P&C with Chris. I mean, we've corrected the situation, so from Q2 and in Q3, you see the trend, but the market in Canada is still very, very, very competitive, right?

The demand is still not there. So, what the guys have been able to do is keep improving the yield, okay, to a certain degree, but work very hard on the cost side. All right? So, that's where we are, and we will see some improvement into 2025. We are opening up a new center in Edmonton, okay, in early 2025. So that should help us reduce our costs with better technologies, et cetera, et cetera. We're gonna be looking at Vancouver, probably 2026, 2027, doing the same thing in Vancouver to improve our technology there. So the guys are working on the costs. We're having some discussion with some partners of ours to move some freight from, let's say, one of our peers to another of our peers with better service and better rates.

So the guys are really working hard to, you know, move freight in a very lean and mean way in terms of cost. Our service is great, our coverage is adequate, so it's just like some mistake that were made in 2023, in the summer of 2023, puts us back a little bit in Q1 and in Q2, but the team is rebuilding the business base and adjusting in a very difficult environment.

Kevin Chiang (Analyst)

That's great color and very, very helpful. Maybe just follow-up question. Just on a comment you made earlier, around I guess the U.S. LTL or TForce Freight sales initiative to get from two shipments to three shipments. Sounds like that conversion has been a little bit more difficult than you anticipated. Just-

Alain Bédard (CEO)

Yeah.

Kevin Chiang (Analyst)

Do you think you need to change, like, the compensation structure to incentivize the sales force to drive towards that improved density, to get that cost per shipment lower? Or is there something else to maybe incentivize them to move towards this sales model that should drive better cost efficiency?

Alain Bédard (CEO)

Yeah. Yeah, that, that's a very good question there, Kevin, and we've been working at the compensation of not just the sales team, okay, but the terminal managers and all that. So it's an evolution from the UPS days to where we are today. And twenty twenty-five, I've not seen their plan yet, but for sure, I mean, the compensation package of our terminal managers, okay, of our salespeople, probably will have to be reviewed and updated in twenty-five so that people understand clearer what the mission is, right? So if you go back to what you just said about the sales team, they must understand that we need more freight per stop. And for them to understand, they understand money, right?

Kevin Chiang (Analyst)

Mm-hmm.

Alain Bédard (CEO)

So you're right. If the compensation is based on getting more freight per stop, hopefully, they will start to understand that this is mission critical, and this is what you have to do, guys. Not open up new accounts. Let's try to get more business with the existing account that we already deal with. They know us, okay? They know our strength, they know our weakness. They accept that because they do business with us, so let's try to grow with existing customer and not try to chase customer all over the place. And, you know, that is one way that's gonna help the operation to reduce our costs. But there again, also, we have to look at our terminal managers' incentive program so that they understand that we must not miss pickup, because a missed pickup is you miss the revenue.

You know, the pickup is the generation of the revenue. If you miss the pickup, you don't get the revenue. So you need the revenue, don't miss pickup, right?

Kevin Chiang (Analyst)

Mm-hmm.

Alain Bédard (CEO)

So, you know, again, it's an evolution because, you know, where we started three years ago and where we are gonna be in twenty twenty-five, our incentive program, our bonuses, will be way more aligned, okay, to what we want these guys to perform on versus twenty-four or twenty-three, because this is an evolution. You know, when you talk to a terminal manager that used to be, his bonus used to be based on global UPS and you say, well, we have to change that based on your terminal now, it's difficult to do. So you need some kind of an evolution, right? So step one, you say, well, you guys are not part of the Big Brown Machine now, okay, you're part of TFI. Well, step one, okay, this is what we're gonna do. Step two, and that takes time to adjust.

Kevin Chiang (Analyst)

That's very helpful. Thank you very much, Alain. Best of luck as you exit this year.

Alain Bédard (CEO)

Thank you. We need luck.

Operator (participant)

Thank you. Our next question comes from the line of Jason Seidel from TD Cowen. Go ahead, please.

Jason Seidl (Analyst)

Thank you, Roberta. Good morning, Alain.

Alain Bédard (CEO)

Good morning, Jason.

Jason Seidl (Analyst)

Wanted to talk a little bit about the service on the U.S. LTL side. You said obviously you're disappointed in the little bit of a step down. I was wondering what you guys are doing to make corrections to that, and your commentary on sort of low single-digit price increases. Does that assume that you get improvement in the service, or would improvement in your service provide potential upside to that number?

Alain Bédard (CEO)

No, I think that the improvement of our service will provide us, down the road, some potential improvement on the quality of our rates, the quality of our pricing. What are we doing to improve service? Number one, okay, is, as I said, we are moving as much as we can more freight from rail to road to improve the service. Because we know that if you give the freight, your line of freight to a third party, you're dependent on the service of that third party, right? So my best peers don't give a lot of freight to the rail because they want to provide good service to their customers. So the more freight we give to the rail, the more dependent on the service of the rail, okay, versus your customer and the service that you provide to the customer.

So we've started, okay, in 2024 to do that, okay? But, you know, we still give the rail more than 30% of our freight today, so it's still too much. The goal is to bring that down closer to 20%. Some of our peers are around 20%. Some of our peers are close to 0%, right? We got to go step by step. That's number one. Number two, it's a culture of not laissez-faire thing, kind of thing, right? Guys, you cannot miss pickup. We started to monitor that, I would say, like, eight months ago. But we still miss about 400 pickups a day. We have to change that culture of, "Oh, yeah, well, it's kind of normal.

We were overwhelmed with a customer, so we've missed fifty pickups today." Well, no, you have to adjust ourselves. So what are we gonna do about that? Well, you know, because you're a union shop, this, you cannot call a third party. Well, maybe we can. Maybe we can have this discussion and change this mentality of abandoning the customer, okay, because you were overwhelmed by another customer in terms of volume, so you cannot service two or three customers. So that, that's not good for your service image, right? So we have to work with our guys to have them understand that this is not acceptable. You cannot miss pickup. This is a no, no, right?

Jason Seidl (Analyst)

Right.

Alain Bédard (CEO)

If you look at our Canadian operation, okay, we don't miss pickup in Canada, and we have a union environment too. So, I mean, why are we missing so many? Because it's not part of our emergency culture that no, no, no, we cannot miss pickup. So we, you know, but until eight months ago, nobody was monitoring that. So now we monitor it, so now we know, okay, who's missing the pickup. So that's another area where you lose the revenue and you have customers that don't like you, right? Because you didn't show up, right? So we have to change that because this is something that's not helping us. When you look at Mastio Report, you know, some people are saying, "Well, these guys, I give them a pickup, they don't show up." And we have all the excuses in the world.

We play a no excuse game, so we got to change that culture. We have to show up and be there to pick up the freight, because that's the revenue generation, right? So these are all things that, down the road, will help us on our, on our cost basis, getting more freight per stop. This is... You don't have to be a rocket scientist to understand that. This is what we're trying to say to our sales guy: "Guys, if you have two shipments, you divide the cost of that pickup by two. If you have three, you know, you divide by three." So you become more competitive, okay, by doing that versus your peers. And more competitive you are, with better service, then more freight you can- you will get down the road.

So it's like an education, a training, a culture that has to change at our TForce Freight. The guys are working hard, but you know, we got to walk the talk, and you know, like we always said, the proof is in the pudding. And right now, okay, I mean, we still have issues, right? To fix.

Jason Seidl (Analyst)

I appreciate the explanation. I wanted to also key in on, you called out, truckload continuing to steal some LTL freight. I guess two things. One, did you see a sequential increase in that? And two, when would you expect that to improve? Is this like a back half of the 2025 event?

Alain Bédard (CEO)

The minute the truckload guys get busier. I mean, so when is this gonna happen? I don't know. Okay, hopefully in 2025. But we know, I mean, those guys are not busy. I mean, we haven't seen any peers so far, except one, and those guys are not really big into the day-to-day truckload world. But we know the market is really weak. And now, for sure, I mean, this will disappear once these guys become busy. Now, when-

Jason Seidl (Analyst)

For sure.

Alain Bédard (CEO)

Is this gonna happen? Well, maybe late 2025, early 2025, I don't think so. Summer of 2025, we'll have to see. But don't forget that, interest rates have come down a bit, and they will come down more, and this should improve, okay, the customer, you know, disposable income for customers because, now, you know, inflation is less today than it was six months ago, so that helps the disposable income. Interest rate going down, again, that helps disposable income. More disposable income, then the consumer can spend more, he spends more, it helps us.

Jason Seidl (Analyst)

Always appreciate the time, Alain. Thank you.

Alain Bédard (CEO)

Pleasure, Jason.

Operator (participant)

Our next question comes from the line of Daniel Imbro from Stephens. Go ahead, please.

Daniel Imbro (Analyst)

Yep. Hey, good morning, Alain. Thanks for taking the questions. I wanted to-

Alain Bédard (CEO)

Good morning

Daniel Imbro (Analyst)

... maybe continue on the U.S. LTL pricing discussion. You mentioned that obviously one of the headwinds was service stepping back, but also that some of the competitors had added capacity. Can you maybe rank order which of those sequentially worsened through the quarter when you look at maybe the step down from the first half, mid-singles to low singles? And then just curious, as you're talking to customers and you're making these improvements to service, do you think your pricing will have to step further down to get customers to try and come back to TForce again? Or, or how are those customer conversations going as you navigate the cost for service changes?

Alain Bédard (CEO)

Yeah, yeah. So, so I think that, you know, you need the service. This is step one to try to convince a customer, right? So you, you know, you can attract a customer with rates, but if the service is poor, I mean, the guy is gonna run, and he's gonna go somewhere else. Because, you know, yes, service is very important. Price is very important, number one, but service is also key, right? So when you're trying to get more freight, the guy will say: "Yes, how's your service?" "Well, my service is great." "Okay, I'll give you a chance." And then, if you don't provide the right service, then he's gonna walk, and you're gonna have lots of churn. So that's one thing that at TForce Freight we have, right? We have too much churn.

Customers try us, and we fail a bit, okay, the guy goes away. By improving service, okay, you reduce the churn. By reducing the churn, you improve your volume, right? This has been key to us. In terms of our peers, the fact that some of our peers are invested heavily in real estate, I mean, we haven't seen anything so far, but I'm just saying that the market is really soft, so you know, people are, some people are trying to chase rate and grow the volume. Our focus is not to chase rate, we have to fix our service first and reduce our costs, and then reduce the churn so that we start growing organically.

Because if you get 3,000 shipments more a day, but you lose 3,000 because, you know, of the churn, well, you're back to zero. So you got to fix the service so that you can reduce the churn of customer.

Daniel Imbro (Analyst)

Yep, that's helpful. And then as a follow-up, some of the balance sheet, you mentioned you're paying down debt like crazy in the near term, but you do need to scale up, it sounds like, to kind of move forward with this spin. So curious how your appetite is on M&A at this point, and how active the environment is out there, given we're two years into a down cycle. Are you seeing more sellers come to market? How are multiples changing on the M&A side? Just curious what you're seeing out there when you're talking to potential targets?

Alain Bédard (CEO)

Yeah. So, yes, reducing the debt for us is key, right? Because, our debt is, we're leverage is about two point something. Okay, we wanna be under two by year-end. Okay, so that's the focus of ours, and also to get ready for something of size down the road in 2025, into 2026, maybe. In terms of M&A, I mean, we've always been very patient. You know, we have a saying within TFI, "You make your money on the buying, never on the selling." So, for sure, you know, if you look at our last trade, those are really accretive to us. The Daseke one will be very accretive to us down the road once we do all the adjustment that needs to be done over there.

And you know, in 2025, notwithstanding anything major by year-end or into 2026, we'll do another $200-$300 million of investment into some targets. Our pipeline is solid. We have lots of opportunities. It's just that we have to be patient. You know, if you go back to 2024, we walked away of one deal because we couldn't agree on the valuation, and that's it. I mean, we're very, very patient. And for sure, the environment, because the freight environment has been so weak, the environment for M&A is good for us, right? But again, because of the Daseke transaction, step one for us right now is to reduce the debt by year-end, to go with a leverage under 2. Keep reducing the debt.

If something good shows up in Q1 and in Q2, in our, let's say, logistics sector, maybe some tuck-ins in Canada on the specialty truckload, where we're so strong. Yes. Well, we'll continue to do that and get ready for something of size. Hopefully, that we could have something good for our shareholders by year-end 2025 into 2026.

Daniel Imbro (Analyst)

Great. Appreciate the color, and best of luck.

Alain Bédard (CEO)

Thank you.

Operator (participant)

Our next question comes from the line of Brian Osenbeck from J.P. Morgan. Go ahead, please.

Brian Ossenbeck (Analyst)

Hey, good morning, Alain. Thanks for taking the question.

Alain Bédard (CEO)

Good morning, Brian.

Brian Ossenbeck (Analyst)

So just wanted to, just want to understand a little bit more of the, what you see in the fourth quarter. In particular, I think the, the guidance for flat earnings would imply a decent sequential step up into Q4, and historically it's sort of been flat to down a little bit. So, maybe you can walk through some of the assumptions, or maybe there's some M&A or something else in there that would make that a little bit counterseasonal to get, a nice pickup here into the fourth quarter.

Alain Bédard (CEO)

It's because, Brian, our Q3 was not good, right? Our Q3, if you look at our specialty truckload, I mean, we did a better job in two than in three. The reason being is that in the US, our specialty truckload operation was affected badly with some major accident from the Daseke team, where, you know, this culture of having a student driver, okay, created a mess in our accidents level. So this has been corrected. I mean, we don't really like, you know, students driving our truck and getting into an accident that's gonna cost us a fortune. So my specialty truckload should have done a much better job in Q3, and they will do a better job in Q4.

So if you look at my Q2, I was $83 million of OE, and in Q3, I'm down to $70 million. That's not normal. That's not normal. And that came from our U.S. operation, from Daseke and also a little bit of TA Dedicated. I don't see that coming into Q4, so we should go back to closer to a Q2 number in our truckload. The same story is true. Logistics will probably be the same as Q3. Why is that? Because JHT is starting to suffer from, you know, our customers, PACCAR and Freightliner, reduce construction, right? Because the market is weak. So JHT will perform not as good as, you know, the first three quarters of the year. So logistics will be down a bit in Q4 versus Q3 and Q2.

But if you look at Q2, Q3, we were stable at about $50 million of OE on logistics, right? So, but we'll be down a bit into Q4. But we believe our LTL, U.S. LTL and Canadian LTL and parcel will do better in Q4 versus Q3. So, we did about close to $100 million in Q3, and we did about $110 million in Q2, so I think that we'll be closer to Q2 than to Q3 in Q4. So all in all, you should see us improve Q4 versus Q3, being closer to Q2.

Brian Ossenbeck (Analyst)

Okay, understood. Thanks for that. And then just one follow-up. You talk about capacity additions and, maybe some additional pricing pressure in U.S. LTL, but we've got the remainder of the Yellow assets coming up for bid. I know in the past you've said you wanted to be a bigger player in the market, but I don't know if that necessarily means here in the near term. So maybe give an update in terms of the footprint for TForce Freight, and if you're looking at the latest round of auctions to be a potential-

Alain Bédard (CEO)

Yep.

Brian Ossenbeck (Analyst)

area where you could pick up a little bit, pick up a little bit more

Alain Bédard (CEO)

Yeah.

Brian Ossenbeck (Analyst)

and optimize a little bit better. Thanks.

Alain Bédard (CEO)

Yeah. Yeah. So, Brian, I mean, in that auction, we're bidding on one site, very small site, very small transaction, less than $1 million, okay? And that would be replacing a site that we are tenants. Okay? So basically, nothing, nothing of importance to us. We keep adjusting, okay, our portfolio. So during the course of Q3, we sold one of our terminals to one of our peers, and we sold another terminal that we have in San Diego, California, to a kind of developer. So we keep adjusting in terms of number of doors that we have, trying to get rid of leased terminals and buying terminals. So that's where the yellow one, where we put in the bid. But, you know, we have the terminal capacity to do 40,000 shipments a day, and we do only 22.

I mean. And it's gonna take us probably a long time unless we do some M&A on the union side, which there's not that many, okay, to do anything with the real estate or we keep adjusting, right? That is always been the plan, is to grow organically from the 22,000 shipments a day, slowly into the 23, 24. But that pace is always on service and trying to grow with existing customer because they know you, right? So that's where we're at. We're not gonna be very active on the auction block with YRC. It's only one terminal, very small terminal that we're in there for. And the rest is, we got already way too much real estate that we are adjusting whenever possible.

Brian Ossenbeck (Analyst)

Okay. Appreciate it, Alain. Thanks for the time.

Alain Bédard (CEO)

Pleasure, Brian.

Operator (participant)

Our next question comes from the line of Ariel Rosa from Citigroup. Go ahead, please.

Ben Mohr (Analyst)

...Hi, great, thanks. This is Ben Moore on for Ariel Rosa at Citi. Hey, Alain, thanks for taking our question. You just mentioned a few minutes ago you'd be disappointed if you don't break ninety OR in twenty-five.

Alain Bédard (CEO)

Yeah.

Ben Mohr (Analyst)

At your 2Q earnings call, you were saying targeting under 90 for the first half of 2025. Do you think maybe just to kind of fine-tune this, the under 90 target is now more like second half of 2025? Or do you think the under 90 could still be a target for first half of 2025?

Alain Bédard (CEO)

Yeah, that's a very good question. You know, like I said, I've not seen the plan, okay, for 2025 from, from that team over there at TForce Freight. But what I would say is this, is that we have to break this glass ceiling of 20 OR. So to me, it would be great if we could do that in the first six months, but I don't know. I don't know. But I would be very concerned if we don't do that, at least on the second part of, of, 2025. With everything-

Ben Mohr (Analyst)

Great.

Alain Bédard (CEO)

That, you know, everything that we're trying to do, accomplish, improve service, trying to educate the sales team, like I said earlier, in trying to get more shipment per stop, et cetera, et cetera, I would be very disappointed, and for sure, I mean, it all relates to beefing up the team, improving the talent, the management talent, because, you know, we have a team in Canada that is second to none, okay. We have the A team in Canada, so in the U.S., we don't have the A team, right. We have to build an A team, and that's what we're trying to do, is improve what we've got, you know, continuously, you know, provide them with better information.

But if a manager sits on his hands and you give him all type, all kinds of information and he does nothing with it, then you have the wrong guy, right? So. And it's an ongoing process that that's going on right now. The mistake I made, guys, is when we bought UPS Freight, you know, I thought that we could bring this company within five years into an 85 OR, which is normal. I mean, we, we do less than 80 in Canada in a union environment.

My mistake was, it's not that we're not gonna get to eighty-five, it's just it's gonna take us more time because, you know, our team over there, the talent that we have, the tools that we have, the financial information, the focus, you know, was not as good as I thought would have been so that's why it's gonna take us more time.

Ben Mohr (Analyst)

Great. Great. Appreciate that color. Maybe as a follow-up, you've been asked a lot about service and service improvement on this call. Maybe just to ask slightly differently, it looks like your customers' perception of your service level is roughly where it was, you know, this year and last year, roughly the same.

Alain Bédard (CEO)

Yeah.

Ben Mohr (Analyst)

Still sort of-

Alain Bédard (CEO)

Yeah

Ben Mohr (Analyst)

... unfortunately, at the lower range compared to your other-

Alain Bédard (CEO)

Yes

Ben Mohr (Analyst)

public LTLs, where some of them

Alain Bédard (CEO)

Yes

Ben Mohr (Analyst)

Have actually improved from 2023 into 2024. Why, why do you think, after all the work, very hard work that you and your team's been doing, why hasn't that shown an improvement from 2023-2024? And do you think we should see some dramatic improvement on any of those things, the damage, the shortage, the on-time pickups, deliveries from 2024-2025?

Alain Bédard (CEO)

Yeah. Well, like I said earlier on the call, I mean, it's a disappointment to me when you look at the claims where we were heading in the right direction and then path, I mean, over the last nine months, a year, now our claims cost is going in the wrong direction. So guys, let's refocus on that. So that does not help us, okay, with you know, the evaluation that our customers are doing of us in terms of service. Claim is a problem, right? Because when you break the guy's stuff, he doesn't like you, right? So that's number one, where we have not improved. So this is why we are at the bottom of the pack, number one.

Number two, if you don't show up for pickup, nobody likes that, because then you're stuck with the freight on your dock, right? And then you have to either call someone else, or hopefully TForce Freight shows up tomorrow. Customer don't like that, right? This is under our control, and we have to do a much better job at it. This is why we have not improved, okay? This is why, like I was saying earlier, you know, there's an evolution in the bonus program that we have with our sales team and our management team. It shows that the program that we have right now in 2024 is not good because, you know, we're not getting the result that we're supposed to get, right?

So we will have to improve the bonus plan so that these guys' bonus is aligned to what we want them to perform. So being improve service, don't break the stuff, don't lose it, show up for pickup, et cetera, et cetera. And then the guys will have to take that seriously, because then the incentive, the bonus, is gone, right? But that's an evolution, because where we were with the bonus system when we bought the company was just, I mean, unacceptable, right? So it's been an evolution, but, I mean, this report, this mastio report is a major disappointment for me, and I'm gonna be with the team, tomorrow, as a matter of fact. And for sure, we'll be talking about that guys, I mean, we're still at the bottom of the pack....

We have not improved.

Benoit Poirier (Analyst)

Great. Appreciate the time as always, Alain.

Alain Bédard (CEO)

Pleasure.

Operator (participant)

Our next question comes from the line of Cameron Doerksen from National Bank Financial. Go ahead, please.

Cameron Doerksen (Analyst)

Yeah, thanks. Good morning. Just a couple quick ones for me.

Alain Bédard (CEO)

Good morning, Cameron.

Cameron Doerksen (Analyst)

I wanted to ask you about, I guess, the free cash flow. Maybe you sort of provided some updates here on your kind of EPS outlook for 2024.

Alain Bédard (CEO)

Yep.

Cameron Doerksen (Analyst)

Is there any change on the free cash flow? You still think you can be within the original range that you were expecting?

Alain Bédard (CEO)

Free cash flow, I mean, it's probably gonna be the same, same as last year. Last year, we did about $775 million, so I think that the range that is reasonable is between $750 million-$800 million of free cash for 2024-

Cameron Doerksen (Analyst)

Okay.

Alain Bédard (CEO)

with CapEx of $300. Net CapEx of $300.

Cameron Doerksen (Analyst)

Okay, perfect. And I know it's still early in your planning process here, but I mean, I guess how are you thinking about the CapEx requirement for twenty twenty-five? I mean, you've invested quite a bit in making your fleet younger. Should we-

Alain Bédard (CEO)

Yeah

Cameron Doerksen (Analyst)

... see some easing of spending on CapEx in 2025?

Alain Bédard (CEO)

Yes, yes, you'll see some easing of CapEx. Number one reason is because the life of a truck has been extended because the market is so weak that we don't run as many miles. So let's say normally, in a normal environment, a truckload truck is good for four years, and now it's gonna be more like four and a half years, so that delays a little bit, the CapEx in that sense. So probably you should see 2025 CapEx, same business, more like $250 million instead of $300 million.

Cameron Doerksen (Analyst)

Okay. That's perfect. I'll... It's been a long call, so I'll leave it there. Thanks very much for the time.

Alain Bédard (CEO)

Thank you, Cameron.

Operator (participant)

Our next question comes from the line of Benoit Poirier from Desjardins Capital Markets. Go ahead, please.

Benoit Poirier (Analyst)

Yeah. Good morning, Alain.

Alain Bédard (CEO)

Morning, Benoit.

Benoit Poirier (Analyst)

Yeah. There was some great comments about we read a lot about heavier freight that was earlier moving toward LTL that has moved to TL. I'm just... And you mentioned some points about the fact that we need to see eventually a recovery of the TL. What are the first things the freight industry needs to see in order to get a more normal freight environment? Is kind of bankruptcy the first thing indicator that you look at that could help TL and eventually LTL?

Alain Bédard (CEO)

No, I don't think so. Bankruptcy, I mean, we saw that in Canada with Pride, you know? A lot of people thought that Pride in Canada would disappear, but they have not disappeared, right? Because the banks kicked the can down the road, right?

Benoit Poirier (Analyst)

Mm-hmm.

Alain Bédard (CEO)

So, no, bankruptcy, it's minimal. It's really, you know, the freight will start moving once the consumer, you know, spends more. This is very simple. North American economy is based on consumer, right? So the consumer right now, his disposable income is not where it was a few years ago. So, I mean, with lower interest rates, lower inflation, improved salaries, okay, that is going on right now, down the road, he will spend more. And hopefully, he spends less on trips and flying all over the place like he did in 2023, 2024, and spends more at home. So that will help freight. Freight will help us, right?

Benoit Poirier (Analyst)

Yeah. No, that's, that's great comment. And for the follow-up question, you mentioned some color about the M&A size, close to $4-$5 billion toward the end of twenty twenty-five, early twenty twenty-six. I was wondering if you could share more details about segments that you would tap. Is it more related to LTL, or could you do something in specialized TL? And are there any comfort level in terms of leverage and milestone you would like to achieve before pulling the trigger on something more sizable?

Alain Bédard (CEO)

Yeah. So our preferred, okay, M&A target is in the U.S., number one. And number two, it's always been, like I said, LTL, we have to do more. I mean, we're a small player in LTL in the U.S. We're the dominant player in Canada, so we will probably never be the dominant player in the U.S., but we have to be more of like, maybe a number three or number four, but not number six or number seven. That 22,000 shipments a day, we're too small. So for sure, LTL down the road. And logistics, I mean, we love logistics because the return on invested capital is huge normally. Although we don't like logistics making two points, I mean, we're not in that league, we're not in that business.

But if you look at our logistics, you know, we're running a 90 OR, 88 OR, something like that. So that's really interesting. So logistics that makes money, but not logistics that makes two points. Logistics that makes money and that we can grow with, I mean, that's all. We love that. You know, if we could find a, let's say, an LTL that's asset light, okay, down the road, that would be fantastic, because if you look at our LTL in Canada, because of our intermodal, the Vitran, the Clarke, and all these guys, I mean, we run a very asset light model into our Canadian LTL sector, right?

Benoit Poirier (Analyst)

Yeah.

Alain Bédard (CEO)

So if we could find a nice business in the U.S. that could be asset light, as an example, that would be an, you know, interesting for us, right?

Benoit Poirier (Analyst)

Yep, yep.

Alain Bédard (CEO)

Because then you don't have to worry that, oh, yeah, but Alain, you run a union shop, and then you buy a non-union shop, and the union will try to unionize the non-union shop. I mean, that's always the concern, but if it's asset-light, that concern does not exist, right?

Benoit Poirier (Analyst)

Mm-hmm.

Alain Bédard (CEO)

Although, to me, you know, we run union shops and non-union shops in Canada, and, you know, the union does not unionize the non-union shop. But in the U.S., it's a big concern. Oh, if you buy a, let's say a non-union shop, or the union will try to unionize it. But, I mean, we run Hercules right now. It's small. It's only $100 million in revenue, and we just bought it, a few months ago, and it's still non-union, right? So, but asset light, non-union, probably would be a good target of ours, you know, down the road. We'll see.

Benoit Poirier (Analyst)

Okay. And just in terms of comfort level for the leverage, Alain, any thoughts there?

Alain Bédard (CEO)

You know, leverage is gonna be under three. In the U.S., we have to keep the leverage under three, okay? So this is why I said, you know, three, four, five billion dollars, maybe we could do that without paper. If we have to go above that, then we have to issue paper, which we don't like to do, right? So we don't like to do. In terms of leverage, we could go all the way up to three. Why is that? Because we could delever quite fast. If you just look at, you know, this Daseke acquisition that we bought in April, we took on $500 million of debt, additional to the debt that we had, and you'll see us down $500 million by year-end.

Benoit Poirier (Analyst)

That's great, caller. Thank you very much for the time, Alain.

Alain Bédard (CEO)

Pleasure, Benoit.

Our next question comes from the line of Bruce Chan from Stifel. Go ahead, please.

Bruce Chan (Analyst)

Hi, can you hear me?

Alain Bédard (CEO)

Yes. Morning, Bruce.

Bruce Chan (Analyst)

Okay, great. Hi. Hi, Alain. This is Andrew Cox on for Bruce.

Alain Bédard (CEO)

Okay, Andrew.

Bruce Chan (Analyst)

You mentioned some impact expecting in the first quarter from the relief efforts from the hurricane, you know, especially given the Daseke exposure. We were just kind of wondering if you're expecting anything here in the fourth quarter as well, or is that more of a one-Q event for you all? Thank you.

Alain Bédard (CEO)

Yeah, very good question. So far, what we know is that, right now, it's a cleanup phase that these guys are going through right now, so it's more like the waste guys that are, you know, taking, are busy with the situation there. So we don't know. The cleanup phase, is that gonna be a week, is that gonna be a month, okay? So once the cleanup phase is done, then they start reinvesting, rebuilding, et cetera, et cetera. So this is why maybe, maybe we'll see some benefit, in Q4, but, who knows? We don't know. But one thing is for sure, if it's not Q4, it's gonna be Q1.

Bruce Chan (Analyst)

Okay. That makes sense, Alain. Thank you. And then, just as a follow-up, I wanted to get your thoughts on the impact of a potential FedEx Freight spin, given your experience with, you know, the Big Brown Machine and UPS. Do you think the spin would be a bigger hurdle, smaller hurdle, or, you know, comparable from an unbundling standpoint? And, you know, over the course of time, do you expect this spin to be, you know, a net positive or a net negative for the group? Thank you.

Alain Bédard (CEO)

I think it's gonna be a net positive, but it's not easy to do. I mean, don't forget to do the spin-off of a division like UPS has done with us. It's not a very easy process. We've done it ourselves. We know how to do it, okay, but it's not easy to do. I could tell you that. You know, I think it's good for the FedEx shareholders, okay? It depends on the valuation of the freight division, but I think it's a good move. I think it makes a lot of sense. I think it's also gonna be good for the LTL industry.

Bruce Chan (Analyst)

All right. Thanks, Alain. That's all I had.

Alain Bédard (CEO)

Thank you.

Our next question comes from the line of Ken Hoexter from Bank of America. Go ahead, please.

Ken Hoexter (Analyst)

Hey, Alain. Good morning, I guess almost good afternoon. Just a couple clarifications on some numbers.

Alain Bédard (CEO)

Yeah.

Ken Hoexter (Analyst)

Just some confusion, and I know you've kind of hit this a couple of times, but just when you answered Ravi at the beginning, you said flat earnings year over year, and then you kind of clarified a couple of things throughout the call. Were you talking about a normalized $6.34, or Bloomberg has you at $6.18 year over year? Just trying to get clarity on the fourth quarter target. I know you said it was more like-

Alain Bédard (CEO)

Yeah

Ken Hoexter (Analyst)

second quarter, which was, I think, $1.71.

Alain Bédard (CEO)

Yeah.

Ken Hoexter (Analyst)

Just trying to clarify that for some investors.

Alain Bédard (CEO)

Yeah. Yeah. Right now, what we're saying, Ken, is that probably is gonna be more the same. So that's for the year. So I don't remember what we did last year. I think it was six something, six eighteen, six twenty. Okay, so I think that's, that's where we're gonna end up the year.

Ken Hoexter (Analyst)

Okay. Because that would be a significantly weaker... I guess, to clarify that, that would be a weaker fourth quarter than I think, you know, I guess the normalized $6.34 that's floating out there as well. Okay. So you're comparing against the $6.18.

Alain Bédard (CEO)

Yeah.

Ken Hoexter (Analyst)

Would you be able to state then to clarify what, what your first three quarters has been just because there's a lot of normalization going on?

Alain Bédard (CEO)

You know what, Ken, I don't have this number. I'll have to get back to you on that, or David will have to get back to you on that. Overall, okay, if you take what we have, I think at the end of Q3, just hold on for a second. We're at 455, so yeah, 455.

Ken Hoexter (Analyst)

4:55, okay.

Alain Bédard (CEO)

So, $4.55 plus $1.60-

Ken Hoexter (Analyst)

About $1.63. Yeah.

Alain Bédard (CEO)

Yeah. Yeah.

Ken Hoexter (Analyst)

Okay.

Alain Bédard (CEO)

Which is basically what we've done in Q3. But I think that we'll do a little bit better in four than in three, like I was just saying about our specialty truckload, you know, a little bit less on the logistics, a little bit better on the LTL and P&C. But to be conservative, what we're saying is that, okay, let's say that 2023 and 2024 are the same, like $618, $620.

Ken Hoexter (Analyst)

Okay, perfect. And then, when you talked about the kinda ninety-one-ish OR for the fourth quarter, you know, I guess you're looking at improvement sequentially for the U.S. LTL.

Alain Bédard (CEO)

Yes.

Ken Hoexter (Analyst)

Can you talk about what gets you there? What gives you the confidence? I mean, it sounded like you were concerned, and should we be concerned with where pricing is headed? Sounds like the renewals are low single digits, so I'm trying to mesh the kinda pricing concerns-

Alain Bédard (CEO)

No.

Ken Hoexter (Analyst)

Service concerns with how you show improvement.

Alain Bédard (CEO)

No, I think it's not the market. It's not the market. The problem that we have to improve versus Q3 is our cost. I mean, we had way too much cost in our claim. If you look at our claim in Q3, at 0.8% of revenue, I mean, this is completely unacceptable, okay? I think that we're gonna do a better job in Q4. That's number one. Number two, again, our fleet costs are improving in Q3, but for sure, they will keep improving in Q4. So labor cost per shipment, we took a little bit of a setback in the first two weeks of October, but September, okay, our labor cost per shipment was the best so far in the year.

So we did really, really well in September, but then the first two weeks of October, it's a little bit a step behind, a step back. But I think that we're on the right track in terms of doing a better job on our labor cost per shipment, Q4 versus Q3, because we were heading in the right direction except the first two weeks of October, because of all these storms. That's the excuse that we have right now, but I'm looking at the third week of October so far, and we're back on track to where we should be. So I think that we'll do a better job on the LTL OE in Q4 versus Q3.

Ken Hoexter (Analyst)

Okay.

Alain Bédard (CEO)

Same volume.

Ken Hoexter (Analyst)

All right.

Alain Bédard (CEO)

Same volume.

Ken Hoexter (Analyst)

That's a great walkthrough.

Alain Bédard (CEO)

Same pricing.

Ken Hoexter (Analyst)

So it's really-

Alain Bédard (CEO)

Okay

Ken Hoexter (Analyst)

-focusing on those costs and the

Alain Bédard (CEO)

Yes.

Ken Hoexter (Analyst)

And improving performance. Yeah, yeah.

Alain Bédard (CEO)

Yes.

Ken Hoexter (Analyst)

Okay.

Alain Bédard (CEO)

Yep.

Ken Hoexter (Analyst)

Thanks for the clarification. Appreciate it, Alain.

Alain Bédard (CEO)

Pleasure, Ken.

Operator (participant)

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Bédard for any final closing remarks.

Alain Bédard (CEO)

Thank you. So well, thank you very much, operator, and thanks everyone for being on this morning's call and for your interest in TFI International. As always, if you have any follow-ups, please don't hesitate to reach out. Enjoy the day, and we look forward to speaking again on our next quarterly call. So thank you. All the best.

Operator (participant)

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.