TFI International Inc.
(TFII-T) C$113.79
Pre-releases Better-than-expected UPS Freight Result Event
Yesterday, after market close, TFI pre-released a stronger-than-expected adjusted operating ratio (OR) for the UPS Ground Freight (now known as TForce Freight) acquisition that closed on April 30. TFI is scheduled to release its full Q2/21 financial results on July 26, after market close.
Impact: SLIGHTLY POSITIVE
We believe that the better-than-expected adjusted OR result in Q2/21 is a slightly positive development. We believe that commentary around the source(s) and sustainability of the better-than-expected results will be topical when the company releases its full financial results on July 26.
TFI announced that UPS Freight is expected to report an adjusted OR below 95% in Q2/21. This margin performance exceeds previous expectations of a 96-97% OR within one year of the closing of the acquisition, and our Q2/21 forecast of 96.8%. Assuming that UPS' Q2/21 revenue (excluding fuel) was in line with our ~ $380 million forecast, this implies Adjusted EBITDA from UPS Freight that is at least $7 million above our forecast, and compares with forecast consolidated Adjusted EBITDA of $220 million in Q2/21. The press release also indicates that the company- wide performance was strong in Q2/21, but did not quantify this performance.
At the time of the acquisition announcement, management believed that UPS had been operating the Freight business as a loss leader to the benefit of other UPS services. From a 99% OR at the time of the acquisition, management is targeting a 96-97% OR within one year and believes that a 90% OR within three years is achievable. This implies an operating margin of 10%, which compares with the rest of the segment at 16.7% YTD in 2021. We believed and continue to believe that this is a reasonable and achievable target for TFI.
UPS Freight generated approximately US$3.1 billion in revenue in 2020. We forecast that it will contribute approximately US$2.0 billion to 2021 revenue (33% of consolidated 2021 revenue excluding fuel in eight months of TFI's ownership) and approximately US$140 million in adjusted EBITDA. Management expects the acquisition to be accretive to diluted EPS in 2021.