This morning, Alain Bedard, President and CEO of TFI International, presented during day two of RBC’s Canadian Automotive, Industrials & Transportation Conference.
Demand outlook solid despite recessionary concerns
No signs of a freight recession at the moment. Key from today's session in our view was commentary from Mr. Bedard that demand remains strong and that his team is seeing no indication of a freight recession. In fact, Mr. Bedard indicated that he remains 10% to 25% overbooked on most lanes. While we could see freight demand slow reflecting macro headwinds in the back half of the year, we are positive on current strength, especially given the recessionary overhang on transportation stocks, in particular TFII.
TForce Freight Integration progressing well
TForce Freight 80 O/R target reiterated. Mgmt today spoke to their conviction surrounding an 80 O/R at TForce Freight and pointed to opportunity to reduce terminal footprint and increase density (i.e. travelling less miles and picking up more freight per stop). In addition, they expect solid margin improvement from updating TForce Freight's fleet as its older trucks are more expensive to operate versus newer alternatives. We estimate that each 5-pt improvement in O/R at TForce Freight contributes $1.12 to EPS, and therefore see significant opportunity surrounding further margin improvement going forward.
M&A increasingly likely in our view
We view a larger deal as likely in 2023. We expect M&A activity to ramp in 2022, likely via small tuck-ins over the upcoming quarters, which aligned with commentary from today's conversation. Key however is that we view a deal of size as increasingly likely in 2023 reflecting TFII's well capitalized balance sheet (TTM debt to EBITDA of 1.8x) and declining public market transportation valuations. We also view M&A as an important offset to potential freight demand weakness, as lower trucking valuations would likely pull forward large M&A in our view.
Solid trends in other segments
P&C pricing is stable. Mgmt pointed to stable pricing trends during our discussion as well as to increasing demand for B2B as the economy reopens. They also highlighted changing mix, with B2C volumes as a percentage of total decreasing to 25% currently, from 40% at the peak, which we view as positive reflecting the better margin profile of B2B volumes. We therefore see upside to Q2 P&C estimates from a more attractive business mix.
TL business solid in Canada. Mr. Bedard today noted that the Cdn TL business was the "best he's seen in 25 years", a positive in our view as the Cdn market has lagged on pricing versus trends seen in the US over the last year. On the other hand, the US TL business is being negatively affected by cost inflation related to labour and equipment. We continue to see the sale of the US TL business as a possibility, but expect management to hold off due to current market pressure on TL valuation.
Logistics segment benefiting from solid pricing trends. We continue to model for solid Logistics revenue growth on the back of eCommerce tailwinds and solid pricing. This aligned with commentary from mgmt, who noted the Canadian business was doing well and the US business was benefiting from solid pricing trends.
Share repurchases elevated
Recent share price weakness an opportunity. Mr. Bedard highlighted today that TFII continues to meaningfully repurchase shares, a testament to the company's FCF generation. We view this as an attractive use of capital given the recent pullback in the stock, and expect activity to remain elevated.