TFI International Inc.
Early read: Q3 EPS slightly ahead as strong TL offsets weak LTL; dividend increased +30%
NYSE: TFII | USD 94.71 | Outperform | Price Target USD 113.00
Sentiment: Neutral
Our view: Our early view on Q3 is neutral with EPS coming in a touch ahead of expectations on better margin (EBITDA came in below). Overall, impressive TL results were offset by weaker than expected LTL margins. We view positively the solid TL margin improvement, robust cash flow generation and dividend increase (up +30% and ahead of consensus for up +11%), and view the balance sheet as well positioned for M&A into 2023 (leverage at 1.1x). However, the weaker margins at TForce Freight were a negative, and we will look to follow-up tomorrow on the call. Moreover, management noted in the outlook that growth continued to slow but that barring a more significant economic downturn the company is well positioned, with material synergy opportunities related to TForce Freight. Key on the call tomorrow will be 1) an update on O/R targets at TForce Freight given Q3 headwinds and 2) color on M&A with the balance sheet well positioned for a deal of size in our view.
First impression
Q3/22 results in line. TFII reported adjusted EBITDA of $348MM, below consensus $364MM, but in line with our $346MM. Adjusted EPS came in at $2.01, slightly above consensus $1.98 (RBC: $1.96). Highlights by segment as follows:
• P&C – EBITDA above (EBITDA $40MM: RBC $37M). Revenue was down -10% y/y to $120MM (RBC: $135MM) mainly due to a decrease in packages, reflecting B2C weakness, as well as lower revenue per pound. Results were better versus our expectations on lower Materials & Services expense due to increased fuel surcharge revenue.
• LTL – EBITDA below (EBITDA $137MM: RBC $159MM). EBITDA came in below expectations on lower revenue and worse margin. The lower revenue y/y was due to decreased shipments. A negative in our view was commentary that while shipments were down -17% in Q3, direct labor costs were only down -2%, causing TForce Freight margins to deteriorate sequentially by 2.8-pts.
• TL – EBITDA better (EBITDA $149MM: RBC $127MM). Results were better versus our estimates on margin and higher than expected contribution from acquisitions. In addition, TFII closed sale of CFI's assets on September 1 versus our expectation for October 1.
• Logistics - EBITDA in line (EBITDA $39MM: RBC $39MM). Results were in line versus our estimates.
Dividend increased meaningfully. TFII's Board of Directors has approved a $0.35 dividend for the next quarterly payment, which represents an increase of +30%. This compared to our and consensus estimates for an +11% increase, which we view as a positive and as highlighting the significant cash flow generation at TFII. Moreover, the TSX approved TFII's NCIB, under which the company can repurchase 10% of its public float (or 6.4MM shares). Finally, TFII repurchased in Q3 2.1MM shares for $199MM versus our expectation for 1.5MM.
Management remains active on tuck-ins. Tuck-in M&A activity was solid in Q3 with four acquisitions completed during the quarter and one subsequent. We view tuck-ins as an incremental driver of growth, and therefore viewed the acquisitions positively.
Conference call details
October 28 @ 8:30 AM EST; Dial-in #: 877-704-4453