Early read: Q2 results well above across the board; meaningful opportunity remains at TForce Freight
NYSE: TFII | USD 94.74 | Outperform | Price Target USD 100.00
Sentiment: Positive
Our view: Our early view on Q2 is very positive as results came in meaningfully above consensus expectations, and while directionally this was consistent with what we saw with US trucking reports, the magnitude, however, was impressive to say the least. Key will be the sustainability of results into the back half, and we will look for color tomorrow on the call. Our view is that LTL demand and pricing should hold up relatively well, in line with commentary from KNX last week calling for double-digit increases in LTL revenue per hundredweight in H2; however, we are more cautious on the TL outlook and expect pricing and demand to come off Q2 highs due to macro uncertainty. Mgmt highlighted in the MD&A that the economy has recently slowed but that TFII is well-positioned for solid operational and financial performance in 2022 and that it has material synergy opportunities related to TForce Freight. Overall, we are positive on Q2, and remain encouraged by the TForce Freight integration opportunity.
First impression:
Q2/22 results well above consensus. TFII reported adjusted EBITDA of $442MM, well above consensus $350MM and our $326MM. The beat was driven by solid results across the board. Adjusted EPS came in at $2.61, above consensus $1.80 (RBC: $1.70). Highlights by segment as follows:
• P&C – EBITDA better (EBITDA $44MM: RBC $35M). Revenue was down -14% Y/Y to $125MM (RBC: $140MM) mainly due to a decrease in packages, reflecting B2C weakness. Results were meaningfully better versus our expectations, however, on lower Materials & Services expense, and we will look for further color tomorrow on the call.
• LTL – EBITDA better (EBITDA $172MM: RBC $147MM). EBITDA came in above expectations on better margins. TForce Freight progress sequentially was a positive in our view with revenue per shipment (excluding fuel) increasing +2.1% q/q and 13.8% y/ y. Key on the call will be progress toward O/R targets of mid-80s by 2023 and of 80 longer term, compared to TForce Freight adj. O/R of 88% in Q2/22.
• TL – EBITDA better (EBITDA $177MM: RBC $122MM). Results were better versus our estimates on revenue, reflecting higher than expected contribution from acquisitions. Margins also came in better, due to gains of $23MM on rolling stock and equipment, effective cost control and strong pricing.
• Logistics - EBITDA better (EBITDA $52MM: RBC $43MM). Results were better versus our estimates on solid organic growth due to 3PL volume improvement in the U.S. Adjusted EBITDA margin of 11.5% was ahead of our 10.4%.
Proposed increase to buyback. TFII announced that it will apply to the TSX to amend its Normal Course Issuer Bid (NCIB). If approved TFII will be able to repurchase 8.8MM shares (up from 7MM). As of June 30, TFII has repurchased 4.4MM shares with 89.1MM shares outstanding. We view the proposed increase to the buyback as an indication from mgmt that they believe the shares are undervalued (we agree) and that further repurchases should provide a solid backstop to valuation. Key is that we believe TFII has the FCF and debt capacity to fully execute on the buyback barring any ramp in acquisition activity.
Conference call details
July 29 @ 8:30 AM EST; Dial-in #: 877-704-4453