TFI International Inc T.TFII

RBC

[retiredcf]

May 15, 2024

TFI International Inc.
Highlights from the RBC Canadian Industrials Conference

NYSE: TFII | USD 136.86 | Outperform | Price Target USD 162.00

Sentiment: Neutral

This afternoon, Alain Bedard, President and CEO, presented during day two of RBC’s Canadian Industrials Conference.

Demand outlook

Volumes continue to face challenges. An important takeaway from today's discussion was Mr. Bedard's observations that demand is still subdued with no signs of fast improvement. While visibility into the outlook is uncertain management expects the current weak environment in trucking will persist through the balance of 2024, in line with the company's guidance. We view this as largely built into expectations and believe it is creating an opportunity to focus on costs, which we believe sets the stage for solid operating leverage when the demand environment (eventually) recovers.

Management maintains 88% near-term and 80% long-term O/R target in LTL. Management has identified several areas to improve margins, such as consolidating the number of maintenance facilities, investing in new equipment, and optimizing routes to reduce mileage between pickups and deliveries. In addition, management today flagged their focus on improving service, which they see as important to drive volume growth with their existing customers. Looking longer term, TFII is concentrating efforts on transforming the operational culture at TForce Freight. They believe there is potential in shifting from the previous focus under UPS to drive market share expansion to TFII's approach emphasizing cost reduction and profit maximization. While acknowledging that cultural change is a long-term endeavour, management is confident in their strategic direction and execution capabilities. The company also noted opportunity to increase weight per shipment, which we have seen in recent results and which we see as a driver of better profitability longer term.

M&A - next large deal not expected until 2025

TFII expected to prioritize smaller acquisitions, while the next larger deal is not expected until 2025. Management today flagged tuck-in M&A as an important part of TFII's strategy, and we therefore expect the company to continue to execute on smaller transactions this year. We continue to view tuck-ins as an attractive use of capital reflecting in our view discounted valuation and margin improvement opportunity but not a needle mover. On a larger scale deal, management noted they like regional based LTL players, which we believe would provide a platform for share gain looking ahead.

Spin out opportunity

Separation of the company likely a 2026 event. Last December, TFII announced that it is evaluating separating into two distinct public companies, and management today noted the Truckload spinout is likely a 2026 event. We had always viewed TFII's valuation as being negatively affected by its Truckload operation, and therefore see the separation as an important driver of value. Key in our view will be management’s ability to drive margin improvement and further scale in the business and therefore valuation closer to in line with well-run peers.