TFI’s Bedard: Acquiring UPS’s LTL business was not a mistake

But the fact that the question even came up, with the fourth anniversary of the acquisition just a few months away, highlights the fact that TFI’s LTL business, which consists largely of the old UPS Freight operations, remain a significant laggard in the trucking conglomerate market. overall performance.

For example, the operating ratio at TFI’s U.S. LTL business was 92.2% in the third quarter ended September 30. That is a deterioration of 140 basis points from the 90.8% recorded in the third quarter of 2023.

In Canada, TFI’s LTL business achieved an improved OR of 76.3%, compared to 77.2% a year ago.

While none of TFI’s U.S. competitors in the LTL segment have yet reported third-quarter earnings, TFI (NASDAQ: TFII) numbers are worse than second-quarter ORs, which ranged from 89.8% for ArcBest (NASDAQ: ARCB) up to 69.5% for Old Dominion Freight Line (NASDAQ: ODFL).

Bedard’s conference calls with analysts are like no other in the trucking industry. He does them solo; Not even its CFO is present, which is pretty much guaranteed in any similar forum. Bedard talks for a few minutes, discussing numbers that were almost all released the day before in the company’s earnings report. The conversation lasted 90 minutes; 60 is standard, and on such calls the business side is usually represented by multiple people, not just one.

And above all, Bedard holds nothing back.

It’s taking longer than expected

“The only mistake we made is that we probably underestimated the time it would take to turn this tide,” he said of the UPS Freight acquisition.

Among the changes yet to be implemented: “improving the management skills of our boys through training, providing them with financial information to continue to improve our cost base by tracking service delivery standards.”

Over the nine months, the OR in US LTL was 91.8%. When asked by an analyst whether he thought TFI could achieve a sub-90 OR by the end of the year, Bedard said no, although he admitted that at one point the company had thought such a target could be achieved reaches.

Bedard then discussed some details about why TForce, the name of the LTL carrier that owns the assets of the former UPS Freight, is struggling.

In possibly the grimmest moment of the call, Bedard spoke of a “chicken-and-egg” dilemma in expanding the company’s LTL business.

The combined Canadian and U.S. LTL operations, based on shipment data in TFI revenues, process approximately 22,900 shipments per day. “If we received 22,000 to 25,000 shipments per day, that would benefit our cost base,” Bedard said. But the TForce business is “too fixed, not variable enough. That’s why we have to work with our team, our terminal managers, to really adapt our costs on a daily basis to the volume that we have.”

Which came first?

He then switched to his chicken and egg analogy. “When you talk to our salespeople, they say, ‘You know it’s hard for us to get more business because the service may not be at the same level as some of our peers,’” Bedard said. “So when we talk to our operations, we say, ‘Guys, you need to fix the service.’”

Fixing the service comes at a cost, Bedard noted. But he was adamant: “No. You need to improve service and reduce costs at the same time. So this is quite a challenge and this is where the talent of our management comes into play.”

Bedard criticized the level of “churn” in the customer base at TFI. “If you get 3,000 more shipments a day, but you lose 3,000 to churn, then you’re back to zero,” he said.

He praised the management of TFI’s Canadian LTL business. “This is a team that has been educated, trained and focused for years,” Bedard said. “If you look at the results: OK, in Canada we are doing very, very well.”

TFI reported that the average weight per shipment in the third quarter of its U.S. LTL business was 1,222 pounds, up from 1,153 a year earlier. The average weight per shipment in Canada was 1,997 pounds, compared to 2,141 pounds a year earlier.

“The only good thing we’ve done with the sales team so far is we’ve gotten the average weight per shipment to 1,200 so we have a little more dollars per shipment,” Bedard said. But a shipment weight of 1,200 pounds is “not optimal,” he added. “By adding more freight per stop at the same time, you spread the cost of that stuff over two shipments or three shipments, instead of one or two shipments.”

Fix the billing system

Bedard reiterated statements from TFI’s second quarter conference call that the company was implementing a new billing system, which it believes should have a significant impact on efficiency, especially by giving terminal-level managers more information about their customers give.

“It is unimaginable that in 2024 we will still have problems billing customers, but it is a fact,” he said. “So we are changing that.”

He called the current billing system at TForce “another excuse not to grow the company.”

Efficiency should also be improved through several other steps, such as reducing the number of maintenance shops from nearly 100 to about 15 now, Bedard said. That large number “was completely out of control,” he added.

Capex has also lowered the average age of vehicles in the TFI fleet, Bedard said.

Looking ahead, he said he hadn’t seen the U.S. LTL team’s operational plans for 2025, “but I would be very disappointed if we don’t break the 90 level in 2025.”

Due to TFI’s concerns about service levels in its U.S. LTL operation, Bedard said it has shifted about 30% of its freight traffic to rail, which he described as “too much.” He said the goal is to get that down to about 20%, which he said is about on par with his LTL peers.

Although Bedard summarized the company’s performance by saying, “Our third quarter wasn’t good, right?” Wall Street didn’t seem too concerned.

At approximately 2:15 PM EDT, TFI rose 0.88% to $135.90 on a day when the general markets were down. TFI shares are up about 14.8% over the past twelve months, but are down about 12.6% over the past three months.

In releasing earnings, the company increased its quarterly dividend by 5 cents per share to 45 cents, an increase of 12.5%, payable on December 31.

In a report released Monday evening, but before the earnings call, TD Cowen’s Jason Seidl noted that the 92.2% OR on US LTL was 170 basis points worse than the company’s forecast.

But a nearly 6% decline in the company’s top line — sales per hundredweight — and a 7.4% drop in shipments were the culprits of the shortage, Seidl said.

Seidl expressed concern in his report that TFI International’s revenue problems were not just a unique situation at the company.

The shortfall in returns “gives credence to concerns that a soft industrial economy is impacting LTL prices, which is negative for the LTL group,” Seidl said. TD Cowen had already become “cautious” about the LTL sector.

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