Q4 2015 Transforce Inc Earnings Call
Feb 12, 2016 AM EST
TFI.TO - TFI International Inc
Q4 2015 Transforce Inc Earnings Call
Feb 12, 2016 / 02:00PM GMT
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Corporate Participants
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* Alain Bedard
TransForce Inc. - Chairman, President & CEO
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Conference Call Participants
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* Mona Nazir
Laurentian Bank - Analyst
* Hilda Maraachlian
Cormark Securities Inc - Analyst
* Jason Seidl
Cowen and Company - Analyst
* Walter Spracklin
RBC Capital Markets - Analyst
* Turan Quettawala
Scotiabank - Analyst
* Cameron Doerksen
National Bank Financial - Analyst
* Benoit Poirier
Desjardins Securities - Analyst
* Kevin Chiang
CIBC World Markets - Analyst
* Maxim Sytchev
Dundee Capital Markets - Analyst
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to TransForce fourth-quarter 2015 results conference call.
(Operator Instructions)
Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Friday, February 12, 2016.
I will now turn the conference over to Mr. Alain Bedard, Chairman, President and CEO. Please go ahead.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [2]
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Thank you, operator and good morning, ladies and gentlemen.
We release our 2015 fourth-quarter results press release yesterday after market close. This morning I will first provide you with an overview of key performance metrics for the year and the fourth quarter, and then I will discuss the fourth-quarter results of each operating segment in more depth.
The economic context in which we operate in 2015 was, to say the least, challenging. The abrupt and very significant fall in oil prices was a real shock to the Canadian economy in general and to the US energy market. At the same time, the lower Canadian dollar has not yet spurred increased manufacturing activity here even as the US economy remained healthy.
I am encouraged that our decentralized and diversified business model has allowed TransForce to be extremely responsive to these volatile conditions. We move decisively to reduce our exposure in operation that were most affected by implementing cost-saving initiatives and adjusting supply to demand. We also discontinued unprofitable rig moving operation in the US
Additionally, we unlocked value for shareholders by initiating the sale of our waste management operation for CAD800 million, a process that resulted in a CAD550 million accounting gain. Taken together, these initiatives enabled TransForce to conclude 2015 with a very strong free cash flow.
Continuing operations generated total revenue before fuel surcharge of CAD3.6 billion in 2015, a 23% increase over the previous year. Operating income reached CAD276.5 million which represents a 21% increase. Adjusted net income 19% to CAD185.6 million or CAD1.82 per diluted share.
Finally free cash flow from continuing operations was CAD291.5 million in 2015, or CAD2.91 per share, while discontinued operation provided an additional CAD78 million. With this healthy cash flow we repurchased 121.8 million in common shares, paid dividend totaling CAD68.6 million and reimbursed a net amount of CAD139 million in our long-term debt.
I will now turn to our Q4 results. Total revenue for continuing operations was CAD1.3 billion up 4% over the comparable quarter last year. Before fuel surcharge revenue increased 9% to reach CAD939 million foreign currency exchange movement as a positive impact, as did the acquisition completed over the previous 12 months. Operating income from continuing operations was similar year-over-year at CAD66.5 million. Adjusted net income from continuing operation came in at CAD42.9 million, or CAD0.43 per diluted shares, compared to CAD43.3 million, or CAD0.41 per diluted shares last year.
Free cash flow from continuing operation totaled CAD125.8 million, or CAD01.29 a share, while discontinued operation provide additional cash flow of CAD24.8 million. We will now take a closer look at each of our business segments.
In our package and courier increased volume in the US e-commerce initiatives are helping us to offset lower shipping activity of the non-renewal of unprofitable business, both in Canada and the US in our last mile divisions.
Revenue in this segment before fuel surcharges reached CAD340 million in Q4, up 11% over the previous year. Organic growth was CAD12.2 million. Operating income held relentively steady at CAD26.5 million in Q4, but the operating margin decreased 90 basis points to 7.8%.
Increased transportation costs had a negative effect on margins, but these were partially offset by the continuous savings achieved by consolidating facilities in operation to increase productivity and efficiency. In LTL, revenue before fuel surcharge was CAD189 million, down 7% from the same period last year. Tonnage was lower by a 8.3%, but yield per ton was up 5.3%.
Operating income in LTL decreased CAD4 million to CAD10.8 million. Included in the number is a CAD4 million gain on sales of property in Lloydminster and Kamloops BC. These results are disappointing. Volume decrease, especially in Western Canada, undercut operating margin, even though we moved quickly and aggressively to adjust supply to demand. We will reduce costs further to reflect these ongoing conditions.
Turning to our truckload segment year-over-your revenue before fuel surcharge was CAD369 million, or 17% increase over the same quarter in 2014. This is mainly because of the Contrans acquisition and the favorable foreign exchange impact. Excluding the acquisition revenue decreased by approximately 2%, essentially because of weaker results from the division that services the energy sector.
Operating income in our truckload rose by CAD1.3 million to CAD30.1 million. Contrans contributed CAD6 million to this increase, which offset the decrease in operating income from divisions service -- serving again the oil and gas sector. These divisions were mainly responsible for 90 basis point decrease in our operating margin to 8.2%.
Finally, in the logistic segment, total revenue in Q4 increased by 12% to CAD59 million. Much of this increase came from the cornerstone logistics, which was part of the Contrans acquisition. Operating income also saw a solid 24% increase to CAD5.3 million, which reflects improvement that has been made in existing operation.
The operating margin grew by 90 basis points year-over-year, essentially because of efficiency improvements. I will now provide a brief outlook for 2016. It appears that the US economy will remain relatively solid in the year ahead, driven by strong consumer confidence and higher spending.
This should mostly benefit the P&C and domestic truckload market. The Canadian economy is another story with low oil and commodity prices exerting a significant drag on growth, and the effect of a weakening dollar, not yet providing a boost to the manufacturing sector.
This situation is unlikely to turn around quickly; however, the cost reduction measure is underway in our Canadian operation, and the investment being made in productivity enhancements would help to mitigate these negative impacts. By monetizing the waste management segment, TransForce has additional financial flexibility.
So now I would be pleased to open up the call for questions. Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Mona Nazir, Laurentian Bank
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Mona Nazir, Laurentian Bank - Analyst [2]
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Just a couple of questions for me. Firstly despite a challenging environment, you just spoke to increased consumer confidence in the US and a pickup in volume due to a weak Canadian dollar if all goes well. What kind of organic growth can we expect to see perhaps in the P&C space, similar to the 4% this quarter or could we see further growth?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [3]
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Well I think that our last mile business both in Canada and in the US you will see some significant growth which is a first for us really during 2016. We just signed a deal with a major e-commerce player in Canada with one of our division, All Canadian Courier (inaudible) to service the Vancouver and Toronto market.
We also just signed a deal with a large brick and mortar guys in Canada to service this customer across Canada with our next day service which is Loomis and Canpar. So we are very confident also that in the US the largest e-commerce player we just signed new markets with these guys. And we are working with a lot of other players.
So in terms of organic growth on the P&C side and the last mile, I feel good. We still have to shed some unprofitable or -- it's not unprofitable it's low profit business. I say to my guys, I like a customer that gives me 2% bottom line, but I prefer a guy that gives me 10%. So because time is limited in our life, let's work more with the 10% guy than the 2% guy.
So this is why we're still eliminating low-margin business in the US and then the same thing in Canada. But in terms of growing our piece of the pie with e-commerce, we feel good. But you know, Mona, this has also a negative effect on the LTL, because every time that e-commerce grows, the guy that is losing is the LTL guy, because it is the small brick-and-mortar guy that has been serviced by an LTL trucker that's losing that business.
The chance we have is that yes the LTL market is tough for us, and it is going to get tougher because of -- this is one of the reason. But we're working on our costs. We are reducing our net worth, but the flip side of that is that it's helping our e-commerce, though, with our last mile or next-day service.
On a truckload side, we feel good also with the US domestic business. We believe that Q1 and Q2 will probably a little bit slow. But we believe that there's going to be a significant pick up late in 2016. Don't forget that we're starting to see the -- we will start to see the effect of that ELD implementation that takes effect late in 2017, but the shippers and the truckers they are not going to wait till December 2017 to get organized to face this new challenge.
So that's what I'm seeing is that Q3 and Q4 you will start to see some efficiency that is going to get back into the Truckload segment in Canada and in the US. So that's going to be positive for our Truckload operation during the course of Q3 and Q4 and going into 2017.
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Mona Nazir, Laurentian Bank - Analyst [4]
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Secondly, you spoke in length on the last conference call about the timing of a potential truckload transaction and as you were working through the details, of what that could be and how it would be structured. I am just wondering is it still a potential goal for 2016, and do you have any additional details on what it -- if it could be a US-listed Truckload company, and is that still on the table?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [5]
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Mona, we are talking to lot of people in the US because we believe that when the time comes for M&A, and I don't believe Q1 and Q2 is the right timing because there's too much insecurity in the environment right now. So this is why we went with this buyback of our stock.
But for sure our Truckload business that we have in the US, our domestic Truckload with America we have a solid team there, and I'm still convinced that probably sometimes maybe late in 2016 there will be some kind of a combination between us and somebody else that's going to create a stronger great Truckload in the US.
Now, we're working on it. Timing is not going to happen in Q1. Is not going to happen in Q2. In Q1 and Q2 we will be busy buying back our shares because when you start looking at numbers, the enterprise value of TFI this morning is not cheap. It's very cheap. So you look at that we have enterprise value of $2.7 billion which is six times our EBITDA today. So we're going to be busy buying back our stock in Q1 and Q2.
Then in Q3 and Q4 we will see what we do with our Truckload. It takes time. Patience is really the solution in M&A. It took me a year to close that Waste Management deal. A lot of people were laughing at me when I bought the company in 2005, but, we generate a profit of over $500 million with these transactions. So I know that there was some speculation that we would buy something very expensive, and it doesn't happen like that. People were laughing in 2005 and look at what we've done with our waste.
We've built a great business. We have a solid team. We sold it at a fair price to GFL. We made a huge gain and the buyer, GFL is really happy because he bought a tremendous company.
So on the Truckload side, we will be busy at that, but it's going to be late in the year. Now, Q1, Q2 I'm busy buying back my stock.
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Mona Nazir, Laurentian Bank - Analyst [6]
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Okay. That was great. Thank you so much.
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Operator [7]
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Hilda Maraachlian, Cormark.
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Hilda Maraachlian, Cormark Securities Inc - Analyst [8]
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I have a bigger macro question here. Q4 benefited from the strength in the US, but the latest macro and the freight indicators and the data we follow are showing some signs of weakness or slow down. Are you seeing that at all, or are you worried at all about that? I know you mentioned consumer is strong, but I think it could weaken. Are you seeing that at all?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [9]
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No. What we are seeing is that kind of a industrial recession in the US, an energy depression in the US like in Canada. But the consumer is still present and like I said earlier, I believe that Q1 and Q2 is going to be a little slow.
I was just looking at my January number. A little bit slow but still good. I just -- I was at a conference a Stifel conference in Florida, and we talked to shippers. We talk to other truckers. Everybody feels good.
It's going to be Q1, Q2 maybe a little bit soft. Not so much, but then Q3 and Q4 everybody feels good about that. And on our dynamic side, we feel great about the new market that we will be servicing and the new service that we are adding. So no, I mean the US, nobody has a crystal ball but so far so good.
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Hilda Maraachlian, Cormark Securities Inc - Analyst [10]
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Okay. And my second question here was in Canada. With the weakness in Alberta, I think it may be a matter of time until the weakness spreads to the rest of Canada. Are you seeing anything there? What are your thoughts about the rest of Canada?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [11]
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The situation in Alberta is terrible. It's terrible, and it's going to get worse. It's going to get worse, and you know, Hilda, I think that it's already spread to Ontario and the rest of Canada. The Canadian consumer is depressed. He is taxed like there is no tomorrow.
The Federal just increase the income tax to the highest earner, the top 1%, so and they're supposed to lower tax for the families. I haven't seen anything yet. So already the Canadian economy and we see us our LTL market is terrible. Because Alberta was our best market until a year ago. Now it's our worst market.
It's worse than Ontario/Quebec because we are down 25% in volume there. And it's going to get worse because it's like -- Calgary is like a ghost town now. But we are ready for that, and this is why we've invested so much money in 2016 -- in 2015 in our P&C, in our technology in our equipment to face this tough situation. The LTL, the market is shrinking because of like I just said earlier the e-commerce, the industrial base of Canada is not growing at all.
So, the LTL is slowing down, but we are at the same time reducing our footprint. So for instance, we sold our Kamloops terminal in Q4, and we're going to be selling more. We just closed -- we're closing one in March 1 in Quebec City where we have a US-LTL tenant there. So we are just selling that for close to $6 million. So the Canadian economy, it's not going to be great and the Western economy, Western Canada economy to me it is going to get worse. And the good thing for us is that Western Canada for us is about 15% of our revenue including BC, Alberta, Saskatchewan and Manitoba.
It's 16% of our total revenue today close to about $4 million. Our growth will not come from Western Canada that's for sure. Of growth will come from the US and to a certain degree from the big market in Eastern Canada.
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Hilda Maraachlian, Cormark Securities Inc - Analyst [12]
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Okay. And my last question here is on the LTL you mentioned being weak. So even in your prepared remarks you talked about the margins being disappointing. I know it's part of it's volumes. Where do see the trajectory and given what you said that volumes may make that worse here especially Western Canada, where do see the margin trajectory going? I know you are working, but how is the progress there, and what do you think?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [13]
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Hilda, you know what keeps me up at night like last night is the LTL. It's a terrible business. The market is shrinking, and a lot of other players don't understand that you have to adjust offer with demand. So us our solution is quite simple.
We made some great acquisition a year and a half ago with Vitran and Clark. We bought Quick X, so these are mostly asset light LTL players. So these guys are doing well, and these guys my return-on-invested capital is great, because I've got no capital.
But my big problem is not these guys. My big problem is my over-the-road guys except TST Overland which is a great franchise, but I've got two divisions, one in Ontario/Quebec and one out West that is really a big problem. But we have a new management team there. The guys are working day and night to reduce costs, reduce -- improve productivity and all that in a very, very difficult environment.
Market is not going to help us on the LTL terms of volume, in terms of pricing power so the name of the game is to be, to stay in that 6%, 7% -- 5%, 6%, 7% EBIT is really to keep on working at our cost, improving productivity, reducing assets. And you will see us reduce our asset base because why would I invest in a truck and the guy gives me 2% on the LTL side where I can invest in a truck or no truck in the P&C business with 8 to 10 points. I mean, it doesn't make any sense.
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Operator [14]
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Jason Seidl, Cowen.
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Jason Seidl, Cowen and Company - Analyst [15]
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Just a couple of quick questions. Let me follow up a little bit on the US Truckload. You are talking that it's going to be a tough Q1 and Q2, and there's hope for a back-end pick up. Can you give us a little more data on what you're seeing right now in contractual renewals in your business?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [16]
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Well, you know what, Jason, so far so good. It's the utilization that is affecting us a little bit, number of miles okay. We don't see pricing pressure. I mean I was with Keith for two days this week, Keith Klein, the guy that runs America for us, doing a great job. And we feel good.
We will be in a position to improve our pricing maybe not as 2014, but we feel good that the 2, 2.5 points of pricing improvement is in the work for us in 2016. Q1 will be soft. There is a little bit too much capacity.
As you know in the US they had about 3.8% more trucks on the road in 2015 because 2014 was a great year, and now we are going through a little bit of industrial recession for the US because the dollar is so expensive, tough for the US to export industrial goods. And that affects the truckload market and a little bit the LTL as well.
But we believe that by the end of Q2, Q3, Q4 with the fact that the DLD will be introduced -- because all the big fleet in the US they all have DLD. It's the small guys that are not ready yet, but they will have to get ready for the end of 2017. So we still see a great year for us in 2016 on the US domestic truckload, Jason.
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Jason Seidl, Cowen and Company - Analyst [17]
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Okay. And thinking back on a response to an earlier question on M&A, you mentioned that you're going to concentrate on buying back your own stock now and then maybe look at M&A later. If valuations are depressed right now and you think things are going to be recover later, why not go for an acquisition now? Is it just that there's a lack of dance partners?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [18]
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No. There's a few people that we are talking to, Jason. No, it's just that I feel that our stock -- when you have a chance to buy your stock at six times EBITDA like we are trading now, it's such a great deal and we're not buying something that is unknown. We are buying our Company.
We know what we are buying. If you are doing a truckload deal there's always a risk. So I understand that the valuation on the truckload side have come down big-time in the US But what we are really looking at late in Q3 and Q4 is probably is going to be more of a paper deal, Jason, between us and somebody else.
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Jason Seidl, Cowen and Company - Analyst [19]
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Okay. Makes sense. And my last question before I turn it over to somebody else, you talked a lot about the very positive outlook for your last mile in sort of that e-commerce related type business. What are you project e-commerce is going to be as a total percent of your business in 2016, roughly?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [20]
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We closed the year in 2015 about $100 million. We feel pretty good that this 2015 -- 2016 will be above $150 million, between $150 million and $200 million. That's an area that is really growing fast for us, big time. And we are gaining some new market this huge player is opening up more of the same day.
It's a very cost efficient solution for the e-commerce guys. We don't touch the product. It's easy to service. It's a great -- it's great for our independent contractor. It's a good way to make ends meet for these guys, so it's a great business.
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Operator [21]
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Walter Spracklin, RBC.
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Walter Spracklin, RBC Capital Markets - Analyst [22]
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You gave some guidance under I guess when you had waste within your continuing operations, I was wondering is it just simply do we just back out the EBITDA that you trended at, and we get the same number, or can you give us maybe an updated range if it's changed at all for EBITDA cash flow?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [23]
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On the EBITDA side, Walter, if you look at our year 2015 I think that if you take out all the discontinued we are playing at 450 something. So we believe that in 2016, we will lose again a little bit of EBITDA with our customer or our division that is our energy-related which is Alberta and Texas. So the forecast is that we will probably lose maybe 10. It's tough to lose more than that because if we lose more than that I'm going to have to shut the operation down again like we did with the rig moving.
That being said, we also believe that our P&C next-day service in Canada will definitely improve. Our last mile will be contributing more because of our growth in Canada and in the US Our Truckload should do probably similar this year in 2016. All in all, we had such a -- an okay year for our Truckload. Logistics will probably do a little bit better.
So if you took the base of 450 reduce that by maybe 10 because we anticipate that Alberta like I said earlier is going to be even worse than what it is today. So that's why we are a little conservative on that. But with all the improvements and everything else, so, a range let's say between 450 to 465 something like that for 2016, Walter, waste is -- excluding waste, because don't forget waste for January is going to be $5 million, about $5 million EBITDA.
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Walter Spracklin, RBC Capital Markets - Analyst [24]
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So roughly 450 less 10 is 440 then you're going to look at 10 to 15 in growth in the combined areas.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [25]
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Right.
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Walter Spracklin, RBC Capital Markets - Analyst [26]
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Okay. When I look at your -- you've got $800 million in proceeds, and you've earmarked $220 million for the share buyback. You're fairly certain that $220, is there any flex that you could go lower than $220 million, or do you expect to use the full $220 million for the Dutch auction?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [27]
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You see Walter this is based on the reception that we're going to get, because there is a cap on the price as a the first step. Right? If we do the $220 million plus the dividend that's going to be about $60 million so that means that we're going to give back to our shareholder about $280 million.
Our free cash flow forecast for the year is about -- without any real estate sales, but we're going to do about $25 million of real estate sales this year, but if you exclude that from operation we will generate around $300 million. So what it means is that most of our free cash flow will go towards the shareholder this year. So somebody that says that our debt to EBITDA will increase by half a point, he is completely lost, because my debt today is $850 million, and if we do the $220 million plus the dividend plus our normal CapEx we will be at the same number at the end of the year which is going to be about $800 million to $850 million.
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Walter Spracklin, RBC Capital Markets - Analyst [28]
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So really the share buyback is coming out of -- arguably coming out of your operating cash flow.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [29]
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Absolutely.
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Walter Spracklin, RBC Capital Markets - Analyst [30]
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And you will still have the $800 million to do with what you want.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [31]
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Yes.
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Walter Spracklin, RBC Capital Markets - Analyst [32]
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Any idea what you are eyeing? Do you think the full $800 million will go toward acquisition, or could you reduce debt a little bit more, or could you buy back more shares? What you think you're going to do with that $800 million over the course of the next year?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [33]
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It depends, Walter. We have to have better visibility of Q1 and Q2. So that's why M&A for us is going to be towards the latter part of the year. It's -- there's -- we are having discussion with some great company.
But I give the say -- you know when I'm talking to the management of one company that I've got in mind, those guys have built a fantastic company. But if I would buy it tomorrow, everybody would think that I'm crazy again. In 2005 when I bought Matrec everybody was saying, hey, this guy is crazy. He knows nothing about waste. What is he doing? Well, after 10 years we built a great profit of over $500 million.
So if I would buy this company tomorrow, everybody say oh Alain no, no, he is crazy again. He is stupid. Right?
So that's why we are not going to do anything else on the M&A side until we get clear vision of what's going on and in the meantime, we generate $300 million of cash. We're going to use that to buyback our stock which is trading today at six times EBITDA. I see some other Canadian companies that are in a very difficult environment that has a better valuation than us.
I said, Jesus, there's something wrong with me, or there is something wrong with the way people understand what we do, so will we'll take advantage of the situation, and we'll buy stock at $19, $19.50, $20, $21, whatever.
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Walter Spracklin, RBC Capital Markets - Analyst [34]
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You mentioned when you said just then Matrec people questioned whether you knew that market. Are you implying that perhaps you might look outside of your traditional trucking market when you look for future acquisitions?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [35]
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No. What I'm saying is that I'm just giving you an example as -- sometimes you look at -- you judge a book by its cover. So when I bought Matrec people judged a book by its cover. They said he knows nothing about this business, so if I'm buying something good today, I'm buying something excellent today, I know that I'm going to have some critics that's going to say the guy is crazy, he is stupid. He's paying too much. He's this, he's that.
The same thing happened when I bought ICS in 2007. I bought ICS and everybody said this guy is buying this company at 10 times EBITDA, crazy. Well, what we did over time is we doubled and more than doubled the EBITDA over time. Okay?
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Walter Spracklin, RBC Capital Markets - Analyst [36]
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Understood.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [37]
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The timing is wrong, Walter, everything that I'm going to do except buying my own stock, I'm going to be criticized. So I said, you know what, that's what I said to the Board. I don't have 10 years to do what I did with the waste, so no, we will just buy back our stock and we will see in six months.
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Walter Spracklin, RBC Capital Markets - Analyst [38]
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Fair enough. That make sense. And I know that you flagged the yield increase in LTL over I think it was 5.3%. Did you do that to indicate that there is perhaps some improvement in the problem that has persisted there for quite some time? Or is there still a US-dollar phenomenon that's inflating that a little bit?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [39]
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Yes, the US dollar is helping us a bit, Walter. But also if you listen to what UPS is doing in the west their volume are down 10%. UPS [held] freight. UPS freight down 10% in Q4, down 10% in Q3.
But their yields are improving. Because they made the decision okay like we are doing that you know what, guys, if I am making two points or am losing five with this guy, I am going to have somebody else service the guy. We can invest our capital elsewhere. Right?
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Jason Seidl, Cowen and Company - Analyst [40]
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Okay. That makes sense. Thank you very much for the answers, Alain.
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Operator [41]
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Turan Quettawala, Scotiabank.
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Turan Quettawala, Scotiabank - Analyst [42]
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I have just one question here on the P&C business. Most of the other stuff has been already answered. On the P&C side, if you look at the business obviously you've been shedding a lot of unprofitable business over the last few years, but your margins haven't really moved that much. And I know there are moving parts here with the economy, but could you give us some sense of when you think those margins will start moving in the P&C side?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [43]
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I think, Turan, the improvement in margin will take effect really in 2016. Because when you look at our margin in 2015, our last mile operation in Canada was really badly affected. We had a major issue. If you look at my Canadian dynamics operation year over year we are behind $4 million 2015 versus 2014.
So we had some major issues that are being addressed, and they are fixed now. So that's going to be behind us. Also, we had the same kind of situation with a very, very difficult customer in Texas that we advise those guys that we're not in the business to service you and lose money. So that also affected us badly.
This is new business that we took on in 2015 in Texas for this customer. And it turned out to be completely the opposite of what it was. But you negotiate with the customer. You try to fix the issue. Takes this and than finally there's no way you can solve it.
You've lost $4 million in that period of time and you say to the customer, okay, I will give you your notice. But you still have to suffer 120 days before -- because that's the clause in the contract. So, this is what happened in our same-day because our next-day service in Canada the margin at Canpar at ICS at TForce Integrated Solution and a little bit Loomis have improved.
It's our last mile that really took a beating for us, both US and Canada, but this is fixed now. Plus we are also growing on the e-commerce side, and we've made a lot of investment on our next-day service in Canada we've combined the hub of Loomis and Canpar in Toronto we did the same thing in Monkton. We did the same thing in Quebec City. So we let go a lot of people. That's why we have severance this year of close to $8 million. Just on the P&C I think it was around $4 million. So that affects our margin. Now that $4 million of severance is not going to be there next year, but the savings will be there, in 2016.
So that's why I feel good under Scott Leveridge, the Dynamex US, under Chris [Iam] in [Oigagnon] in Canada and Brian Kohut and his team in Canada. The guys will definitely improve 2016 over 2015.
------------------------------
Turan Quettawala, Scotiabank - Analyst [44]
------------------------------
So I guess how many points are we talking here? I think you hinted about, around 7%?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [45]
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Turan, we always say that we should improve at least 100 basis point? But last year we did nothing -- we did (expletive), excuse the expression. We did nothing. So that's why we have to be 100% -- 100 point better this year.
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Turan Quettawala, Scotiabank - Analyst [46]
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That's helpful. Maybe I will just ask one more on the rig-moving business, the one that you're obviously going to sell here on the [disk] operations. Just on that business, obviously it's a tough time. Do you think you can sell that in 2016, or do you think you will kind of have to hold onto it for a while?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [47]
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No. We shut down all of the operation, Turan, so don't have anything moving there at all. So this is completely gone. We're stuck with the asset, so we took a reserve of $6 million versus book. We never lost any money selling the asset. But because the market is so bad as being very conservative we said, listen, guys, we will take a 20%, 25% provision on selling those assets. We don't really lose a lot of money on the trucks and on the trailer.
It's mostly the crane where it's been a very tough, difficult market. So that's why we have a reserve of about $6 million that's been taken to -- in case that we lose money on those nice piece of equipment that don't generate -- if you look at my delta in my rig moving between 2014 where I made money, and 2015 where I lose a ton of money, I mean just on that delta you are talking close to $30 million of delta between the profit and the loss, right?
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Turan Quettawala, Scotiabank - Analyst [48]
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No, that's a big number.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [49]
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But that's gone.
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Turan Quettawala, Scotiabank - Analyst [50]
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Understood.
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Operator [51]
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Cameron Doerksen, National Bank Financial.
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Cameron Doerksen, National Bank Financial - Analyst [52]
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Most of my questions have been answered, but I just had a couple of outlook things. Just on the CapEx for the year. What is your expectation there, and I guess also you mentioned the $25 million potential in real estate sales. What other -- hopefully your asset sales do you hope to get out the door in 2016?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [53]
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Yes. So the asset held for resale we believe that were going to sell that in 2016. The $25 million like you just said about the real estate that we believe it's a great target. And also in terms of our net CapEx, last year was an extensive year for us. This year is going to be a little bit less.
So in our plan, we believe that our net of disposal not including the real estate or the S&L for sales we're going to be playing between $80 million to $100 million. Why this spread? It is the US dollar because every piece of equipment is bought in US dollars and then converted to Canadian dollars.
So that's why we're conservative by saying between $80 million to $100 million
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Cameron Doerksen, National Bank Financial - Analyst [54]
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So that's $80 million to $100 million before any asset sales?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [55]
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Before any abnormal asset sales which is the real estate and those assets held for resale.
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Cameron Doerksen, National Bank Financial - Analyst [56]
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Got it. You've had the Contrans business now for a little over year. There were some synergy targets or aspirations at the time of that deal. Where do those stand? How has that progressed through the year, and what more is there to do there?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [57]
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That's a good question, Cameron, because that's a question that was asked by our Board and Greg Rumble did a great job of explaining that what we said at the time of the acquisition we were looking at about $15 million in synergies, $5 million was the private company which was easy to do. And then $10 million was the rest. And in his presentation Greg reviewed all the numbers, and in 2015 that's what we're talking about. About $10 million.
But what is not really easy to establish is how much are you gaining now that you are working with your largest competitors? Now, okay, the timing is maybe not the best in the world because the commodity market is terrible. The mining industry in Canada is to a standstill. And Contrans and TFI were big players in that field. This is like it's gone.
Everybody talks about oil. But there is another killer in our Canadian economy. It is aluminum. It's nickel. It's copper. It's iron ore.
All those mines are operating at -- I don't know -- some are closed. We see that it's not just energy. It's mining as well. So that's why I'm saying. But that's why when we look at our numbers, Contrans and the pre-TFI business, we've done great in 2015 with this environment that is not so good.
Now in 2016, there again the Contrans, the executives of Contrans are working hand-in-hands with the existing executive that we have based in Quebec. And I'm really happy. I had a dinner with the executives of Contrans in December in Toronto. We have a great team there. We have a great team in Quebec. Those guys are working more and more together.
We were -- we are doing some small tuck-in acquisitions. We've bought three small companies so far in Ontario. We are looking at buying another one in the next two or three weeks which are tuck-in for Contrans. We feel good. We feel very good about our operation.
What we don't like is the economy. Okay? But we can't change that. And in the meantime, with the cash flow that we generate this year, my proposal to the Board yesterday was, guys, stock is trading at six times EBITDA. So we're going to postpone our M&A activity for late in the year, and we're going to use this cash to buy back our stock. It's going to be the best investment we can make.
Because we've got guys that don't want to hold TFI shares. They are afraid. They are worried. They are tense. So we will relive them by buying back 10 million shares which is about, a little bit more than 10% of what is in circulation.
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Cameron Doerksen, National Bank Financial - Analyst [58]
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I think that makes an awful lot of sense.
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Operator [59]
------------------------------
Benoit Poirier, Desjardins Securities.
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Benoit Poirier, Desjardins Securities - Analyst [60]
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Just to come back on the latest M&A transaction the acquisition of Optimal Freight. Nice tuck-in in the US to strengthen your foothold in the US on the logistic side. Could you elaborate a little bit how you see logistic in the US and whether you want to strengthen that piece over time?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [61]
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If you look at what we do in our logistics sector, our revenue is $250 million. Our EBIT is better than 12 points, Benoit. We are doing great with that business in Canada. And Keith Klein, the guy who runs America says to me, Alain, we have the opportunity of buying this small Optimal which could be a base for us to grow.
We are not looking at buying companies like the best company in the world, but [Kreote] for $1.8 billion. Those guys -- for those guys it's pocket change. So for us, logistics you will see more and more TFI going more and more into the asset light situation. I've said that five years ago, and now people have said hey what are you doing? You bought some [truck old] company.
Well, because they were a great company, and that's going to beef up our Truckload operation. But at one point, there's going to be a next step. But for sure logistics both on the Canadian side and on the US side, it's always something that we look at. Now, let's be clear that this acquisition the vendor keeps 25% of the company, because I don't want to buy a shell a nice logistics company and then the guy that build it after two months he says you know what Alain I'm going to retire in Florida, and I'm stuck with a company without the guy, the captain that built it.
So this is why the way we do it normally same thing when we bought Patriot Freight in Montreal is we want the owner to keep a piece of the action for three to five years. And that's what we did with this small great company, and I was looking at our month of January with these guys. They are right in line, better than budget. So we feel good.
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Benoit Poirier, Desjardins Securities - Analyst [62]
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And so could we see more transaction in logistic or maybe even larger transaction in that space?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [63]
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Larger transaction? It's nothing is going to happen in terms of big size, Benoit. I know that there was some rumor in Montreal that Alain he's now a -- he's a [deve] junkie. He's going to go crazy. I don't understand that the guy that could say stupid things like that, but it's a fact it was on the street. I know because I saw my stock after the announcement that we closed the waste deal the next day the stock was down eight points.
Everybody was calling me with this rumor in Montreal. No. What we are buying Benoit right now is our stock. That's clear. We're going to buyback 10 million shares, because there's pressure on our stock. So we will relieve that pressure at least by 10%. And then we will look at something else.
We generate so much cash like I said to our Board this year where our cash this year is not going to be applied toward debt reimbursement because our debt is under two times EBITDA. So we will use that. M&A we don't have any vision. We don't have any clarity enough on the market. So let's buy our own stock.
That we know. Then comes Q3, we talk to a lot of people in the US We have discussion with some great people. But, now is not the time. Because if I would buy something important in the US today, I would be crucified. Like when I bought Matrec 10 years ago people were laughing. And that guy's crazy.
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Benoit Poirier, Desjardins Securities - Analyst [64]
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Very good color, Alain. Just on the LTL side you are looking for margins around 6%, 7%. Just wondering what type of improvement we might see in 2016, because looking at Q4, I understand it's a weaker quarter, but there was also some gain on disposal in the margins so I just wanted to have more color on that thought.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [65]
------------------------------
That's the target, Benoit. 5%, 6%, 7%. That's where we have to be. Now, you'll see our volume, our revenue will probably still come down. Our investment will be less, our capital invested in that business. I am talking the over-the-road LTL, not the Intermodal business.
The Intermodal business I mean we doing very good with Quick X, Vitran, Clarke a little bit affected because of the steel industry. But at least we don't have millions of dollars invested in trucks and trailers and this and that. The problem we have is in the over-the-road, the margins are not there. The costs are too high. The coverage we have is too extensive so for instance, that's why we are shutting down today Kamloops, and there will be more, because Kamloops was great 30 years ago, maybe 20 years ago was great. Nowadays with the competition we have, with the depressed market, it doesn't make sense to be there.
So we have other markets that doesn't make any sense to be there. So that is going to be part of our 2016 plan. And we will focus on high-density area where we can make a difference with our technology, with our service.
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Benoit Poirier, Desjardins Securities - Analyst [66]
------------------------------
Very good. When we look at your EBITDA guidance for 2016, 450, 465, you currently assume a pickup in the economy in the second half, but assuming it doesn't materialize, how would you impact your guidance, or is your guidance already reflect kind of a normal trend in the second half, Alain?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [67]
------------------------------
The guidance is very easy, Benoit, because we say you know what 2016 will be a little bit better in the sector not because of the market but because of our costs. We will do not as good in Alberta. That's the killer for us. Used to be great. That is killing us right now. I was looking at my month of January and in Alberta, it's worse than last year.
So it's not getting any better. So it's worse. So that's why we are prudence. We are saying we see Alberta as costing us another $10 million, Alberta in Texas. The rest we believe that everything remains quite stable.
We will grow a little bit here, a little bit there. We will reduce our costs here and there. So that's why we feel good that for 450, 460 that's where we should end up in a very difficult environment again.
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Benoit Poirier, Desjardins Securities - Analyst [68]
------------------------------
Last question, Alain, just for the Dutch auction. Could you mentioned that the timeframe for the tender, Alain?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [69]
------------------------------
This is a technical point. I know that Greg, our CFO, and Martin, our VP of Finance, and Josiane are working on that. To me is yesterday.
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Benoit Poirier, Desjardins Securities - Analyst [70]
------------------------------
Okay.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [71]
------------------------------
But if we have to go through the legal stuff, so to me is yesterday. So it's like whenever we can do it we do it. We're not cutting our dividend. Our dividend stays the same. We will be giving back about the same $65 million minus 10% because we're going to buyback about 10% of our shares so it's going to be around $60 million in dividend and about $220 million in buyback.
So $280. But our dividend stays the same. We're not reducing our dividend. We're not reducing our CapEx. We are building for the future.
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Benoit Poirier, Desjardins Securities - Analyst [72]
------------------------------
Perfect. Thank you very much for the time, Alain,
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Operator [73]
------------------------------
Kevin Chiang, CIBC.
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Kevin Chiang, CIBC World Markets - Analyst [74]
------------------------------
Just a couple of quick ones for me. On the e-commerce guidance you provided revenue jumping from $100 million last year to potentially doubling in 2016. I know in the past that number has been pretty choppy. That's a pretty big jump year over year. I'm just wondering does that reflect just the size of the pie growing and obviously some optimism with the US consumer?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [75]
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No.
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Kevin Chiang, CIBC World Markets - Analyst [76]
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Maybe entrench yourself more with some of your partners there, and you are actually gaining market share in that space? And how big do you think this revenue number could get in three to five years?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [77]
------------------------------
That's a very good question, Kevin. Let me explain to you what's going on. What's going on is that the e-commerce player more and more are opening up DC.
And by doing that it puts them in a position to use guys like us and like others in the last mile to service the consumer. This is a market that is growing because they are opening up the door to the last-mile guys. Because prior to let's say if you go back four years ago, four years ago an e-commerce gay had just a few DC, and everybody that was ordering from those guys it had to be shipped to a UPS or FedEx or USPS.
So the product was brought to their hub, sort, put either on a truck or an airplane to get to their hub to the destination hub. Sort again. Put it on the right truck and deliver to the customer. Those guys are doing a great job, a fantastic job, service wise, perfect. But it's expensive. So the big e-commerce guys are saying, you know what, how about if we open up more DC.
And that is what has been changed over the last four or five years. They open up more DCs. If you take the example of LA, big population. So they don't have just one DC now in LA. They have more than one so by doing that it helps them using us and others in the last-mile sphere to deliver from their DC to the consumer.
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Kevin Chiang, CIBC World Markets - Analyst [78]
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Okay.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [79]
------------------------------
It's not that -- the market is growing in general. It's benefiting the next-day guy like us in Canada and others in the US, because we're not in the next-day market in the US, but by opening up more DC, it help us, the last-mile guy. So that is what's happening.
So a year ago we were playing about $80 million in the sphere. But really 2015 is the year starting I would say in July we open up for this big player. We open up two cities in Florida. We did this. We did that. Now we are opening up new markets for those guys. So it's new market that these guys are opening up to the last-mile guy.
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Kevin Chiang, CIBC World Markets - Analyst [80]
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When they open up these DCs do they typically consult with you first so they have a last-mile player position or do they (multiple speakers).
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [81]
------------------------------
No, no. They don't talk to us. They talk to us when it's done, when they are ready. It's an open discussion. We are big with these guys. But like I said to our team in the US, we have to have a cap. We cannot be too dependent on one account right?
That's why we are fairly diversified today. It's not just one guy. We're working with other players in the industry. But we feel good that it's going to be an area of growth for us in 2016. The transition is ongoing. It's working well. It's sufficient. And the market is growing so fast that the big next-day guys they don't even notice that we are there.
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Kevin Chiang, CIBC World Markets - Analyst [82]
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Right. Okay. Maybe just more of a technical question. When I look back the last couple of years, I think gain on sale of assets of property and equipment have provided call it $20 million to $25 million boost to your -- have been included in that operating income number. Is that a good run rate we should be thinking about when you provide your annual outlook for EBITDA that you are going to be gaining roughly $20 million to $25 million a year, or should we be thinking of another number?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [83]
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Yes. No, you are good with that, Kevin. Because you see like I said, our LTL is where we have a lots of real estate. And a lots of market that it doesn't make any sense for us to be in there. Like I said, we sold Kamloops, huge gain.
We sold also Lloydminister, huge gain there as well. We are selling one in Quebec city, there again a huge gain. This is rented to another LTL players, and we bought a new terminal for our TFI operation on the North Shore of the St. Lawrence, because that's where they wanted to be. This terminal is on the South Shore.
So we bought that new terminal in Q4, and we are selling that other terminal in Q1 of this year. So it's an ongoing thing. Because every day our guys are just, what can we do to do more with less?
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Kevin Chiang, CIBC World Markets - Analyst [84]
------------------------------
Okay.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [85]
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That's the thing.
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Kevin Chiang, CIBC World Markets - Analyst [86]
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That's helpful.
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Operator [87]
------------------------------
Maxim Sytchev, Dundee Capital Markets.
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Maxim Sytchev, Dundee Capital Markets - Analyst [88]
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Just going back to Canada and thinking about the [C dollar] depreciation just trying to get a sense of what will we need to see in order for the exports to actually pick up? Are you seeing any anecdotal evidence of that or is it still maybe a 2017 event right now?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [89]
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What we see so far, Maxim, is the forestry of people like the lumber guys, the plywood guys that relates to the housing market in the US. That's starting to move.
We see the newsprint, although who's buying a newspaper today much. It is not the same as 10 years ago but still those big cardboard guys are benefiting really. And that is really -- we don't have a lot of industrial products -- production left in Canada, but these guys are still there. It's been a tailwind the US dollar for these guys.
So these are the customer that we are starting to see a little bit more action, building material, roofers, all of these products like that. But it's never going to be like it was in 2005. I mean we lost so much industrial capacity in the East that it's never going to be the same.
But at least we are starting to see a little bit. I was looking at our flatbed operation in January, and we did way better than last year. The weather helped us, because flatbed when it's minus 35 degrees you don't see a lot of action, but so weather help us. But we believe that slowly the drywall maybe to a certain degree building materials, forestry products, that's at least something. But let's say the cabinet maker in the [bos] we haven't seen this guy back in the US yet. The window makers, the window manufacturers, we haven't seen that yet.
------------------------------
Maxim Sytchev, Dundee Capital Markets - Analyst [90]
------------------------------
And then what percentage of the overall revenue is right now driven by a cross-border movements? Can you shed a bit of light on that?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [91]
------------------------------
In our Truckload you're talking about?
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Maxim Sytchev, Dundee Capital Markets - Analyst [92]
------------------------------
In Truckload and across the business if it's possible.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [93]
------------------------------
In the P&C side, Maxim, it's none, very little. On the LTL side, out of about let's say $800 million revenue total you've got probably about 15% of that, that is transborder business, $15 million to $20 million.
On the Truckload side, if you exclude the domestic truckload, just the Canadian-based Truckload because our US domestic Truckload they don't do any transborder basis. They don't cross into Canada. But our Canadian-based guys either in Alberta or in Ontario/Quebec, they do.
So there you are looking at probably $200 million $250 million of transborder business between Canada and US. But it used to be way more than that. In 2005, we didn't own Contrans, and it was more than that. When the dollars start to appreciate 2008 my Truckload business, this is pre- Contrans acquisition, went from $800 million to $600 million within the year. So I lost $200 million.
Because the Canadian manufacturer could not sell any more into the US. So that tells you how important it was at the time. Now it's never going to be the same. It's not as important.
------------------------------
Maxim Sytchev, Dundee Capital Markets - Analyst [94]
------------------------------
Thank you for that. Maybe switching gears back to e-commerce. I mean obviously sort of the obvious largest e-commerce player right now there is lots of articles that, that adding some capacity to their own fleets. I'm just wondering if there is an existential threat or how do you perceive that market evolving over a number of years, because obviously right now it looks like a huge opportunity for you guys but just trying to think down the line a little bit.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [95]
------------------------------
So what you start reading now is that there is somebody that wants to build a network in the US, and their network -- that is doable. And the first thing that you also could do easily is to build a line-haul network like Walmart for instance.
Walmart has 7,500 trucks in the US so they do a lot of their own line haul. So you buy trailers and you either buy truck or you buy somebody that's going to haul your trailer. So these are two things that maybe you could do better or more efficiently because you know when you are talking airline haul it's expensive so maybe if you buy lease old planes and this and that or capacity, it could be cheaper than to use the other major network.
But when you get to the last-mile guy, it's -- we are like the poor guys of the industry, us. So it's a lean and mean operation. To make good money you've got to be sharp. So it's probably the last thing that these guys would start looking at. So they are going to be busy for 10 years just trying to build what I just explained.
The truck-line haul and the airline haul, these guys are going to be busy. So the last-mile guy is excuse the expression, it's like chicken (expletive). We are small. We don't have a lot of the market share. So it's the big next-day guys that own probably 99.9% of the market today or 99% of the market today.
We are really small. The last-mile industry in the US is total is $10 billion, the last numbers that I saw.
------------------------------
Maxim Sytchev, Dundee Capital Markets - Analyst [96]
------------------------------
And sorry, Alain, and what is your market share right now that you would estimate out of this $10 billion?
------------------------------
Alain Bedard, TransForce Inc. - Chairman, President & CEO [97]
------------------------------
We do us in the US, we'll do about $550 million this year, $500 million, $550 million. We are the largest player on -- see XPO is the largest player on the large goods, and we're the largest player in the smaller trucks if you want to say that -- say it like that.
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Maxim Sytchev, Dundee Capital Markets - Analyst [98]
------------------------------
That's very helpful.
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Operator [99]
------------------------------
There are no further questions at this time. Please continue.
------------------------------
Alain Bedard, TransForce Inc. - Chairman, President & CEO [100]
------------------------------
Thank you. Ladies and gentlemen, thank you for joining us today. I would like to invite you all to our annual meeting of shareholders to be held on April 20 in Toronto. I also look forward to speaking with you again following our release of our Q1 results. Thank you and have a great day.
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Operator [101]
------------------------------
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.
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