Q2 2016 Transforce Inc Earnings Call
Jul 22, 2016 AM EDT
TFI.TO - TFI International Inc
Q2 2016 Transforce Inc Earnings Call
Jul 22, 2016 / 01:00PM 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
* Fadi Chamoun
BMO Capital Markets - Analyst
* Walter Spracklin
RBC Capital Markets - Analyst
* Benoit Poirier
Desjardins Capital Markets - Analyst
* Cameron Doerksen
National Bank Financial - Analyst
* Jason Seidl
Cowen and Company - Analyst
* Turan Quettawala
Scotiabank - Analyst
* David Tyreman
Cormark Securities - 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 the TransForce second-quarter 2016 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 today Friday, July 22, 2016.
I will now turn the conference over to Alain Bedard, Chairman, President, and CEO. Please go ahead, sir.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [2]
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Thank you, operator Good morning, ladies and gentlemen, and thank you for joining us this morning. Our 2016 second-quarter results press release was issued yesterday after market close. Let me begin today by giving you some of the key highlights of the quarter.
So, in broad terms, market conditions in North American freight market have been somewhat challenging and the Canadian economy has been clearly weakened the prevailing condition in the energy markets. These issues are reflected in our results for the second quarter, particularly in regard to organic growth. That said, TransForce was able to generate solid Q2 operating results thanks in large part to continuous effort made in right-sizing operations, rigorously controlling cost, and generating cash flow.
TransForce initiatives to boost its asset-light activities, including e-commerce in the US, also lead to further volume and margin increase in our P&C segment. Our decentralized business model is geared towards quickly aligning supply with demand as market conditions evolve and this model continues to serve the Company well.
Total revenue from continuing operations in Q2 was CAD978 million, a 5% decline compared to the same quarter last year. Before fuel surcharge, revenue from continuing operations was down 2% to CAD904 million. The decrease reflects lower volume, partially offset by acquisition completed over the last 12 months and local currency appreciation on US dollar revenue. Operating income from continuing operations was CAD73.4 million compared to CAD93.3 million last year. The reduction comes as result of overall lower revenue and a CAD10.3 million year-over-year decline in gain-on-sales of real estate.
Adjusted net income from continuing operations was CAD54.9 million, CAD0.58 per diluted shares, compared to CAD66.6 million or CAD0.65 per diluted shares in Q2 of 2015. Finally, TransForce generated free cash flow from continuing operations of CAD84.3 million, or CAD0.90 a share. With this free cash flow, we repurchased 1.9 million common shares for a total conservation of CAD44.8 million and reimbursed just over CAD30 million in long-term debt during the quarter.
Now let me turn to the results for each business segment. In our P&C, performed well. Revenue before fuel surcharge increased to CAD323 million, up 6% compared to the same quarter in 2015. Excluding acquisition, revenue rose 2%.
This growth is attributed both to greater volume in the same-day e-commerce market, which was upset by the non-renewal of low profitable business and lower shipping activity across our customer base. Operating income in P&C grew by 20% primarily because of savings related to our right-sizing effort.
In LTL, revenue before fuel surcharge reached CAD184 million, a decline of 7%. Lower oil and commodity prices continue to impact the Western Canadian market, northern Ontario, and northern Quebec. Operating income in LTL decreased by CAD6.1 million in Q2. However for the most part, this reflects a lower gain of CAD5.7 million on the sale of property. Excluding such gain, operating margin as a percentage of revenue before fuel surcharge increased by 40 basis point, largely because of efficiency improvements.
The truckload markets face a number of difficult circumstances in Q2, including a US freight market challenged by volume and rate pressures. Specialized divisions serving the oil and gas market also had an uphill battle. As a result, before fuel surcharge in -- our truckload fell to CAD353 million, 4% decline compared to last year. The decrease was partially offset by the impact of favorable foreign exchange rates and small acquisition in specialized activities.
Generating greater brokerage revenue continues to be one of the key features of our asset-light strategy, and this focus is paying off. In Q2 truckload generated CAD53.4 million in brokerage revenue, representing a 14% of total revenue. Last year, brokerage revenue was 13% of revenue.
Operating income in truckload fell by CAD9.3 million to CAD31.8 million in Q2 2016. The operating margin for the quarter was 9% versus 11.2% last year. Most of the decrease is due to the truckload division in the US, where the rate environment is very challenging. We remain focused on profitable revenue generation and implementing further cost [resolution] initiatives.
In the logistics segment, revenue rose -- revenue before fuel surcharge decreased by 15% to CAD59 million. The decline reflects lower volume, including the fact that in 2015 we had nonrecurring revenue of approximately CAD7 million that was generated by a strike at the port of LA. Operating income felt by CAD5.6 million, mainly because of lower gain on the sale of a property amounting to CAD4.7 million. Excluding this gain, operating income declined slightly due to lower volume.
At this point I'd like to provide you with our outlook for the upcoming quarters. In general term, we anticipate that low commodity prices will continue to have a negative impact in many of the sectors we serve in Canada. At the same time, the lower Canadian dollar hasn't yet provided any significant boost to activity in the Canadian manufacturing sector. In the US, consumer spending is spurring activity in the P&C same-day market, but a softer manufacturing sector is creating headwind for truckload activities.
For these reasons, the principal driver for operating income growth remain efficiency gains, asset rationalization, and rigorous cost control. Moreover, in a fragmented North American transportation market, TransForce's disciplined acquisition strategy should continue to offer attractive opportunity and to maintain our focus on this potential, we recently appointed David Saperstein, an M&A veteran, to our new position of VP, Merger and Acquisition. We are particularly encouraged by the a steady progress the Company is making in it's asset-light activities, which includes e-commerce, intermodal, brokerage, all of which are high-return niche markets.
In P&C consolidating operation and optimizing asset utilization remain the priorities. In LTL, adapting supply to demand remains a key focus, and to enhance value, we are also targeting our efforts on high-density urban opportunities. Disciplined supply management, supply strategies, and an optimal utilization of existing assets will underpin our effort in the truckload market.
In logistics, the Company believes it can further enhance its presence. And because of its non-asset-based activity, we believe that logistics can generate a solid free cash flow.
Although the economy is hesitant, we expect to make the most of the opportunity available in each of the markets we serve and to create more shareholder value. TransForce will maintain its focus on generating strong cash flow, and we will use that cash flow to repurchase more shares and reimbursed that.
So I'd like to turn open the call for questions. So, 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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Good morning, Alain. Just a couple questions from me. Firstly, the core of your Company and strategy has been your M&A activity.
I'm just wondering if you could speak to why you decided to create M&A position now, as when I look back, you have been pretty successful on consolidating the market? Is it because there's a larger acquisition or a more complex structure if we think about a new entity formation on the truckload side? So, any elaboration would be much appreciated.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [3]
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That's a very good question. I have been doing M&A for the last 20 years within TFI, and we had the opportunity to have a young guy, he's not even 40 years old, with lots of experience, US-based. Because as you know, and I have set it any times, acquisition in Canada is pretty limited to us. So yes we are doing the small deals in Ontario here and there, okay, but anything significant in Canada for us, it's becoming some kind of a problem because of our size, right?
So this is why the focus has to be in the US. I was thinking that we had the opportunity to have this nice man to help us on the M&A side and also on other subjects, because he's got lots of knowledge. Very well-educated, he knows a lot of people. So you know, it's really an investment in the future that we are doing. And I think David is going to be a good support for Greg and myself in trying to grow this Company south of the border.
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Mona Nazir, Laurentian Bank - Analyst [4]
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(Multiple speakers).
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [5]
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But Mona, excuse me, let me say one thing that's [clear]; I am not retiring next week. Okay? So David is here to help me and Greg in growing this Company, but it's not because I am going to be retiring within six months.
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Mona Nazir, Laurentian Bank - Analyst [6]
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Okay. And the timing of a transaction could still occur in 2016 or 2017? Correct?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [7]
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Absolutely. We've looked at many, many opportunities, and we just want to make sure that it's the right fit. It fits well within TFI. So absolutely.
There's lots of opportunity, and like I've always said, you buy in bad news and you sell in good news. So right now, what we are doing is we are buying on bad news our stock, because our stock is being really depressed over the last year or two. So that is what we are doing. But as soon as we find the right opportunity, the right fit, definitely we will move on.
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Mona Nazir, Laurentian Bank - Analyst [8]
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And just lastly for me before I step back in queue. Going back through your remarks and conference calls over the last year plus, I know looking at the different divisions, LTL has not been looking that great, but we have been seeing some positive trends on the P&C side that have held.
But on the truckload side, we saw some optimism a little bit on the yield side and then volumes, but that has not held. I'm just wondering, how do we think about organic growth going forward? Do you see it getting better or remain as it is, heading into Q3 and the balance of the year?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [9]
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So LTL, it's shrinking and will keep on shrinking in Canada. There is no question about that. I mean, our Q2 was difficult on the top line because of the situation in western Canada. There are two provinces that are really affected badly, and Newfoundland in the East. And also, the brick and mortar guys that are being serviced by our LTL companies are suffering because of the e-commerce at the same time.
It will keep on shrinking. Is it what, 3%, 4%, 5%? And us, our goal is really to protect our margin and to improve our bottom line at the same time by reducing our cost. And you know, if we ever see an opportunity that fits well in the LTL market in Canada, we will look at it. I don't see anything in the next 12 to 18 months in the LTL. On the P&C side, though, organic growth, we definitely see that moving on in the US and at the same time in Canada.
I mean, our Canpar operation is growing its e-commerce business, and the same thing with Dynamex in Canada and same thing in Dynamex US. We definitely, in the P&C side, see improved volume and organic growth. If you look at our performance of Q2, for the first time really, we delivered in EBIT that is double digit if you exclude the depreciation of intangible, okay? So, we are now back on track. You will see our Q3 improving again, okay? And the same thing for 2017.
On the truckload side, I mean the big disappointment for us is the US market. The US market has been really, really difficult. Good companies came out with numbers so far. In the US, truckload market are down 20%, 30%, 40%. One of my Board members, [Gadar] says, hey, Alain, in the context of what 's happening in the US, you guys did very, very well.
Maybe, but we are not happy with the truckload situation in the US. But it is cyclical. Right now, we've got lots of headwinds on trade volume and price. But it's just a matter of time, we believe, that come into 2017, after the US election, the consumer is still supporting the economy big time, although the manufacturing has been slowed because of the appreciation of the US dollar.
But all that being said, we believe that truck's orders are down, numbers of drivers looking for a job are up, because a lot of companies are letting go drivers in the US. Failures or bankruptcy in the truckload market in the US are up. So these are all signs that the capacity is starting to reduce, and at the same time, nobody is buying trucks. Orders of new trucks are down 30%, 40% year over year. So, I think our belief is that, come 2017, with also the ELD kind-of starting to be mandatory at the end of 2017, the balance between offer and demand in the US will start to reestablish, and we will get out of that mess that we are in, in 2016 in the US domestic truckload market.
On the Canadian side, the specialty truckload, that is doing well except in northern Ontario and in northern Quebec, because all the mines are all closed, the commodity prices are so down. So, that affects us a little bit on the specialty. Like I said in western Canada, the same story because oil prices are so low.
But you know, the rest of our business in our Canadian-based truckload operation is okay. I mean, we are not chasing freight as we are chasing freight in the US because of the situation. That will not last.
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Mona Nazir, Laurentian Bank - Analyst [10]
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Thank you. That was really good color.
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Operator [11]
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Fadi Chamoun, BMO.
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Fadi Chamoun, BMO Capital Markets - Analyst [12]
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I want to dig into the P&C segment mores in load-up [med]. You've had a decent improvement, and it seems like you are signaling that there's quite a bit of sustainability to that, going forward. Can you give us an idea what the margins are like in the US at Dynamex and what are we doing in Canada and what really drove that improvement? And how should we think about where the upside will come from over the next few quarters in that segment?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [13]
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Very good question, Fadi. Here is the situation. The e-commerce in the US, and everybody knows about that, it's been growing for many, many years. But the last-mile guys were never really part of the equation. They were just the very insignificant player in the e-commerce until about a year ago. Okay? Where one of our customers started to open up a lot of distribution centers.
So that creates a lot of demand for the last-mile guy, and that will keep on growing in the US. And the same thing, we have two major customers in the e-commerce that will be growing their business like there is no tomorrow in the US, and we are piggyback on the growth of these guys. And at the same time, okay, we are also letting go low-margin guys. Guys that, oh, you're 2% guy. No, no, no, 2% doesn't fit our model. 2% bottom line is not going to make it at Dynamex Canada and at Dynamex US. So we are replacing all that low-margin business as we speak, and we have been doing that for a year-and-a-half to two years, now.
Same thing in Canada, we had a lot of (expletive) accounts filled with low margin in Canada, Dynamex Canada, I am talking about. This will be replaced slowly by new business that is in neighborhood of good profit margin that can sustain the growth of TFI. What you are going to see in the next quarter, okay, in our [D]&C same day is major improvement in the profitability.
So, if you look at Dynamex bottom line today in the US, you are very close to a double-digit EBIT now. When we bought the company in 2011, the EBIT was about 2 points. We've improved that big time, and then we did the Velocity acquisition that was a mess for us. It dragged us down for about two years. Now, the cleanup is done. We are building back again.
We also hired a new CFO at Dynamex US. We just hired a new CFO to support our Dynamex and All Canadian Courier operation in Toronto. We are building a very, very solid team because the organic growth of TFI within the next two to three years will definitely come from the P&C business.
Our next-day service that we provide in Canada with Loomis and Canpar and ICS, we are also seeing a little bit of benefit in there of the e-commerce, but most importantly, traditional customers. With traditional customers, our business is growing slowly but I had a Management Team meeting with these guys earlier this week, everybody feels good about some organic growth in our next-day business in the next few quarters. The team is working very hard on the consolidation in reducing cost and improving our network and our system.
So P&C, Fadi, to me is really a diamond in the rough. Like my waste management was. Okay? So we are polishing the diamond right now. You see that our EBIT, excluding the intangible is finally double digit, and you will see that improving over the course over the next few quarters. And I have been saying that for many, many quarters, but finally it is starting to show.
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Fadi Chamoun, BMO Capital Markets - Analyst [14]
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Okay. You had a 2% organic growth and you are signaling that maybe you've had some upgrade in the revenue quality, like you let go some business. How should we think about the real organic growth, if we start to see small stability in the book of business and really, is this a business that can grow mid single digit once we get to that point where the quality of the book is -- (multiple speakers).
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [15]
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Mid single digit is really something that's attainable right now. You don't see it because we are replacing low-margin account by better margin account. So in the US, I would say that the cleanup is, I would say, probably 95% done. But Dynamex Canada, we have a big job to do there.
We have a big cleanup to do there. We have lots of very low-margin accounts. If you look at all the division that we have within our P&C, Dynamex Canada is really the dog. It's the lowest margin division that we have within this division, and the guys are working really hard to improve that.
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Fadi Chamoun, BMO Capital Markets - Analyst [16]
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Okay. Second question, just quickly on the truckload side. You have made this US acquisition a while ago. And it feels like you are saying that you want to maybe expand that exposure in the US.
I am just wondering, given your experience right now so far with Transport America and the US truckload market in general, what's the upside of growing this business? It feels like you want to be bigger there, but at the same time this is a very challenging market, and I'm not sure what we should be making of it, like longer term? Is this business is going to be much bigger part of transports? What's the strategy, the end game, there?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [17]
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Well, you see, we jumped into the US truckload market in the summer of 2014, and that was a great period for truckload because there was lots of demand for truckload, and if you look at the truckload market in the US, it's highly fragmented. It's way worse than in Canada. And at the same time, you had a lot of good companies that had trucks. This favorable situation we have because of that strike in LA and because the dollar was still okay disappeared in 2015.
We've just started mid 2015 to see the effect of adding trucks on the road with a lower demand environment. A lot of truckload guys in the US are suffering right now because of these poor decision. So you say, why would you grow more into an industry that is so not disciplined like that? Well I think that what we could do is just say, you know what? We quit. There is no way we could do better than what's going on and we just say that's it, that's all. We just do something else.
But in my mind, and I've said it many times, what we need, and if you go back 15, 20 years ago, our truckload business in Canada was supported by international trade. The trade between Canada and the US. So this has always been the support of the growth of the truckload market in Canada. Sorry to say that because our manufacturing capacity in Canada just disappeared over time, because of the appreciation of the Canadian dollars, because also productivity was not there, a lot of Canadian plants were closed.
But what's happening today is that Mexico is the Canada of 25 years ago. The free trade that was signed was also signed with Mexico. And the trade with Mexico now is growing more and more towards the US and also to Canada. So as I said before, the way I see it is that if we could grow our truckload business in the US, and then at the same time grow it with the trans-border business with Mexico, because as of today, about 10% of America's revenue comes from trade between US and Mexico.
So it is small. But if we could find the right fit with the right company that's got an edge on that Mexican market and also growing our US domestic market to a certain degree where we could be the guy that could be running out of Mexico into Canada, out of Mexico into the US, out of Canada into Mexico, and vice versa, this is where I see the difference between just being a Canadian domestic truckload or a US domestic truckload. You understand what I'm saying, Fadi?
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Fadi Chamoun, BMO Capital Markets - Analyst [18]
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Yes. Yes. Good color. I get it. Thank you.
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Operator [19]
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Walter Spracklin, RBC.
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Walter Spracklin, RBC Capital Markets - Analyst [20]
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So I will start -- continue on the truckload. I mean, down the road, you signaled that your valuation is somewhat negatively impacted by the dichotomy between a traditional truckload business and a last-mile business that is really tapping the growth of some of the e-commerce initiatives, and you talked about perhaps spinning off truckload.
Is that still in the books? Are you waiting for a better market? What would be the timeframe there, if you are continuing with that strategy?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [21]
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Walter, for sure it's not going to be a 2016 event. The market is really not good right now, and on the truckload side in the US, there's no IPO. There's nothing that's going to happen in 2016. So really in 2016, can we make the type of acquisition that I was just discussing with Fadi, there?
Can we find that right company that's going to be the right fit? So that's what we're looking at right now. But the plan, okay, which size? For sure, it's something that I've got in my mind and we will see if it makes sense in 2017. But right now, it's not really part of the focus right now.
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Walter Spracklin, RBC Capital Markets - Analyst [22]
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Okay. If I could come back to your outlook. You had guidance out there. In my notes, the last check was around the CAD450 million to CAD465 million. Any up date there in terms of your guidance on EBITDA and cash flow, free cash flow?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [23]
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So what we said is CAD450 million to CAD465 million, and if you look at where we are today after two quarters, it's very disappointing because it's going to be a hell of a job to really reach the target. I've said it from day one, we believe that Q1 and Q2 will be difficult, and Q3 and Q4 will be better. We still believe that. That Q3 and Q4 will be much better than what we saw in Q1 and in Q2. Don't forget that in Q2, we had a few million dollars of exceptional cost, like professional fees and some accident that were really costly to us.
Now that being said, are we still feeling good that it's going to be north of CAD450 million? No, I don't think so. Could it be between CAD435 million and CAD450 million? I think that's where we are today, between CAD435 million and CAD450 million because of the very slow start of our Q1 and Q2. Without any acquisition, I feel that, that's pretty good.
In terms of cash flow, Walter, cash flow is not going to change much. It's not going to change much. Free cash flow.
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Walter Spracklin, RBC Capital Markets - Analyst [24]
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Okay. Just on the same note, just going through the divisions, listening to what you said on P&C, seeing organic growth, seeing margin expansion, again I think I have in my notes around a once, I think it was a wide range you had for EBITDA potential in 2016. But, do you have, on a P&C and LTL basis, those being the growth, the ones that are really performing well here, any sense -- are you updating any EBITDA guidance for those two segments separately?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [25]
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No. Not now. We need Q3, because I think you will see some good improvement in the P&C market in Q3 and in Q4. And then, probably in October, we will be in a better position to have a better feeling of what's going on with the truckload market in the US. What's going on with our growth in the last-mile business that we have. Because like I was saying, we have two major customers that are really helping us grow this e-commerce business in the US.
In Canada, we have two good customers as well. We have to see a little bit clearer. Because, as I said, our e-commerce business in the US, with one customer just a year-and-a-half ago was like zero, and now we'll probably be running north of CAD35 million this year.
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Walter Spracklin, RBC Capital Markets - Analyst [26]
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Those two customers, do you have them -- what are their contracts? Are they locked in for a number of years? Or is it more on a short-term basis?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [27]
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You know, contracts in our world, unless it's really dedicated, Walter, it doesn't really exist. It's more like a relationship. We provide very, very good service to these guys. They are very demanding customers, because e-commerce is, a lot of it is service, service. If they go on the website of our customer, they don't want to see that we are short on the product and the product is late.
So these customers are highly demanding. So we follow the service activity day by day, site by site. We're servicing, with customer number one in the US, we're up to 17 site that we service these guys from. Customer number two, only 2 site as we speak now. No, more than that, 5 sites. We are going to be probably, by early next year, into the 10 to 12 site with these other guys.
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Walter Spracklin, RBC Capital Markets - Analyst [28]
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Okay so you could double. In order of magnitude, is that suggesting a doubling on number 2, there?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [29]
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It's going to be probably doubling, yes. These guys are very, very smart. They came to market, it was okay but not great. But these guys have so much money and they have so much brain power that they are coming back.
We are just opening with them in San Jose, a new facility just for them. And they are coming back with a new recipe, which I think is going to be a home run.
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Walter Spracklin, RBC Capital Markets - Analyst [30]
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Final question. In that e-commerce side, are there any new customers, new large customers, that you are bidding right now that you see some opportunity to get new business outside of the strong growth you're getting from your existing customers?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [31]
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The brick-and-mortar guys, Walter, they still have a lot of issues in trying to figure out the e-commerce. So we have one in Canada that it's going to be probably a CAD6 million account. It's a large brick-and-mortar guys, and I think they are testing the product in Canada before going full fledge in the US, but we are talking to a lot of them.
If you take a retailer in Canada, a big retailer in Canada. The problem that he has is that he has got franchisee. So franchisee, he has got a territory. So how do you service that territory with e-commerce? Right? You understand what I'm saying?
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Walter Spracklin, RBC Capital Markets - Analyst [32]
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Absolutely.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [33]
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So, it's a problem for them, so it's a problem for us. We are just scratching the surface of the e-commerce, Walter. It's just, we're in the early, we're like in the first inning.
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Walter Spracklin, RBC Capital Markets - Analyst [34]
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Okay. That's all my questions. Thanks very much, Alain.
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Operator [35]
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Benoit Poirier, Desjardins Capital Markets.
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Benoit Poirier, Desjardins Capital Markets - Analyst [36]
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Good morning, Alain. Just to come back on your package or your P&C business, what would be roughly the size, right now, and what could be kind of your forecast in terms of revenue next year, given the size that you are going to expand with the number 2 customer?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [37]
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Well, what we said is e-commerce for us is going to be, in 2016, in the neighborhood of about CAD160 million, CAD150 million, maybe CAD175 million. For sure in 2017, the way we see it that it's going to be probably closer to CAD225 million and it could go up to CAD275 million. I'm talking both Canada and the US.
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Benoit Poirier, Desjardins Capital Markets - Analyst [38]
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Okay. Perfect. And you talked about Dynamex Canada, the fact that it still, there's more restructuring to be done. I'm just wondering, what is the magnitude of the revenues you could be looking to replace or lose, given that the low profitability of that business right now? How sizable as that business?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [39]
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The size of Dynamex Canada right now is about CAD150 million, CAD160 million, and in there, there's about CAD40 million of account that are highly questionable in terms of profitability. Dynamex Canada is, like I said, it's the dog of our P&C division, because right now they are a 4% bottom line type of guy. 4% doesn't work for us. That's not going to work.
But, he's got some good business. He's got some 8%'s, he's got some 9%, but he's got some dogs at 2%, and 1%. It's probably CAD40 million of business that will have to be replaced slowly, over time, and let me tell you that the guys that are in that division, like I said earlier, we have a new CFO that just started about, I think it's this week or last week, and that's business number one. Working with the guy that runs the show there, Chris, he has been there for a long time.
A little bit of change of mentality. 2% is not going to make it. So it's going to take us some time in Canada. But, we did the same thing in the US. In the US, it's much bigger. And we finally were able to do it with Scott and his team. We have a very, very strong team in the US right now at Dynamex.
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Benoit Poirier, Desjardins Capital Markets - Analyst [40]
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Okay, and if we stay on the margin side, I mean you were close to double digit if I look at the EBIT margin in Q2. So it seems that Q3, Q4 will still be solid. Just wondering whether we should be close to the double digit or even above that? And given what's happening with all the change to growth in US, should we be in the double digits for next year, which would be a sizable improvement versus 2015?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [41]
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I think we will be double digit next year for sure, Benoit, including the depreciation of intangible. Because depreciation of intangible cost me about 1.2%, if I remember correctly. We will definitely be, even taking into consideration that depreciation will be in the double digit next year, because like I said, Dynamex Canada will definitely improve. The guys are working day and night.
Every rock there has been turned over to really change this approach and the guy on the next-day market, they are doing a fantastic job in terms of the operation. We are starting to get the feeling that the market that's been really, really soft for us on the next-day service in Canada with zero growth, we are starting to see that maybe, maybe in 2017 we'll start to see some organic growth in that sector.
------------------------------
Benoit Poirier, Desjardins Capital Markets - Analyst [42]
------------------------------
Okay, and when you talk about 1.2%, it really includes the amortization of intangible as well as the appreciation --
------------------------------
Alain Bedard, TransForce Inc. - Chairman, President & CEO [43]
------------------------------
That's what I'm talking, yes.
------------------------------
Benoit Poirier, Desjardins Capital Markets - Analyst [44]
------------------------------
Okay. Perfect. Very good. And could you provide some color about Purolator? It seems that there's some labor issues, and whether you see some kind of a pent-up demand for you guys?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [45]
------------------------------
Well you see, our approach to this, maybe Canada post-strike, has been different than Puro. Puro has said, please, bring the volume in. Us, We said, no, no, no. We are not going to take volume for short term and disrupt service to our good customers. So that is really the approach that we took, us, which is probably a little bit different than Puro, because we hear they are having a service issue. And its normal, because you know if you do 100,000 shipments a day and then you go up to 175,000 for a week or two, for sure it creates a lot of disruption.
That's why us, we said no, no, no. Because as soon as the strike is over, or if there is no strike, whatever, if the threat of a strike is over, all of these customers go back to Canada Post because it's cheap rates and they like the service of Canada Post. Our service is very different than these guys. And we can't afford to operate and lose money. Right?
So, we are different. So, that's why the strike in July or the possibility of a strike or the threat of a strike at Canada Post adds a little bit of influence to our numbers, but not much.
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Benoit Poirier, Desjardins Capital Markets - Analyst [46]
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Okay. Very good color. Just on the truckload side, could you provide more color about the opportunities to right-size that business? What needs to be done, and also what we should expect from a margin standpoint on the truckload side, Alain?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [47]
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The US domestic truckload, I think that's what you're talking about, it's a cyclical situation here, because everybody was happy in 2014. Guys had 5% more trucks on the road, and at the same time, this opportunity of that strike disappeared because they saw the strike and the demand from the industrial base of the US was reduced because of the appreciation of the US dollar. This is cyclical, because there again, now the market is being adjusted, but in the meantime we are suffering.
We are suffering in 2016, that's for sure. We're suffered Q2, Q3 and Q4 of 2015, and we're going to be suffering probably until Q2 of 2017, until the offer and demand are balanced like they should be. So, what we are really doing with our good management team that we have here in the US, is we are aggressively looking at every penny that we are spending.
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Benoit Poirier, Desjardins Capital Markets - Analyst [48]
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Okay. Okay. Perfect. And just in turn for 2017, I understand it's probably a bit early, but you mentioned some color about the ELD, the package & courier business. I'm just curious, what type of EBITDA growth we might see in 2017 given the current market environment?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [49]
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Well, you said it, Benoit, it's still too early. I need to see more of July, August, and September. This is why, in October, when we have our conference call of Q3, I will be in a better position to really give the market some indication of what we see for 2017. It's still too early.
We need to see some improvement in the US domestic market, which I think that we've hit the bottom of the barrel. But in Q3, we will know more, and we will know also more about the timing in the US of this improved market condition. So is it going to be in Q1, 2017 or is it going to be in Q4 of 2017? It is still too early to say. But what I can say, though, is that our P&C business, because this is for sure on the right track of improving. We are improving at Dynamex Canada.
That's where we have a lot of opportunity. Our Loomis operation, we still have a lot of cost to take out of that business and improving the operation, but the guys are working at it. We are doing well, and we're going to do better.
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Benoit Poirier, Desjardins Capital Markets - Analyst [50]
------------------------------
And just in terms of CapEx, what would be the number you are looking at this year and the remaining assets for sales, Alain?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [51]
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The remaining assets for sale that we have on the balance sheet is about CAD13 million. That's going to be sold before the end of the year. We took again another CAD5 million provision on these assets because the market for energy-type related asset is really, really bad. So that's going to be gone.
In terms of real estate, in Q3 we will probably be selling two or three small properties, and by the end of the year another one or two properties. So it's not going to be large deals, but it's going to probably be in the neighborhood. If you total of these real estate deals between now and the rest of the year, you are talking maybe between CAD10 million and CAD20 million of disposals.
On the CapEx side, I've said it, we will be spending about CAD80 million to sustain our Company. So it's a normal year for us. A little less CapEx, probably, at Transport America, because the market has slowed down a bit, but we are investing heavily into our LTL to be more efficient technology and sorting facility for our next-day services on the P&C side.
------------------------------
Benoit Poirier, Desjardins Capital Markets - Analyst [52]
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Okay, and last one for me. Just for your logistic EBIT margin at around 7%, is it going to be a good run rate going forward, Alain, or should we expect a pickup in that division?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [53]
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You mean logistic revenue or the bottom line?
------------------------------
Benoit Poirier, Desjardins Capital Markets - Analyst [54]
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Logistic margins, EBIT margin of 7.4% over --
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [55]
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Well, you see the logistics margin of EBIT, we should be closer to 10%. I don't have the numbers in front of me, Benoit, but in my mind, we are in that neighborhood of 10%. You are saying 7%, it's probably because of the intangible depreciation.
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Benoit Poirier, Desjardins Capital Markets - Analyst [56]
------------------------------
Okay, and is it kind of a sustainable number going forward, Alain?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [57]
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Yes. We are small in that sector. We are doing about CAD200 million or something like that. It's really small, but it's high-quality, and we are not growing that very fast. But if we see an opportunity, we will definitely look at it.
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Benoit Poirier, Desjardins Capital Markets - Analyst [58]
------------------------------
Okay. Thanks very much for the time, Alain.
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Operator [59]
------------------------------
Cameron Doerksen, National Bank Financial.
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Cameron Doerksen, National Bank Financial - Analyst [60]
------------------------------
Just want to go back to the M&A and maybe the priorities, there. You talked a bit about truckload in the US. I would assume that maybe you want to wait on that until after the US election to see if a wall goes up between US and Mexico (laughter) but if we put that aside, where are you seeing maybe the most opportunities or maybe the best valuation? Is it in package and courier?
You mentioned logistics in the last question. Is that something you could come back to look at? Just any thoughts what you're seeing as far as what's available and what the priorities are, beyond truckload?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [61]
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Well P&C has always been the priority. Logistic is nice, but it's always difficult to buy a logistics company because, you know, a lot of it is in the end the relationship with the customer. So that's why we are not big fan of acquiring logistics company. If we see something that we feel good about, yes we will do. But it's going to be small deals in logistics sector.
On the P&C side, the problem that we face all the time there is that we are competing with private equity guys. So if it's a large deal, there's an option and then you've got all this PEs that are coming in and will put a valuation of 8 to 12 times, and when TFI trades at 6 or 7 times, it's not going to be good for the dilution. A lot of guys will say, oh, Alain is going crazy again, he's buying a company at 8 to 10 times.
So that's my problem. In a smaller deal on the P&C side, both Canada and the US, there we could buy something at maybe 4.5 to 5, 5.5 times. Then it makes sense for us. That's the problem we face, and I've been saying that for the last three years. And going back to one question that I have about spinning truckload, okay, this is one of the problems that we have. Is that the our asset-light division are being, valuation has been dragged down by our asset-heavy operation.
It's always the same thing. It's like the valuation of Matrec. Valuation of Matrec was down to 6, 7 times and we sold it for more than 10 times. That is my problem, is that it's tough for me to grow in the P&C business in the US because I'm competing, if it's a large deal, with all these PE guys that lever the company 5, 6 times and buy it with an 8 to 12 times multiple.
This is why our focus has been on the truckload side to try to build that North American carrier, which just think that it's going to make a lot of sense down the road. And then if we can see some small deals where we can afford to buy them, because the problem is, is if I would have the valuation of my friend Murray, I would be really happy, but the market doesn't value TFI at the way that they value my friend. So I can't touch something at 8 to 9 times, and that is one of my problems.
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Cameron Doerksen, National Bank Financial - Analyst [62]
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That make sense. You highlighted in your, I guess in the financial statements and in your comments today just about the freight brokerage business within truckload. Is that something that you expect to continue to grow, and is that something where you could do an acquisition to accelerate the growth of that?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [63]
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It's something that we will definitely keep on growing. No question about that, because if you look at Transport America, for instance I mean they are very, very small in that revenue of CAD50 million-some. So the opportunity is really to grow that within Transport America. That's really one sector that these guys have not been up to par to where they should be. So that's number one.
In terms of acquisition, like I said earlier, I am not a big fan of buying those brokerage company. There, again, another of our competitor, XCO, bought a lot of brokerage house at 8 to 10 times. So there's a market there. And me, I can't touch something at 8 to 10 times.
The reaction, if you just look at what happened to our stock. Our stock went down to CAD18 after we sold Matrec because there was some speculation that we were buying somebody at 10, 12, 13, 15 times, and everybody got nervous and they dumped the stock. Created an opportunity for me to buy back, but still it's an issue.
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Cameron Doerksen, National Bank Financial - Analyst [64]
------------------------------
Yes, makes sense. To wrap it up, then, if there's maybe no large-scale deals that happened here at least in the near term, how active do think you'll be on the share buyback? I mean if you've bought stock up to, I think, north of CAD24. Do you still feel as though it's a good buy, here?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [65]
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Well, absolutely. We will be announcing that the Board has renewed has allowed us to renew our NCIB, which is ending in the end of September. In our plan, Cameron, is, as I said to our Board, is we are looking at buying back up to 9 million shares. Our SIB was not very successful because we were able to get only 2 million shares.
But between now and the end of 2017, I would like to reduce the share count by about 9 million, because we've got too many shareholders that are nervous that listen to that small broker. So I think that 9 million shares of TFI will be out of that market before now and the end of 2017. That's about 10% of our share count today.
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Cameron Doerksen, National Bank Financial - Analyst [66]
------------------------------
Very good. All the rest of my questions have been answered, so thanks very much.
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Operator [67]
------------------------------
Jason Seidl, Cowen and Company.
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Jason Seidl, Cowen and Company - Analyst [68]
------------------------------
Just a couple quick questions for you. Looking at the trucking business in the US, there's been obviously a differential in the first half of 2016 between pricing in the truckload side and pricing on the LTL side. We are getting a sense that spot rates, at least in the truck-load side, are moving up. Could you tell us what you're seeing on the LTL front?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [69]
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On the LTL side, what we are seeing, Jason, is that the market in Canada is really, really not growing at all because of the economy is very weak, number one. And number two is the e-commerce, like the Amazon and others, are really effecting the brick-and-mortar guys, and these are my customer, my LTL customers.
So our revenue is going down and this is some kind of an impairment, a permanent impairment of the market. So we have to adjust ourselves, and that is what we're doing. If you look at, I think, our Q2, year over year was pretty good in terms of adjusting with lower revenue to some good level of profitability.
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Jason Seidl, Cowen and Company - Analyst [70]
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Okay. That's a good update. Could you talk a little bit about what kind of an impact, if any, the Fort McMurray fires had on you guys, and if there's a chance to see a little bit of a rebuild boost in the back half of the year?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [71]
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The fires at Fort Mac probably affected us by something around CAD1 million, bottom line. Now, in terms of building it back, it's too early to say, but for sure. In 2017, that should be little bit of a tailwind for us compared to being a headwind for us in 2016. People are back, but it's still very slow there.
But you know, with price of oil being like that, what we see is that there's not going to be any new major project, that's for sure. And they will probably keep on running what they have and what they have been invested in over the course, unless oil goes back to $75 to $80, which I don't think is going to happen anytime soon. But it should help us a little bit in 2017.
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Jason Seidl, Cowen and Company - Analyst [72]
------------------------------
Okay. And just lastly, you kind of mentioned your EBITDA target's probably somewhere between CAD430 million or CAD450 million now for the year. How should we think about the cadence for the back half of the year? Is that going to be more 4Q loaded, are you still going to be able to grow that EBITDA for 3Q?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [73]
------------------------------
Yes. We believe that our 3Q will be better than our 2Q. Absolutely, Jason. And 4Q, it's always the same thing because of Christmas and the holidays. It's not as good as 3Q.
We think that July, so far what I have seen from July looks pretty good, because our P&C keeps on improving. It's still slow and soft in our truckload in the US. But still soft in our LTL, but our P&C is really pulling us in the right direction, and in Q4, we believe that the e-commerce is going to be a very strong Q4 come October and November with our two major accounts that are really humming.
We believe that this going to be a help for us. If the US domestic market starts to improve in Q4, that is going to be a good benefit for us, absolutely.
------------------------------
Jason Seidl, Cowen and Company - Analyst [74]
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And, Alain, you mentioned when you were talking about M&A, that you have an interest in looking at somebody with Mexican exposure, maybe a little bit of US exposure. Could you talk about the size? What would be a good size for you guys to look at or maybe what you're comfortable going up to in acquisition?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [75]
------------------------------
Well you see, we run America with about 1,400 trucks. So for sure, we're looking at something that's going to be more than 1,000 trucks. Less than 1,000 trucks for us, it doesn't make any sense. But on the same token, more than 5,000 trucks doesn't make any sense either.
So it's going to be between 1,000 and 3,000, 4,000, 5,000 trucks additional, and there's not that many carriers that have that kind of a fleet. So we are talking to maybe 4 or 5 candidates in that sector. But for sure, it's going to be good for us. It's going to boost our density and improve, because as I said earlier, America's revenue, about 10% comes from the Mexican market, which is pretty good.
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Jason Seidl, Cowen and Company - Analyst [76]
------------------------------
Right. That's great color, Alain. I appreciate the time as always, sir.
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Operator [77]
------------------------------
Turan Quettawala, Scotiabank.
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Turan Quettawala, Scotiabank - Analyst [78]
------------------------------
I had just a couple of quick questions here. First of all, I guess, on the P&C side. You obviously spoke about the differences in both US and Canada. Is it possible to give us a little bit of color on what the magnitude of strength and weakness might be in the two countries?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [79]
------------------------------
Well, you know, you are talking P&C last-mile, right?
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Turan Quettawala, Scotiabank - Analyst [80]
------------------------------
That's right.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [81]
------------------------------
Well, you see, the difference between Canada and the US is that, in the US, we've been working very hard with the management team that we have there and two, when we were bogged down for about two years with the Velocity acquisition. And we were able to build a better team faster in the US than in Canada.
In Canada, we have this small acquisition of TDS in western Canada that really cause us more problems than anything. We are rebuilding Dynamex Canada with a much better team than what we had, let's say, a year ago. The market condition, we should do as good or even better in Canada. We are a way more dominant player in Canada on the last-mile than we are in the US.
It's just that we have to change our mindset that a 2% guy doesn't fit us. We don't want to be big. We want to be profitable. So sometimes you have guys that say, Alain, yes, but we are making 2 points. I said no, no, no, we are too busy. We don't have time to service a 2-point guy. Because if the markets soften, he is going to call you back and you're going to be dragged down to zero with this guy.
So let's refocus unless, because the e-commerce, we have the chance of having the knowledge that not a lot of people have in Canada because of our brother in the US is probably two or three years ahead. So we can learn from the US guy, whereas a lot of people in Canada, they don't know. They don't know because they don't have any brother in the US.
So change your mindset, stop servicing those poor guys that cannot afford to pay us the right price. And let's focus on the good business where you are going to see some growth, for sure. We see that in the US big time in terms of growth. Like I said, in the month of July, we are delivering on average about 35,000 parcels a day for one customer. Okay? So this is big.
So in Canada, we are doing (expletive) right now with Dynamex Canada. We're doing better with All Canadian Courier, which is a much smaller company. But there we have a small management team that's always been focused on bottom line and profit. Dynamex culture in Canada and in the US too, when we bought the company, the focus has always been volume, volume, volume. That's why in 2011 I wanted to buy Dynamex Canada because their mindset was always been volume and cheap price. And finally I had to buy both because the competition I had with Greenbrier made it, but at the end of the day, it was a good move, buying both.
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Turan Quettawala, Scotiabank - Analyst [82]
------------------------------
Okay. That's helpful. In terms of the guidance for next year, is it fair to assume though, that the improvements that you're doing in P&C will definitely be able to offset maybe some challenges in P&L, as we think about 2017 overall?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [83]
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I think so. Our target of CAD450 million is going to be tough for us to really attain that in 2016. But I think that with all the improvement that we have in our P&C, and probably 2017 is not going to be as difficult for us on the truckload, the US domestic truckload.
I mean if you talk to those US guys, I mean, the result that is coming out right now are very, very bad. But I think that 3Q and 4Q, you are going to start to see some improvement because capacity is shrinking. They are not buying more trucks, they are not adding trucks. They are letting go people, they are letting go drivers. Few small carriers are going bankrupt because they can't go through that cycle.
2017, we should be helped by the improvement of Dynamex Canada and Loomis, and also the improvement of Dynamex US and the growth, the organic growth, and our truckload for sure should be better than what we saw in 2016.
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Turan Quettawala, Scotiabank - Analyst [84]
------------------------------
Last quick clarification from me in terms of the -- I think the corporate expenses were a little higher this quarter, I think you alluded to maybe some stuff. Is that basically, should we expect that to trend back down again as we look at Q3, Q4?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [85]
------------------------------
Yes. Absolutely. What's in there is CAD1 million in professional fees that are not usual, and we also, because of our captive, the captive is the responsibility of our head office, and we had a major settlement that cost the head office CAD2 million. That's why you see a big bump in the expenses of corporate. You should not see that in the rest of the year.
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Turan Quettawala, Scotiabank - Analyst [86]
------------------------------
Got it. That's helpful. Thank you very much, Alain.
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Operator [87]
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David Tyreman, Cormark Securities.
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David Tyreman, Cormark Securities - Analyst [88]
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First question, I just wanted to clarify your EBITDA guidance. Does that include the asset gains that you show on your P&L statement?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [89]
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(Laughter)
We are going back to the same question. No. No, no, you see us, when we talk about our EBITDA target, it includes the normal gain on disposal of equipment. That's why the difference between let's say Q2 of this year and Q2 of last year, there's CAD10 million of difference, and this is all related to real estate asset sales.
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David Tyreman, Cormark Securities - Analyst [90]
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Okay. So I don't see CAD10 million difference and I know you referenced that in the text of the MD&A. Where would I see that in the statements?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [91]
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Well, if you look at our logistics, for instance, this is an easy one. If you look at disposal gain, there's a gain this year and there's a gain last year and there's no gain this year. This is a property that was sold.
If you look at our LTL, this year versus last year, last year we sold two properties for a major gain. This year there was no disposal of real estate in our Q2 numbers. This is why the only thing you see there is equipment. Right?
------------------------------
David Tyreman, Cormark Securities - Analyst [92]
------------------------------
Right. Okay.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [93]
------------------------------
So if you sum up the LTL and the logistic, that is the difference between a last year gain, if I remember correctly, of CAD15 million, versus this year a gain of CAD5 million. So the gain of CAD5 million this year is 99% equipment that we sell on an ongoing basis. Whereas last year you have that CAD4 million, CAD5 million of gain on equipment and you had also a gain on disposal of real estate.
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David Tyreman, Cormark Securities - Analyst [94]
------------------------------
Right. And how much would you expect in the CAD235 million to CAD450 million of normal gains?
------------------------------
Alain Bedard, TransForce Inc. - Chairman, President & CEO [95]
------------------------------
Well the normal gain on disposal of equipment that we have, year over year, all the time because of our depreciation, aggressive depreciation, you are talking between CAD15 million to CAD20 million every year.
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David Tyreman, Cormark Securities - Analyst [96]
------------------------------
And that's what you would expect this year?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [97]
------------------------------
Yes.
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David Tyreman, Cormark Securities - Analyst [98]
------------------------------
Okay, that's fine. Second question, just on the CapEx. So the CAD80 million you are talking about, is that the equivalent of the, it looks like about CAD30 million spend in the first half, you'd have CAD50 million in the second?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [99]
------------------------------
Yes.
------------------------------
David Tyreman, Cormark Securities - Analyst [100]
------------------------------
Okay. That's helpful. Then on the tax rate, it is being lower in the first half of the year, maybe closer in the second quarter. Can you provide any insight into where you see that going in the second half of this year and into 2017?
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [101]
------------------------------
The only variation in our tax rate that I know of is how much profit comes from the US, and the US has a larger tax rate and a higher tax rate than in Canada. What the guys are telling me is that our tax rate should be in that 27% neighborhood, if everything stays the same.
But let's say our profit contribution from the US is more, which is the case now because Dynamex US is way more profitable this year than last year, that may increase our tax rate a little bit. But 27%, I think, is the number to play with.
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David Tyreman, Cormark Securities - Analyst [102]
------------------------------
Okay. Perfect. That's all for me. Lots of good info. Thank you.
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Operator [103]
------------------------------
There are no further questions at this time. Mr. Bedard, I turn the call back over to you.
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Alain Bedard, TransForce Inc. - Chairman, President & CEO [104]
------------------------------
Thank you for joining us this morning. I look forward to speaking with you again following the release of our next quarterly result.
Thank you and have a great day. Bye-bye.
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Operator [105]
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This concludes today's conference call. You may now disconnect.
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