Good morning, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's third quarter 2019 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions for entering the queue will be provided at that time. Before turning the call over to management, please be advised that this conference call will contain several statements that are forward-looking in nature and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. In addition, the company earlier this year adopted the new accounting standards under IFRS 16, and as a result, certain numbers are not directly comparable with past results. Lastly, I would like to remind everyone that this conference call is being recorded on Friday, October 25th, 2019.
I will now turn the call over to Alain Bédard, Chairman, President, and Chief Executive Officer of TFI International. Please go ahead, sir.
Well, thank you, operator, and thank you, everyone, for joining our call this morning. Yesterday, after the close of trading, we released our third quarter results. If you need a copy of the release, please visit our website. Our continued strong performance at TFI International through the first nine months of the year reflects our unwavering focus on the fundamentals of the business, regardless of the economic condition that have continued to fluctuate. By always concentrating on the fundamentals of the business, we were able to drive strong and consistent free cash flow and earnings per share, which in turn provide us the flexibility to optimize our approach to the business and ultimately create shareholder value. How did we put this philosophy to work during the third quarter? We pursued an asset-light business model. Our team was constantly on the lookout for potential operating efficiencies.
We maintained a strong balance sheet, and we completed two accretive business acquisitions, adhering to our highly disciplined approach to M&A. If this sounds familiar, it's because at TFI International, our operating philosophy does not change in our quest to generating not just growth, but profitable growth. Through this approach, it remains our intention to create and unlock shareholder value, and whenever possible, return excess capital to our shareholders. Let's have a look at our third quarter results. Total revenue was up 8% compared to the prior year third quarter and set an all-time third quarter record for TFI at CAD 1.3 billion. As I mentioned, we're focused on profitability, not revenue growth for the sake of revenue growth. Our operating income was up 3% to CAD 132 million, and our adjusted EPS on a diluted basis were CAD 1.4, consistent with the prior year.
In terms of our cash flow performance, which is important to us, net cash from operating activity of CAD 187 million was up 12%, and our free cash flow of CAD 130 million was up 50% compared to CAD 86 million in the prior year third quarter. Driving our strong operating and financial results is the continued strength of our four business segments. Starting with our P&C, packaging and courier, this segment represents 14% of the total segment revenue, and revenue before fuel surcharge was flat at CAD 155 million. Operating income grew 1% to CAD 28 million, and the operating margin was 18.2%, also up slightly versus 18.1% in the corresponding period last year. We view this as a solid performance given the slowing freight environment over the past year.
Regardless of macro factors, we're committed to deploying cutting-edge technology, optimizing the business mix and asset utilization, and leveraging our strong network to capitalize on e-commerce growth opportunities. LTL represents 18% of our total segment revenue and generated revenue before fuel surcharge of CAD 205 million relative to CAD 228 million the prior year. Our operating income was CAD 26 million, up slightly versus CAD 25 million a year earlier, and our operating margin was very strong at 12.6%, which is up 140 basis points from the prior year at 11.2%. This strong performance reflects strong cost management and a 2.5% increase in our revenue per 100 weight, excluding fuel surcharge, as we continue to focus on the quality of our freight. Our Truckload segment represents 48% of total revenue and generated revenue before fuel surcharge of CAD 557 million, an increase of 7% over the prior year period.
Our truckload operating income was CAD 76 million, up 19%, relative to CAD 64 million a year earlier, and our operating margin was 13.6%, compared favorably to 12.2% last year. Our adjusted operating ratio was 83.1% for Canadian truckload, 87.1% for our special TTL, and 90.9% for our U.S. TL operation, reflecting improvements for both Canadian and U.S. truckload. We're very pleased with the year-over-year performance of our truckload segment, given how strong our third quarter was in 2018, and given also the weaker truckload freight market. Logistics and last mile represent 20% of total revenue and generated revenue before fuel surcharge of CAD 257 million, up 9% relative to CAD 235 in the prior year third quarter. Operating income was CAD 13.8 million, relative to CAD 16.8 million a year earlier. Within this segment, we're very actively executing on a margin improvement plan following the same strategy that we have many times before.
As a result, we're confident in our team's ability to deliver. Turning to capital allocation, our approach remains balanced and disciplined. During the quarter, we made two accretive business acquisition, and we returned CAD 84 million to our shareholders, including CAD 20 million of dividend and CAD 64 million of share buybacks. You'll recall that twice this year we expanded the size of our buyback acceleration that commenced in 2018 from 6 million shares originally, and ending with a total of 8.3 million shares, and we repurchased 7.3 million shares under that program by September 30th, during the one-year period. More recently, on September 30th, TFI International was granted approval by the Toronto Stock Exchange to repurchase for cancellation an additional 7 million common shares, representing 9% of our public float over the 12-month period from October 2nd, 2019 to October 1st, 2020. Going forward, our capital allocation plan is unchanged.
We plan to buy back additional shares, pay our quarterly dividend, and extend our track record of identifying accretive acquisitions opportunity executing on them in a highly disciplined manner. I'm also pleased to announce that yesterday we raised our quarterly dividend by 8% to CAD 0.26 per share. Now operator, if you don't mind opening the lines, I'll be pleased to address questions from the audience.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question is from Konark Gupta with Scotiabank. Please go ahead.
Thanks, operator. Good morning, Alain.
Hey, good morning to you.
Morning. Alain, on the free cash flow, it was a pretty decent quarter from free cash flow perspective. Looks like you are tracking ahead of CAD 400 million on a trailing 12-month basis here. Do you see any upside to your CAD 400 million guidance that you provided before? Do you expect any more asset sales in Q4?
Yeah. Well, that's a very good question. Yes. First of all, in terms of asset sales on the real estate side, as you know, we've always been able to identify things that we could do. For sure, we anticipate that probably one or two properties, okay, that we could sell probably in Q4. One small one in the South Shore of Montreal. It's a possibility around Montreal. We also have other areas that we could see some potential. We did about CAD 20 million so far, I think this year in real estate sales. Maybe we'll be able to add between CAD 5 million and CAD 10 million, and we see something kind of similar for 2020, probably like CAD 15 million to CAD 20 million in 2020.
We're also buying a terminal, in Toronto, the older Vitran Well, it's not really an old terminal, but the Vitran terminal in Toronto, okay, that was a kind of sales and leaseback. We're buying that back for CAD 38 million in Q4. We've also bought a building in Montreal for about CAD 6.5 million, okay, which is going to be housing our head office. Right now, we rent one floor and we've decided to buy a building next to the airport in Montreal. Those will be major CapEx that we'll do in Q4 on the real estate side. The other side of the coin, we sold some real estate during the first nine months, and we'll be selling more of those excess real estate in Q4 and in 2020. Total, probably between Q4 and the end of 2020 is in the neighborhood of CAD 15 million-CAD 25 million.
Okay. The free cash flow, that might progress more sort of toward CAD 450 million you think for the full year then?
Yeah. Don't forget that we're buying this terminal that's going to cost me CAD 38 million, and we bought this head office that cost me CAD 6.5. If you put that, this is why our guidance is still because of those real estate deals, are still in the same kind of zip code, the same neighborhood. Excluding that, you're right. We would do better than that. Yes.
Perfect. No, thank you for that. On the logistics and the last mile segments, a couple of questions here. Can you help us with the volume and pricing trends between the logistics and the last mile? They are the two different entities, right? Can you help us understand the trend from those?
Yeah. If you look at that, what we're doing is we're combining those two because they're really asset-light. We don't own any asset. In terms of the logistics, what we do, we have operation both in U.S. and Canada. In that sector, we do about 30% of our global revenue, 25%-30%. The rest is all of our last mile, mostly U.S.-based and some also in Canada, as you know. Our gross margin and our OE is down, okay, year-over-year, not because of Canada. We've performed fantastically in Canada. Our revenue and our OE is just outstanding, what we do in Canada. This is why we've made some changes. We've asked Al, our EVP, to help us in the U.S., help the team there. We have a very good team in the U.S. We need more support.
That team was reporting directly to me until just a few months ago, maybe I was not doing a good job enough, this is why I asked Kal to help me. Okay, help those guys over there in Dallas. What we see there is that we have opportunity to improve our margin, number one. Number two is we also have opportunity to reduce our cost. The problem we have with our last mile in the U.S. is we're competing with a lot of guys that don't like to make money. We bought a few of them this year, like BeavEx, like the logistics division of Dicom US. There's more maybe that will happen in the future. This is a market where a lot of these guys, if they make one point, they're really happy.
This is why when we look at our U.S. operation, we're running between five, six, seven points, which is not even 50% of what we do in Canada. We're far, far, far. Some of it is the market, but some of it is us too. This is why we're going to be working aggressively in the U.S. with the team, to reduce our costs, improve our margin, because in some areas, maybe our pricing was based on facts that don't reflect reality. We'll be working very aggressively in trying to improve that. I think that you will see some great improvement over the course of the next 12 months.
Okay. That's good color. On the logistics side, you had these two new tuck-ins that you described, one in Canada and the other in the U.S. Any sense on the revenue and margin profile for these things? You said it's accretive. How accretive would they be?
Yeah. Well, the one in Canada is really a great one because it's based out of Montreal. I mean, those guys have done a fantastic job. It's a hybrid. Right now, these guys run logistics and a few trucks, a few assets. We'll see down the road because normally we don't like those hybrid model, but we'll see. I mean, those guys are doing well. The guys in the U.S., this is the logistics, the one I talked about is Dicom. Those guys were doing okay, not good, but okay, but the purchase price was really favorable to us because I think nobody wanted to buy it anyway. It's going to be accretive to us no problem. The revenue of the U.S. one was about CAD 50 million. After everything that doesn't make any sense for us, we're probably down to CAD 30 million-CAD 35 million, but making money.
Not four or five points. That's one of the trade that probably will be closer to 8-10 by the end of 12 months that we run the show over there.
Okay. That's perfect. Thanks so much. I'll get back in queue.
Your next question is from Jason Seidl with Cowen and Company. Please go ahead.
Hi, this is Adam for Jason. Maybe just a quick one and kind of following up there on your previous comments. Just asking kind of what the M&A market looks like right now and how your M&A pipeline looks. Do you guys see multiples coming down? What specific areas are you focused on in M&A?
Yes, that's a good question. If we think about the U.S. market, we're really focused on the last mile. If we could do more of these transactions that we've done so far to eliminate some of the players in the market that, like I said earlier, cannot make money or do not like to make money. That's one focus of ours, last mile in the U.S. If we could do something in Canada, it would be great as well. If you look at the Canadian market, our focus has always been in the LTL. What can we do to. Because as you know, our revenue keeps on coming down organically. It's negative growth for the market. If we could find a good fit with another LTL company, that would be great. Specialty truckload, we've been active in the U.S. market. We're the number one player in Canada.
We want to grow our base in the U.S. with a specialty truckload, so we're active in that. We did two interesting acquisitions so far in the U.S. We're on the lookout for that as well. Same thing for Canada and the specialty TL. In terms of valuation, I think guys, valuation is okay. It's acceptable. Some areas where you look at the file and the guy is asking for something that we can't afford, so we just pass. We're disciplined. I mean, us, M&A it's not an easy business, so you got to be very careful about what you do. It's easy to buy a company, but then you have to integrate, you have to manage, you have to improve, you have to generate the free cash flow and all that. It takes time.
This is why with TFI size today, we could do multiple in a year like we're doing this year and the previous year. We could do a major one maybe in 2020. Discipline is the key there and the fit also within TFI. Maybe a new platform like our U.S. specialty TL that we've done this year. It's a new platform for us for growth in the U.S. We feel good about that. I think 2020 is going to be again a good year for us. In terms of valuation, it's still acceptable. Are they less than they were a year ago? Well, in terms of, if you say that 5 times EBITDA and your EBITDA is down 20%, maybe the valuation ratio is still at 5, maybe the EBITDA is down 5% or 10% or 15%, 20%. Price goes down accordingly, right?
Got it. No, that all makes sense, and I appreciate the color there. Maybe just a quick follow-up and switching gears a little bit. Obviously, the U.S. trucking market has been soft now for much or if not all of 2019 and all sorts of difficulties.
Yeah.
there and pretty well-publicized. I wanted to ask a little bit about the Canadian trucking market and how that compares to the current state of the U.S. market, and what kind of trends are you seeing in the Canadian trucking market?
Well, it's basically the same. The big difference between Canada and the U.S. is on one sector, our specialty truckload on the flatbed side has been affected badly, okay, with the steel tariffs that took effect, I think, late last year into early into next year, the steel tariff between U.S. and Canada. I know that these disappeared a few months ago, it takes a long time for the steel industry to get back on track. That has been a negative effect for us, but that should go away in 2020. Also, the strike at GM or the strike right now at Volvo and Mack affects our aluminum, affects shipments, affects also steel shipments to those guys. Our flatbed have been very unlucky right now. Now, in terms of the van side, if you look at our Q3 numbers for Canadian van, we're at 83 OR.
It's tough to do better than that, right? Now, we have pressure on freight, for sure. Freight is soft there as well. Why? Because a lot of corporations are just waiting on the sideline for investment, okay, in order to understand what are the new rules of international trading because of all this fight between, let's say, U.S. and China, this free trade deal between Canada and the U.S. that has been agreed upon but not signed yet. There's a lot of standby investment that affects us in Canada as well as it affect us in the U.S. Still, our guys have done a fantastic job of adjusting the cost to the reality. We also have another factor in Canada that's very negative for us, is the principle of what they call Driver Inc.
This is really unfair competition to us and other companies that operate legally in Canada. Driver Inc. is a model, okay? You hire a driver, but you don't pay the driver as an employee. You say to the driver, "Oh, now we're going to hire your company." Okay? There's no fringe benefit. It's like a very gray area that slowly will probably be addressed by the local authorities in Canada. This is really unfair competition to us. Those guys are mostly based in Ontario. It's a big problem. It's been there for a long time, but it's been growing like weeds. That's another issue. Our guys have really done a fantastic job of fighting these kinds of unfair competition.
Hopefully, the Canadian government and the Ontario and Quebec guys will wake up and smell the coffee and start to address this situation because this is really major unfair competition to us.
Got it. Well, really appreciate the color there. Thank you, guys.
Pleasure, Adam. Take care.
Your next question is from Cameron Doerksen with National Bank Financial. Please go ahead.
Very much. Good morning.
Morning, Cameron.
I just want to maybe ask a few questions for you just around the capacity situation that maybe you're seeing or competitive capacity, because there's been some, I guess, maybe some early indicators that maybe some of the smaller competitors in the U.S., maybe even in Canada, are in some financial difficulty and maybe exiting the market. I guess we've also seen truck orders down massively year-over-year.
Yes.
I'm wondering if you could sort of talk about what you see as the capacity situation as we look ahead into 2020, whether you see a supply and demand balance kind of getting a little better for you.
Yeah, I think that in the U.S. particularly, Cameron, there's some equilibrium that's coming. There's bankruptcy every week in the U.S., every week. You have a large trucking company like Roadrunner that says, "You know what? We're going to shed 400 to 500 trucks from our truckload operation." For sure, you look at the situation today, and you look at the situation in six months. The fact also, like you said, that the Class 8 order for trucks are down big time. For sure. There's going to be less offer down the road versus what it is today. It's the nature of the trucking industry. 2018 was great. The truckers were able to adjust rates to a more reasonable level.
Guy says, "Oh, let's add trucks." This is I've been 20-some years in the business, and I look at that, and I keep saying, "How come we don't understand this basic principle of offer and demand?" When the demand is high, what do you do? You move your price reasonably, okay? You don't add capacity because then in 6 months or a year, then you're gonna be stuck with the other problem where there's too much capacity, then you got to bring the rates down. It's the stupidity of our market. I think things are starting to change in the U.S. Things are also improving in Canada, except like I said earlier, for the Driver Inc., okay, situation that we have in Canada, which is really unfair.
Except for that, in Canada, things are getting better, and I would say that the U.S. is gonna get back to more of an equilibrium probably within the next three to six months, faster than Canada. The problem in Canada is we're adding capacity with those Driver Inc. guys.
Right. Okay. No, that's great. Just on specifically looking at your U.S. Truckload operation, just maybe an update on some of the operational improvements that you're still implementing there, what's left to come? I know the TCA business is the one that's been underperforming. Maybe you can just talk a bit about that.
Yes. Absolutely. It's a very good question, Cameron. What we've done in with trying to help TCA is we've asked Greg Orr, the guy that runs CFI, doing a great job there with his team. I said, "Greg, could you help us with TCA?" He said, "No problem. We'll do that." We've started to implement some principles, some KPIs there, and we're starting to see some improvement because if you look at our OR in Q3 year-over-year, it's still an improvement. Most of the improvement comes from year-over-year from TCA. Okay, we've invested a lot of capital in TCA because right now in 2019, my free cash flow coming out of TCA will be CAD 0. Why is that? Because we're investing a lot of CAD in the capital of our fleet, buying new trucks.
The beauty of that is that the guy delivered on that. Our maintenance cost now at TCA is comparable to CFI and basically comparable to what we do in Canada. I'm really happy with that. We're starting to see some improvement there. More improvement has to come from utilization of the assets. We have to do a better job on that. Globally, it's not easy to do when you have a soft rate environment. If market is soft, then you have to adjust your level of assets. The other thing also that's important that we do better is owner-operators. We have to try to grow this fleet of owner-operators that we have within TCA and CFI.
If you look at what we do in Canada, our percentage company drivers O/O is like 65%-70% versus 30% asset-light operation and logistics brokerage. We're still far from that in U.S. This is another area of improvement, that would improve our return on invested capital because we have to invest less capital. We still have some good stuff to do. One other thing also that I think I said earlier on the call, I think it was in Q2, is that we're implementing the same software for financial purposes as the one that CFI is using. That's going to be easier for the finance team to KPI the two companies. Because now we don't have the same finance software. By January of 2020, we'll be running on the same financial software.
Part of our plan for 2020 is also to move the operation into a different TMS, which is the McLeod system, which a lot of the US truckload guys are running on versus what we're using now, which is a kind of green screen old technology. That will be, again, a very important process for us to try to improve our operation, improve our lane density. You know what? I'm really happy with it because when I look at our Q3 numbers for our US TL, and we compare that to the best guy, okay, which you could say Knight is probably the best or one of the best, and we compare ourselves, I mean, we're getting closer to those great truckload guys. In a freight environment, that's difficult.
No, that's great. Maybe just final, very quick, just on the EPS guidance for the full year. I sort of assume here that you're still quite comfortable with the CAD 3.90-CAD 4.10 you'd kind of talked about.
Yes.
Okay. Just want to confirm that. Great. Thanks very much. That's all for me.
Thank you, Cameron.
Your next question is with Benoit Poirier from Desjardins. Please go ahead.
Good morning, Alain.
Morning, Benoit.
Yeah. First question, if we look at the logistics and last mile, obviously you mentioned, that there are some margin improvement with the integration of the latest acquisition. First, could you talk a little bit about the contribution of the last two tuck-ins? I've heard you on the call saying that the $50 million, that will come down to $35, but were you including Prowler as part of those, what's included?
No. The $50 million U.S. is the last one that we buy in the U.S. This is just the U.S. It will come down to $35 million U.S. Some of that is line haul business, okay? These guys were doing line haul for a customer. I mean, we're not a line haul kind of company. This had to go away. There was also some logistics kind of business in there. What we've done, small, $4 million-$5 million, we moved that to our CFI Logistics business, okay, because that's what these guys do. This is why when I talk to my last mile guys from $50 million, now we're down to probably like around $35 million. In there, okay, we have a great piece of business, which is about $20 million-$25 million, that is healthcare related, okay?
If you remember when we bought BeavEx, there was also an healthcare thing there that's called GML, Guardian Medical Logistics, okay? I mean, we have all the cars to do a much better job than what we're doing today, but it will take some time because this is why we asked our Canadian team, leadership team, to help our U.S. team, okay, so that we could start getting better results faster.
Okay, perfect. What about the size of Prowler, the other tuck-in that you made during the quarter, Alain?
Prowler is small. Yeah, Prowler is small. It's a CAD 27 million company based out of Montreal. It's a great asset, great team, good fit with our other business like Cavalier, like Tripar, all these guys. It's a great acquisition. We're going to do well. Those guys are great team, lean and mean. Perfect. Good fit.
Okay. When we look at the margin profile for logistic and last mile, close to 5%, obviously down versus last year because of the integration.
Yes
of those acquisitions. Longer term, where do you see the margin potential for logistic and last mile once those acquisitions are fully integrated, Alain?
Well, you know what, guys? I think that I haven't seen the plan for 2020 yet, but when I talk to Kal and to the rest of the team, for sure in 2020, we see a 200 basis point improvement over this year. No doubt about that. Let's say we end up the year with something around 5% or 6%. I think that next year we're going to be closer to 7%-8%.
Okay. That's pretty good.
That mostly comes, excuse me, that mostly come from improvement in the U.S. In Canada already, we do very well in Canada. Our team is lean and mean. The guys are really focused. In the U.S., we made some changes. Let's refocus because those guys were too acquisition. We bring the Canadian team as the support, to help those guys turn around the situation. Those company like BeavEx, the reason they went bankrupt is not because they have a star management team. It put a lot of pressure on our U.S. team. This is why I say, "Hey, guys, you know what. Canada is running perfectly good. Let's have these guys support our U.S. team, guys.
Okay.
You'll see. I'm telling you'll see major improvement in 2020 within our last mile division, logistics and last mile, mostly coming from our last mile in the U.S.
Okay. That's great color, Alain. When I look at the truckload business, in Canada.
you've been able to improve the OR by 4%, so from 87 to 83, while when you look at the US TL, it's been almost flat a quarter-over-quarter, close to 90%-91%. I was just wondering if you could provide more color about why Canada was able to improve so much, and if you still see the opportunity for US TL to reach kind of the 80%-85% over time.
Well, 80, that's going to be quite a challenge. What I said, Benoit, is always the same. You have to run a truckload operation with a 90 OR over a period of 10 years on average. Okay? 2019 is a difficult year, versus, let's say 2018 was a great year for truckload guys. To me, 2018, we should have run between an 82 OR to an 85 OR because that was a great year. We didn't do that because we came from 105 OR in 2017. We had a lot of work to do.
If you look at 2019, with this kind of freight environment, when you look at the Knight of the U.S. truckload, okay, and you look at a Knight and those guys are running an 80 something, 88, 87, 86, and you're running a 91 or 90.9, you say, "Well, we still have some work to do." Absolutely. Okay? We're on the right track. In Canada, the big difference is we have a solid team that's been there for a long time. Okay? That being said, okay, we have pressure now that, like we've never seen before with those Driver Inc., like I was saying earlier. Okay?
The guys are working hard, but if we don't have a solution, this unfairness practice, okay, it could put some pressure on the possibility of us running an 85 or an 88 OR when these guys are running maybe a 95 OR, but with 15, 20% less cost than us on labor. Okay?
I see. Assuming, let's say that US TL finished close to 90%-91% for the full year, and also in light of the market condition that should be more favorable in 2020, as you mentioned, what kind of the margin improvement or OR we could see, let's say, toward the end of 2020 for the US TL, Alain?
It's still hard to say because I haven't seen the plan from our guys in the U.S. The guys are working on their 2020 plan, which, we're meeting those guys, November 11th. I'll be in a better position to answer that kind of question. My feeling is that we still have room to improve our cost, okay, improve our asset utilization, improve our revenue per mile. Maybe that depends a lot about the quality of the market. I wouldn't say anything about that, the quality of the revenue, but our cost, we still have some room to improve. Let's say, the market condition remains basically about the same, freight environment a little bit more favorable to truckers. We work on the cost.
I think that we should end up in 2020, although this is still early judgment, I think that we could do something like closer to an 89-90. If market helps us a bit, we work on the cost, we improve our asset utilization, I think it can be done. We have a great team now running our truckload operation in the U.S. A great team.
Okay.
We're going to get there.
Okay. In terms of contractual rates, in terms of renewal, what do you see these days, Alain, and what would you expect going into 2020?
What we're seeing right now is that one of the reason we had so much freight softness over the first 9 to 10 months, even now, October, it's still not a normal October, what we see so far. The reason being is that there was lots of inventory at the level of our shippers. If you look at the inventory level in the U.S., December of 2018, and that keeps on falling, okay, until, let's say, October of this year. That bodes well for us in 2020, because freight environment is going to be soft if those guys have too much inventory, which is a problem that we went through all of 2019. 2020, it's still early in the game. We'll see better now.
Next year.
in the next two months.
Okay. Perfect. That's it for me, Alain. Thanks for the time.
Thank you, Benoit.
Your next question is from Fadi Chamoun with BMO Capital Markets. Please go ahead.
Thank you. Good morning, Alain.
Morning, Fadi.
My first question is, I wanted to get your thoughts on now that we have seen maybe two or three quarters of CN Rail kind of becoming a little bit more involved in those last mile operation with the recent acquisitions they've done. Have you seen the market and the competitive environment change a little bit? Any additional thoughts on this now that you've had maybe two or three quarters to see it play out?
I think, Fadi, what CN has done is great. They took TransX, and they took also the intermodal division of H&R, and it's just normal for them. It makes a lot of sense, those moves. Do they want to be truckers? That's the question. I think that everything that they do over the road probably will not fit CN in the future, but that's their decision. What I've seen so far is that those guys are moving into the truckload segment of the intermodal, which is something that we don't do us except within our Quik X track, okay, which is small. It's about CAD 40 million-CAD 50 million of business that we do.
Truckload on the rail reefer from east to west, okay, with customers like in the dairy industry out of Quebec and some food industry also out of Ontario into the Western Canadian market. I see that very positive because CN is all about making money, and when I see a company that grows, that their focus is about making money, I like that. What I don't like is when I see all those guys that don't like to make money, and they think that 1% or 2% is great. Well, I don't like to compete with those kinds of guys.
Okay. That's helpful. My second question, on the truckload side, it sounds like you have good management team in the U.S., but you also always characterize this market with being very competitive and maybe even irrational a little bit, and you're still on the smaller size in terms of the U.S.
Yes.
Is this business much bigger in three to five years, or is the strategy maybe is to exit, make it smaller in three to five years? How should we think about where do you see the capital deployment going in the next three to five years? Is it going to Truckload or retreating from that business?
Yes. That's a very good question, Fadi. Our approach to that is very simple, is what we said is we have a great team that can run 3,000-4,000 trucks in the U.S. We'll never be a 15,000 or 20,000 truckload guys in the U.S. No way. Okay? The size that we have today, it is good. We could do well with that. Our focus now is to grow like we have in Canada. In Canada, we have a balance between van and specialty TL. We favor the specialty in Canada. Right now in the U.S., it's the complete opposite. Okay? Right now, let's say we have about 3,500 trucks on the van division, while we don't even have 1,000 trucks in our specialty TL today in the U.S.
Really the focus for us in the U.S. on the truckload side is specialty truckload. We made two very interesting acquisitions so far with Schilli and Aulick. We're really very happy about what's going on over there. The focus, to answer your question, Fadi, is not to grow our van division in the U.S., at least for now. It's to grow our specialty truckload. It's the same in Canada. Okay? Absolutely, we're looking at all kinds of opportunities to grow our specialty truckload operation in both Ontario, Quebec, not so much out west. Because our philosophy, as you know, is we like to be the big fish in a small pond, never the small fish in a big pond.
Okay. Thank you.
Your next question is from Walter Spracklin with RBC Capital Markets. Please go ahead.
French, good morning, Alain.
Morning, Walter.
I would like to focus a little bit on your guidance items. It sounds like not a lot has changed, but the world has changed around us. You've done a couple acquisitions, just wanted to just check, make sure I know. You mentioned CAD 400 million for free cash flow is still the target, but I think would've been higher if you weren't doing those real estate purchases. Coming back now, EPS, you were at, I think, CAD 3.90-CAD 4 Any reason why that would change at all in 2019 here?
No, not really. We want to be very conservative, Walter, as we said. The same question was asked in Q2. We said, "No, guys." Yes, Q2 was great. We're sticking to our guns with the CAD 3.90 to CAD 4. If we beat it, fine. So far what we're seeing, like I said earlier, we're seeing an October that we haven't seen before. This is not a normal October. Now, don't forget, we had an election in Canada. An election always affects the consumer and the things that happen. We have all kinds of situation in the U.S. with this China thing there that hopefully they could get some resolve in there. It seems like it's going to go well with their phase one kind of deal. That will alleviate also some clouds. There's lots of cloud because of that, and not with the consumer.
With the corporate world, they're not investing, so it's affecting us. This is why, to me, I said to our guys, "Listen, if we can deliver between CAD 3.90 and CAD 4, guys, with this kind of freight environment in 2019, it's okay. I'm happy." 2020, we'll see.
2020-
No, we're not increasing our guidance, Walter.
2020, I think most are taking a cautious view.
Yes
tone that came out of the rail reports, and I think that's where.
Yes
they were kind of pointing everyone. Consensus out there right now for you is in the 420, 425, maybe up to 430 range, implying about 5% growth. Is that reasonable, you think? Do you think in an environment where we have a sluggish first half but a back half rebound, which is what the rails were kind of intimating, can you do 5% in a kind of not a recession, but a sluggish first half and then an improving back half?
M&A is a thing that helps us a bit, Walter. When you look at organically, we have no growth. It all depends how good our M&A will be late 2019 and into 2020. If we don't do anything, Walter, let's say we don't do any M&A, this is not reasonable.
Okay.
425, it's out of the question. As you know, the proof is in the pudding. Saying that we're not going to do anything never happened.
Right.
Right?
With that in mind, just say you have CAD 1 of free cash. As you look into the 2020 kind of framework, where do you want to spend that CAD 1? Do you want to put it all back into your company? Do you want to focus on a few tuck-ins here? Your balance sheet looks good. Are you increasingly focused on evaluations becoming appealing enough that you're going to get much more active, do you think, as we go into 2020 and through 2020, outside of that larger acquisition, that you could get a little bit more active on the acquisition front?
Yeah. let's say there's no big whale for us in 2020, Walter. We're going to do about CAD 200 million of M&A for sure in 2020. I'm convinced. Now, this is not in our forecast for 2020 because in our plan, every year, we never forecast any M&A, to say that we're going to be at CAD 4.00 a share or CAD 4.20. M&A is always out of that equation. Based on what I can see, based on our pipeline, based on the market condition, I think that a CAD 200 million investment in 2020 is reasonable on M&A for us.
Barring any large acquisition, the other CAD 200 million goes into
Right
the buyback. Is that right?
Yeah.
Okay.
Mm-hmm. Yep.
Final on CapEx, then, you were guiding us, I think, CAD 200-CAD 225 net. Any change in that and any indication for 2020 as to what your CapEx spend will be like?
It's about the same, Walter.
Okay.
It's about the same. What we're trying to do is to do more with less, okay? This is why we are able to sell some real estate. We buy back real estate when it makes sense, like the Toronto terminal from Vitran. We're trying to work with our U.S. guys to try to do more with owner ops, if possible. Try to do more revenue with our CFI Logística operation, our CFI Logística in Mexico. That's the focus. Basically, I would say so far, early numbers that I'm seeing is that CapEx is basically going to be the same. Now, maybe just a tick less because TCA, we did a major push at TCA in 2019. Those guys are back. If you look at our MD&A, you'll see that the average age of our trucks in the U.S. truckload now is really where it should be.
There's not going to be a major push in 2020. It's going to be just replacing, okay, in a normal fashion. It'll be a little bit less.
Okay. No, that's great. Thank you. Final question is on pricing. I've been doing some channel checks with some of your larger and smaller peers in Canada. It's been an interesting dynamic where the smaller peer is saying that pricing is just falling off a cliff. When I compare that to some of your larger private peers. They're saying that no, the smaller players really jacked prices high in 2018, and now to the point of taking advantage of the shipper, and now it's swinging back on them. Larger carriers did not do that, and therefore, you didn't see as much of that swing. Would you characterize that for your company that, yes, there might be some pressure on pricing, but the bottom's not falling out like it might be for some of the smaller peers?
No, absolutely. If you look at our results, Walter, the problem that we have. Are you talking truckload or LTL or P&C in general?
This was Truckload.
Truckload?
It was Truckload for sure, and a little bit of some of the smaller guys, they were a little bit all over the map, but yeah.
Yeah. Well, the big problem we have in truckload in Canada is very simple, is the Driver Inc. situation in Ontario. The freight market has been soft. Those guys keep on bringing new Canadians into this truckload market and hiring those guys through a Driver Inc. model. This is to me the big pressure. For sure, the shipper, they like to use those guys because it's cheaper for them. That's the kind of pressure that we see on rates right now. Also our answer is that, "Listen, guys, this is completely unfair competition, so if Mr. Shipper, you want to use these guys, well, go for it, but it may be not going to last." No, we see pressure on rates. We see more pressure on volume, Walter. The same in the U.S.
We see not so much pressure on rates, but we see a little bit of pressure on volume, the freight environment. Like I said earlier, October has not been the normal October that we normally see. When we read about the general economy in the U.S. or in Canada, we're confident that this situation probably will resolve in 2020. Like you said, probably first six months is going to be not so good. Maybe the back half of 2020 will probably be much better. Like the rest of the team.
Appreciate the color as always, Alain. Thank you.
Well, pleasure, Walter.
Your next question is with David Ross from Stifel. Please go ahead.
Hello. Good morning.
Morning, Dave.
Just a quick follow-up there on the comments about the tone in October and into 2020. Is that much different than you would've thought a few months ago?
Well, to say the truth, David, I'm a little surprised about October. I thought that October, we would start to see back to normal freight environment, but we're not seeing that yet. Maybe November will change the trend. Or maybe it's going to have to go into 2020. We don't know yet. What we're seeing is still a soft environment. If you look at the guys that came out this year so far in Q3 with the US TL, some of the guys are down 8%, 5%, 10%, volume wise, I'm talking about, right? Us, we're down also, but not so much. We'll see. I'm confident that when I look at level of inventory coming down big time versus what it was in January of 2019 versus what it is today, consumer confidence is there.
The only problem we face both in Canada and U.S. is the corporate world not investing, okay, because of all this unknown about these trade wars and different political situation right now.
Another thing the truckload guys have been talking about besides the weak volumes and the pressure on pricing from customers is the rise in insurance costs.
You bet.
How are you thinking about dealing with insurance at CFI and TCA given all of the jury rulings and other issues?
Absolutely. You're absolutely right. This is a fact for both Canada and the U.S. In Canada, we see a lot of pressure. The market for insurance is tightening up so bad. We saw a guy that just got a 75% increase in insurance premium. The way we service Canada, U.S., is different than the way we service the U.S. In the U.S. we don't use our captive or whatever, we use really the insurance market. Our focus in the U.S. has been safety.
What we did in order to prevent those huge insurance premium increases is that we said to our guys, "Listen, we have to spend more on safety and making sure that those accidents, okay, if they occur, we have the reality of what happened." We've invested in forward-facing camera because when we bought CFI, there was no camera on the trucks. By the end of this year, according to what Greg is telling me, is that 100% of our fleet will be equipped with those forward-facing camera. That helps because if you're involved in an accident, now you have a clear picture of what happened. It's not just hearsay or this is what the guys are saying. Safety is big. We've also invested within our new trucks with all the safety like collision avoidance, lane change assist, and all that.
That's been the focus for us in 2019. There again, we want to be renewing our policy in U.S. Our retention is quite high in the U.S. The idea, our focus, Dave, is, okay, premium will be what the market is. What do we do to do better is to have less of these accidents. The quality of your drivers. Instead of just trying to hire drivers with little or no experience, we're trying to focus on drivers with lots of experience, because we have better results. If you look at TFI, Greg was telling me that we probably have like 600 or 700, 1 million miler within TFI. Driver with experience help us. Also, the turnover. We're trying to focus on driver turnover.
Turnover is another factor that is a negative, okay, in terms of insurance claim, because you got new guys, you got guys that don't know the customer, don't know the area well, and they make a mistake, and then oops, we're involved in an accident. I agree with you, Dave. The pressure on the rates, on the premium from the insurance company is great in U.S. and the same in Canada. Thus, our focus is, guys, listen, let's reduce our claim. Let's be better. Now, so far, if I look at my claim this year, 2019 versus 2018 per mile, okay, we're doing just a little bit better. We're not where we should be, but we have a great team in safety like Lisa Gonnerman, the lady that runs the safety department. She's really working hard in trying to educate safety and all that.
I feel good that we're going to be in a position to really reduce that. In Canada, our teams are very experienced there, and we're doing a great job. We were hit with some claims from one of our operations from four or five years ago in 2019. What we've seen so far, we are really under control in Canada, so we feel good about that. Our competition, the small guys and the medium-sized guys, both in Canada and the U.S., for sure, they're getting hit with all kinds of insurance rate going up.
On LTL, the quality focus there has been terrific as we've seen in the margin expansion. When does the growth focus resume? When do you feel comfortable enough there to try to add more volume back to the board?
The growth. Yeah, the problem with organic growth, Dave, in my mind, it's very difficult to do right now in Canada because the market is shrinking, and a lot of these other truckers don't understand that when the market is shrinking, you have to shrink your offer, you have to shrink your fleet, et cetera. So it's a difficult situation, so you should never anticipate seeing TFI's organic growth in LTL. What you could think of is, okay, is he going to buy another LTL company anytime soon? Maybe, okay, if we could find the right company, the right fit. I'm telling you, every LTL company that I look at right now, they're not highly profitable. There's some in Canada that are probably highly profitable, comparable maybe to us, but these guys are not for sale.
These guys are running a good operation, so they're trying to grow their business slowly. Us, our focus is really on the bottom line. I don't think that if you exclude M&A, you're not going to see top-line growth in our LTL in Canada. No. I think M&A is the solution like we've done in the past. If you look at what we've done, we bought Cavalier, we bought Normandin over the last 18 months, and it has been fantastic. In terms of top line, we're back to square one. We're flat. Bottom line, we're flat. Top line, we're down.
Excellent. Thank you.
Your next question is from.
Thank you.
Gianluca Tucci with Echelon Wealth Partners. Please go ahead.
Hi, Alain. Good morning.
Good morning.
Can you talk quickly about the impact e-commerce had on your overall business in Q3 in Canada and the U.S.? Secondly, how your strategy differs in both of those markets pertaining to e-commerce. Thank you, Alain.
Pleasure. The problem we have with our e-commerce is that one player, okay, which is the largest player in North America. We basically don't service this customer or this company, because we made the decision that these guys are not part of the solution. Our focus has been, let's try to see what we can do with some of the brick-and-mortar guys that understand what e-commerce is all about, and this has been the success of our e-commerce solution to our customers. We have some great brick-and-mortar guys that have finally were able to understand how the e-commerce market works, and we're trying to grow with that. If you look at my annual revenue from e-commerce, I'm basically flat. The reason being is that some of my competition, the focus is volume.
It's not about making money, it's about just growing market share, and hopefully one day we'll make money. It's like this philosophy that comes from this large e-commerce guy that says, "Well, we're there to service customer." Are we making money on doing that? Probably no. They came out with their numbers just a day or two ago, and in terms of delivery, their cost is just going through the roof because we're lean and mean. We could do a good service, but we can't work with a customer that says that your margin is my opportunity, right? There's no future for us in trying to work with this guy. This is why for us, we're trying to work around the largest e-commerce guy and trying to grow profitably. We could grow our e-commerce at least by CAD 100 million a year easily, if we sacrifice the bottom line.
Well, I said to my guys that, "We can't do that." Us, if we don't have any bottom money now, why would we have investors? The guy would say, "Well, those guys are running a great company, but they don't make any money." We're not in the world of maybe some players that they don't make any money, and they have a huge market cap, but in the truckers world, if you look at UPS, one of the best company in the world, those guys are all about making money, like us.
That's good color. Thanks, Alain. Just one more question here quickly. Your overall business in Mexico seemed to have shrunk quite considerably, albeit it's a small number. Can you just talk about how that market is shaping up as we enter 2020 and your growth strategy down there over the near term? Thank you.
Our strategy there is in Mexico, we have a logistics company there. Our revenue are down a little bit with our logistics company, but our investment are huge. We see a lot of potential there. Okay? So far, the results are not there 100%. We keep on investing in our TFI Logistics and our CFI Logistica in terms of people, in terms of trying to grow that, because our focus is to try to run as much possible an asset-light operation. In terms of our truckload operation, we still have about 2,000 trailers in Mexico every day with freight coming in and out of Mexico. For sure, our focus is always to run a very profitable operation. If there's no money there for us, we're going to shrink. We're going to adjust ourselves.
We're down a little bit, like we're down a little bit with our truckload U.S. in terms of top line, because we have to adjust to market condition. Now, if market condition improves like we believe it will in 2020, then we'll see what needs to be done and adjust ourself accordingly. One of the things that's very important to TFI is the return on invested capital. This is key.
Right
key to us. Somebody comes to me and say, "Hey, we're going to invest CAD 1 million and make two points." No. Why would I do that? I'm going to take my CAD 1 million and invest in, I don't know, maybe RBC or one of those great Canadian banks and make three or four points in dividend. Why would I make 2%, take all kinds of risks? That's our philosophy.
Understood. Thank you, sir, and enjoy the weekend. Thank you.
Thank you. Likewise.
Your final question comes from Kevin Chiang with CIBC. Please go ahead.
Hey, Alain. Thanks for taking my question. Just a couple here. Just on the logistics front, you've talked about the delta between your U.S. and Canadian margin profile.
Yes.
For that U.S. margin profile to improve, is it really just cost cutting and maybe repricing some underpriced contracts? Do you need to be bigger there? Is M&A part of the strategy to maybe get scale?
Yes
to have a margin profile that sounds like could be double digit?
Yeah.
Is that necessary?
M&A is not necessary, it would be a good plus. Really, the job has to be done by us, Kevin. We have to do the job in the U.S., like we did in Canada. Right? Don't forget that when we bought this company, Dynamex, in 2011, those guys were one to two-point guys. They were happy with 1%, 2% bottom line. It's a huge culture change. We've been doing a better job in Canada and trying to change its culture. In Canada, we're running a double-digit EBIT company now for the last two, three years. Canada is smaller. Right? It's smaller. We were faster into changing the culture in Canada because don't forget, we are a big fish in Canada. We have a deep bench in Canada. It was much easier for us to change the culture and the philosophy in Canada.
What we're doing now is through all these M&A, because don't forget, the U.S. excuse is that, "Well, we're competing with BeavEx and those guys don't want to make money, and we're competing with Dicom US, those guys don't want to make money." That is true. Those guys are gone now. Yeah, but there's others. Okay, fine. In the meantime, we have to change a little bit the culture and be more focused about being hungry for making money. Five points to me, it's not making money. It's not. The guys, they understand that we have to do a better job, and the guys are really focused. This is why I had a meeting with them last week in Dallas, and I feel so good about now the team, the dedication, and the focus.
That's why I feel good that I'm convinced that those guys will improve their bottom line by at least 200 basis points 2020. This is a combination of pricing improvement, because pricing was priced wrong. Okay. It's not that we're raising prices, we're just pricing it correctly, number 1. Number 2 is we have to address the cost situation. It's something that we have to do a better job. Real estate is a big killer for us in the U.S. right now because as a percent of revenue, we're hovering around 5%. That's not good. We should be closer to two. We have to work with our customer to try to work more off their dock instead of having our own dock. This is all kinds of changes, this culture, and when you talk to the customer.
Don't forget, when you have BeavEx as competition and those guys said, "Well, real estate for us is not a problem, so we'll rent more space to please the customer." Us, we say to our guys, "No, real estate, no." We'll work off your dock. Now BeavEx is gone, those guys that didn't understand that, no. You don't want 5%, because don't forget, BeavEx, CAD 200 million, those guys were running at like 80 locations. It's completely stupid. We run, us, about 60-some locations right now within our last mile in the U.S., which is plenty. We could add more volume. If ever there's another potential acquisition in the last mile, for sure we're going to look at it.
That's helpful. Then just turn to your Specialized TL. I recall maybe a quarter or two ago, in terms of conference calls, you noted this being a focus of growth because you have a little bit more pricing power in that.
division. I know there's a lot of M&A in there, but it is the one division, as you noted, that's shown a degradation in that OR-
Yeah
on a year-to-date basis. Just wondering, are you seeing that pricing power? If I were to take out M&A, would those margins be improving year-over-year, similar to what we've seen in your other divisions? Are you capturing that pricing power that you were talking about a couple of quarters ago into the bottom line within specialized TL?
What's happening, Kevin, is, like I said earlier in the call, is that our flatbed division in Ontario has been suffering badly in 2019. Very bad.
For all kinds of reasons. The steel tariff is one. The level of uncertainty in the global economy for our customers to invest or not to invest. It's been a tough haul for us with the flatbed business mostly in Ontario. We do flatbed in Quebec, but not so much compared to what we do in Ontario. We feel good. Steven Brookshaw, that's his strength. He used to run the flatbed division, and he's highly involved working with Christine, the leader we have there. We have a fantastic team, so we're going to turn the corner there. At the same time, we got hit with those strike at GM. You say, well, the strike is only one month old, but it's affecting us because don't forget, when the guys feel that there could be a strike, they slow down.
They slow down because they don't want to get stuck with too much product. This strike hopefully get resolved, but it will affect us for the rest of the year. Hopefully, in 2020, we'll be back to normal. At the same time, we have those guys at Volvo Mack that decided, oh, no, we're going on strike. Again, that affects our aluminum shipments to the U.S. It affects some of our steel shipments in the U.S., those strikes. Those guys are saying, "No, we're stopped. Don't send us anything." This is why, if you look at our specialty truckload, we did very well with our M&A in the U.S. Our Schilli and Arctic acquisition, fantastic. If you look at what we've done in Quebec, the Brasseur acquisition turned out to be good.
We had a little bit of issue with the one that we did on the cement hauling business. We're working on it now. For sure, we're going to downsize our share of cement hauling in Quebec, because there's too much pressure and too much investment needed. We're going to adjust ourselves there. We have a plan. We know what needs to be done. When I look at my OR in my specialty TL at 87, and I look at the van division in Canada at, let's say, 83, there's a disconnect there. It's not normal that your van guys are doing better than the specialty guys.
Right.
Absolutely. This is what I'm saying is that, our van guys are doing fantastically well. Okay. Perfect. I'm very happy with that. Like I said earlier, with this Driver Inc. situation, it keeps on growing. It's like a cancer. That could affect our van division. At the same time, our specialty TL guys are doing a fantastic job. What I see probably in 2020, maybe if this Driver Inc. cancer continues, we could have pressure on our OR with our van division. At the same time, okay, we have so much to do with our specialty TL that our specialty TL guys are 87, 88 in Q3. This is not normal. We should do better than that. Those guys should be closer to an 84, an 85. We know where the problem is.
The problem is mostly on the Canadian side, in Ontario flatbed and into some of our specialty operation in Quebec.
Right.
On the cement hauling.
Thank you for the color. Have a great weekend.
Thank you. Likewise, Kevin.
We have no further audio questions at this time. I turn the call back over to Mr. Bédard.
Well, thank you very much, operator. I appreciate everyone joining us today. We thank you for your ongoing interest in TFI International, and you can rest assured that we will close out the year with a continued focus on our business principle. As should be clear from my remarks today, we will continue to seek opportunity to create value, unlocking it for our investors, and whenever possible, return excess capital to our shareholders. We're excited about the opportunities ahead, and I look forward to updating you again on our progress. Thank you again for your time this morning, and have a great day and a great weekend. Thank you.
This concludes today's conference call. You may now disconnect.