Earnings Call: Q3 2019

Oct 25, 2019

Earnings release

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 25, 2019. I will now turn the call over to Alain Bedard, 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 3rd quarter results. If you need a copy of the release, please visit our website. Our continued strong performance at TFI International through the 1st 9 months of the year reflects our unwavering focus on the fundamentals of the business regardless of the economic condition that we have continued to fluctuate 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 Q3? 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 2 accretive business acquisition, adhering to our highly disciplined approach to M and 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. Now let's have a look at our Q3 results. Total revenue was up 1% compared to the prior year 3rd quarter and set an all time 3rd quarter record for TFI at $1,300,000,000 However, as I mentioned, we're focused on profitability, not revenue growth for the sake of revenue growth. Operating income was up 3% to $132,000,000 and our adjusted EPS on a diluted basis were $1.04 consistent with the prior year. In terms of our cash flow performance, which is important to us, net cash from operating activity of $187,000,000 was up 12% and our free cash flow of $130,000,000 was up 50% compared to $86,000,000 in the prior year Q3. Driving our strong operating and financial results is the continued strength of our core business segment. So starting with our P and C Packaging quarter, this segment represents 14% of the total segment revenue and revenue before fuel surcharge was flat at 155,000,000 dollars Operating income grew 1% to $28,000,000 and the operating margin was 18.2 percent, also up slightly versus 18.1 percent 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 $205,000,000 relative to $228,000,000 in the prior year. Operating income was $26,000,000 up slightly versus $25,000,000 a year earlier and our operating margin was very strong at 12.6 percent, which is up 140 basis points from the prior year at 11.2 5% increase in our revenue per 100weight, excluding Q 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 $557,000,000 an increase of 7 percent over the prior year period. Our truckload operating income was $76,000,000 up 19% relative to $64,000,000 a year earlier and our operating margin was $38,600,000 compared favorably to 12.2 percent last year. Our adjusted operating ratio was 83.1 percent for Canadian truckload, 87.1 percent for our Specialty TL and 90.9 percent for our USPL 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 Q3 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 257,000,000 up 9% relative to $235,000,000 in the prior year Q3. Operating income was 13.8 $1,000,000 relative to $16,800,000 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 2 accretive business acquisitions and we returned $84,000,000 to our shareholders, including $20,000,000 of dividend and $64,000,000 of share buybacks. You'll recall that twice this year we expanded the size of our buyback acceleration that commenced in 2018 from 6,000,000 shares originally and ending with a total of 8,300,000 shares and we repurchased 7,300,000 shares under that program by September 3rd during the 1 year period. More recently, on September 30, TFI International was granted approval by the Toronto Stock Exchange to repurchase for cancellation an additional 7,000,000 common shares, representing 9% of our public float over the 12 months period from October 2, 2019 to October 1, 2020. Going forward, our capital allocation plan is unchanged. We plan to buy back additional shares via quarterly dividend and extend our track record of identifying and tracking 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 $0.26 per share. And now, operator, if you don't mind opening the lines, I'll be pleased to address questions from the audience. Thank Your first question is from Kunalark Gupta with Scotiabank. Please go ahead. Thanks, operator, and good morning, Alain. Hey, good morning, Kiran. Good morning. So Alain, on the free cash flow, it was a pretty decent quarter from a free cash flow perspective. It looks like you are tracking ahead of $400,000,000 on a trailing 12 month basis here. So do you see any upside to your $400,000,000 guidance that you provided before? And do you expect any more asset sales in Q4? Yes. Well, that's a very good question. So yes, first of all, in terms of asset sales on the real estate side, as you know, we've always been able to identify the things that we could do. So for sure, we anticipate that probably 1 or 2 properties, okay, that we could sell probably in Q4. 1, 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. So probably like maybe so we did about $20,000,000 so far, I think this year in real estate sales. So maybe we'll be able to have between $510,000,000 and we see something kind of similar for 2020, probably like 15 to 20 in 2020. But also 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. So we're buying that back for $38,000,000 in Q4. We've also bought a building in Montreal for about $6,500,000, okay, which is going to be housing and office because right now we rent 1 floor and we've decided to buy a building next to the airport in Montreal. So those will be major CapEx that we'll do in Q4 on the real estate side. But on the other side of the coin, we sold some real estate during the 1st 9 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 $15,000,000 to $25,000,000 dollars Okay. So I'm like that the free cash flow, I'm like that might progress more sort of toward $450,000,000 you think for the full year then? Yes. But don't forget that we're buying this terminal that's going to cost me $38,000,000 and we bought this head office that cost me $6,500,000 So 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, same neighborhood. But excluding that, you're right. I mean, we would do better than that. Yes. Perfect. Thank you for that. And then 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? So they are the 2 different entities, right? So can you help us understand trends on those? Yes. So if you look at that, I mean, what we're doing is we're combining those 2 because they're really, really asset light. I mean, we don't own any asset. But in terms of the logistics, what we do, we have operation both in U. S. And Canada. So in that sector, we do about 30% of our global revenue, 25% to 30%. The rest is all of our last mile, mostly U. S. Based and some also in Canada, as you know. Now our gross margin and our OE is down, okay, year over year, not because of Canada. I mean, we've performed fantastically in Canada. I mean, our revenue and our OE is just outstanding, what we do in Canada. And this is why we've made some changes. We've asked Cal, our EVP, to help us in the U. S, help the team there. We have a very good team in the U. S, but they need more support. And that team was reporting directly to me until just a few months ago. And maybe I was not doing a good job enough. So this is why I asked Cal to help me, okay, help those guys over there in Dallas. So what we see there is that we have opportunity to improve our margin, number 1. And number 2 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. So we bought a few of them this year, like BeavEx, like logistics division of DICOM U. S. And there's more maybe that will happen in the future. And this is a market where a lot of these guys, if they make one point, they're really happy. So this is why when we look at our U. S. Operation, we're running between 5, 6, 7 points, which is not even 50% of what we do in Canada. So we're far, far, far. But some of it is the market, but some of it is us too. So 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. So we'll be working very aggressively in trying to improve that. So I think that you will see some great improvement over the course of the next 12 months. Okay. That's good color. So on the logistics side, you had these 2 new tuck ins that you described, 1 in Canada and 1 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? Yes. 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 or the one I called, talked about is Dycom. Those guys were doing okay, not good, but okay. But the purchase price was really favorable to us because think nobody wanted to buy it anyway. So it's going to be accretive to us, no problem. The revenue of the U. S. One is about was about $50,000,000 But after everything that doesn't make any sense for us, we're probably down to $30,000,000 to $35,000,000 But making money, not 4, 5 points. That's one of the trade that probably will be closer to $8,000,000 to $10,000,000 by the end of up to a month that we run the Shoal 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. Yes. Hi. This is Adam on for Jason. Maybe just a quick one and kind of following up there on your previous comments. Just asking kind of what the M and A market looks like right now and how your M and A pipeline looks. Do you guys see multiples coming down? And what specific areas are you focused on in M and A? Yes, that's a good question. I mean, if we think about the U. S. Market, we're really focused on the last mile. So 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 don't like to make money. So 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. Then 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 low for the market. So 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. So we did 2 interesting acquisitions so far in the U. S. So we're on the lookout for that as well. Same thing for Canada on 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 guys is asking for something that we can't afford, so we just pass. But we're disciplined. I mean, us, we M and 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. So it takes time. So this is why with TFI's 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. But discipline is the key there and the fit also within TFI. It's got to be or maybe a new platform like our U. S. Specialty TL that we've done this year. It's a new platform for us to grow in the U. S. So 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%. So maybe the valuation ratio is still at 5, but maybe the EBITDA is down 5% or 10% or 15%, 20%. So 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 kind of 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. I mean, 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, but it takes a long time for the steel industry to get back on track. So 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 Mac affects our aluminum, affects shipments, affects also steel shipments to those guys. So our flatbed have been very unlucky right now. Now on terms of the van side, if you look at our Q3 numbers for Canadian van, I mean, we're at 83OR. I mean, 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 U. S. That has been agreed upon but not signed yet. So there's a lot of standby investment that affects us in Canada as well as it affects us in the U. S. But still, I mean, 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. So this is really unfair competition to us and other companies that operate legally in Canada. Driver Inc. Is a model, okay, that you hire a driver, but, you don't pay the driver as an employee. You say to the driver, oh, now now we're going to hire your company. Okay? And then there's no fringe benefit. So 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. And that's another issue. Our guys have really done a fantastic job of fighting these kinds of unfair competition. So 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, really major unfair competition to us. Got it. I really appreciate the color there. Thank you, guys. Your next question is from Cameron Doerkinson with National Bank Financial. Please go ahead. Very much. Good morning. Good morning, Cameron. So 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. So I think as we've also seen truck orders down massively year over year. So 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 supply demand balance kind of getting a little better for you? Yes. I think that in the U. S, particularly, Cameron, there's some equilibrium that's coming. I mean, there's bankruptcy every week in the U. S, every week. And you have a large trucking company like Roadrunner that says, you know what, we're going to shed 400, 500 trucks from our truckload operation. So for sure, I mean, you look at the situation today and you look at the situation in 6 months, the fact also, like you said, that the Class 8 order for trucks are down big time. For sure, I mean, there's going to be less offer down the road versus what it is today. I mean, it's the nature of the trucking industry. 2018 was great. The truckers were able to adjust rates to a more reasonable level. And then guys said, oh, let's add trucks. And 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 offering demand? I mean, when the demand is high, what do you do? I mean, you move your price reasonably, okay, but you don't add capacity because then in 6 months or a year, then you're going to be stuck with the other problem where there's too much capacity, then you got to bring the rig down. It's the stupidity of our market. But 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, I mean, in Canada, things are getting better. And I would say that the U. S. Is going to get back to more of an equilibrium probably within the next 3 to 6 months, faster than Canada. The problem in Canada is we're adding capacity with those driver in guys. Right. Okay. No, that's great. Just 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 sort of left to come? I know the PCA business is the one that's been kind of underperforming, but maybe you can just talk a bit about that. Yes. Yes, absolutely. So it's a very good question, Cameron. So what we've done with trying to help TCA is we've asked Greg Orr, the guy that runs CFI, doing a great job there with his team. So Greg, could you help us with TCA? And he said, no problem, we'll do that. So 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. And most of the improvement comes from year over year from TCA, okay. So we've invested a lot of capital in TCA because right now in 2019, my free cash flow coming out of TCA will be 0. Why is that? Because we're investing a lot of dollars in the capital of the fleet, buying new trucks. But the beauty of that is that the guy delivered on that. So our maintenance cost now, our TCE, is comparable to CFI and comparable basically comparable to what we do in Canada. So I'm really happy with that. So we're starting to see some improvement there. More improvement has to come from utilization of the assets, okay? We have to do a better job on that. And globally, it's not easy to do when you have a soft freight environment, okay. But if market is then you have to adjust your level of assets. The other thing also that's important that we do better is owner operators. So we have to try to grow the suite of owner operators that we have within TCE and CFI. And if you look at what we do in Canada, our percentage company drivers OO is like 65%, 70% versus 30% asset light operation OO and logistics brokerage. We're still far from that in U. S. So this is another area of improvement. So that would improve our return on invested capital because we have to invest less capital. So 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. So that's going to be easier for the finance team to TPI the 2 companies. So because now we don't have the same finance software. So by January of 2020, we'll be running on the same financial software. And then 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 U. S. Truckload guys are running on versus what we're using now, which is a kind of green screen old technology. So that will be again a very important process for us to try to improve our operation, improve our lane density. But you know what, I'm really happy with it because when I look at our Q3 numbers for our U. S. CL 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. That's great environment that's difficult. Yes. 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 $3.90 to $4.10 you've kind of talked about. Okay. So I 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. Yes. First question, if we look at the Logistic and Last Mile, obviously, you mentioned that there are some margin improvement with the integration of the latest acquisition. So first, could you talk a little bit about the contribution of the last 2 talk ins? I've heard you on the call saying that the US50 $1,000,000 that will come down to US35 dollars But were you including Prologer as part of the those was included in the No, no, no, no, no, no. The US50 million dollars is the last one that we buy in the U. S. And this is just the U. S, it will come down to US35 $1,000,000 Some of that is line haul business, okay. These guys were doing line haul for our customer. I mean, we're not a line haul kind of company. So this had to go away. There was also some logistics kind of business in there. So what we've done, small, dollars 4,000,000 $5,000,000 So we moved that to our CFI Logistics business, okay, because that's what these guys do. So this is why when I talked to my last mile guys from 15, now we're down to probably, like, around 35,000,000. But in there, okay, we have a great piece of business, which is about 20,000,000 to 25,000,000 that is health care related. Okay. So if you remember, when we bought BeavEx, there was also an healthcare thing there that's called GML, Guardian Medical Logistics. Okay. So 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 and 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? Okay. Okay, perfect. And what about the size of crawler, the other tuck in that you made during the quarter? Crawler is small. Yes, crawler is small. I mean, it's a $20 some $1,000,000 company based out of Montreal. But 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 and we're going to do well. Those guys are great team, lean and mean, perfect, good fit. Okay. And when we look at the margin profile for Logistic and Last Mile, close to 5%, obviously down versus last year because of the integration of those acquisitions. But longer term, where do you see the margin potential for Logistik and Last Mile once those acquisition 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 Cal 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. So 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% to 8%. Okay. Okay. That's pretty good. And that mostly comes excuse me, but that mostly comes from improvement in the U. S. I mean, because in Canada already, I mean, we do very, very well in Canada. I mean, our team is lean and mean. The guys are really focused. In the U. S, I mean, we made some changes. Let's refocus because those guys were to acquisition. Now we bring the Canadian team as the support to help those guys turn around the situation because those companies like BeavEx, the reason they went bankrupt is not because they have a star management team. So it put a lot of pressure on the U. S. Team. So this is why I say, hey guys, you know what, Canada is running perfectly good. So let's have these guys support our U. S. Team guys. Okay. And you'll see, I'm telling you, 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. And 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 U. S. TL, it's been almost flat quarter over quarter, close to 90%, 91%. So I was just wondering what if you could provide more color about why Canada was able to improve so much and if you still see the opportunity for U. S. Steel 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. I mean, you have to run a truckload operation with a 90 OR over a period of 10 years on average, okay? So 2019 is a difficult year versus, let's say, 2018 was a great year for Truffle Guys. So to me, 2018, we should have run between an 82 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. Now if you look at 2019, with this kind of freight environment, when you look at the star of the U. S. Truckload, okay, and you look at a star 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. But we're on the right track. Now in Canada, the big difference is we have a solid team that's been there for a long, long, long time. Okay. Now 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. So I mean, 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. And assuming, let's say, that USPL 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, towards the end of 2020 for the U. S. TLMA? 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 the 2020 plan, which we're meeting those guys November 11. So I'll be in a better position to answer that kind of question. But 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. So I wouldn't say anything about that, the quality of the revenue, but our costs, we still have some room to improve. So let's say, 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. But I think that we could do something like closer to an 89 to a 90. If market helps us a bit, we work on the cost, we improve our asset utilization, I think it can be done. I mean, we have a great team now running our truckload operation in the U. S, a great team. So I mean, we're going to get there. Okay. And in terms of contractual rates, in terms of renewal, what do you see these days, Alain? What would you expect going into 2020? Well, what we're seeing right now is that one of the reasons we had so much freight softness over the 1st 9 to 10 months, even now October is still not a normal October what we see so far. But 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. So that bodes well for us in 2020 because freight environment has got to be soft if those guys have too much inventory, which is a problem that we went through all of 2019. Now 2020, it's still early in the game. We'll see better now in the next few months. Okay. Okay, perfect. That's it for me, Alain. Thanks for the time. Pleasure, Benoit. Your next question is from Sadegh Chamoun with BMO Capital Markets. Please go ahead. Thank you. Good morning, Ella. Good morning, Tariq. My first question is, I wanted to get your thoughts on now that we have seen maybe 2 or 3 quarters of CN Rail kind of becoming a little bit more involved in those last mile operation with the recent acquisitions there. And have you seen kind of the market in the competitive environment and kind of change a little bit? Kind of any additional thoughts on this now that you've had maybe 2 or 3 quarters to see it play out? Well, I think, Thad, what Sienna has done is great. I mean, they took TransX and they took also the Intermodal division of H and R. And it's just normal for them. I mean, it makes a lot of sense, those moves. Now do they want to be truckers? Well, 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. But 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 except within our QQuickX track, okay, which is small. It's about $40,000,000 to $50,000,000 of business that we do truckload on the rail refer 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. So I mean, 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. 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 kind of very competitive and maybe even irrational a little bit. And you're still on the smaller size in terms of the U. S. Yes. So is this business much bigger in 3 to 5 years? Or is the strategy maybe is to exit, make it smaller in 3 to 5 years? How should we think about where do you see the capital deployment going in the next 3 to 5 years? Is it going to truckload or retreating from that business? Yes. That's a very good question, Fadi. So our approach to that is very simple. As what we said is we have a great team that can run 3000 to 4000 trucks in the U. S. So we'll never be a 15,000 or 20,000 truckload guys in the U. S. No way. Okay. So the size that we have today is good. We could do well with that. Now our focus now is to grow like we have in Canada. In Canada, we have a balance between van and specialty TLs. We favor the specialty in Canada. And right now in the U. S, it's the complete opposite, okay? So right now, let's say we have about 3,500 trucks on the van division. Well, we don't even have 1,000 trucks in our specialty TL today in the U. S. So really the focus for us in the U. S. On the truckload side is specialty truckloads. So we made 2 very interesting acquisitions so far with Shieli and Holic. We're really very happy about what's going on over there. So the focus, to answer your question, Felipe, is not to grow our van division in the U. S, at least for now, is to grow our specialty truckload. It's the same in Canada, okay. So absolutely, we're looking at all kinds of opportunities to grow our specialty truckload operation, both Ontario, Quebec, not so much out west, because our philosophy, as you know, is we like to be the big fish in the small pond, never the small fish in the big pond. Okay. Thank you. Your next question is from Walter Spracklin with RBC Capital Markets. Please go ahead. Good morning, Eli. Good morning, Walter. So I'd like to focus a little bit on your guidance items. It sounds like not a lot has changed, but you have I mean the world has changed around us. You've done a couple of acquisitions. So just wanted to just check, make sure I know you mentioned $400,000,000 for free cash flow is still the target, but I think would have been higher if you weren't doing those real estate purchases. So coming back now, EPS, you were at, I think, dollars 3.90 to $4 Any reason why that wouldn't change would change at all in 2019 here? No, not really. I mean, we want to be very conservative, Walter. As we said, I mean, the same question was asked in Q2. And we said, no, no, guys. I mean, yes, Q2 was great, but we're sticking to our guns with the 3.90 to 4. I mean, if we beat it, I mean, fine. But so far, what we're seeing, like I said earlier, I mean, 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. And the election always affect the consumer and the things that happen. We have all kinds of situation in the U. S. With this China thing there that hopefully you could get some resolve in there. It seems like it's going to go well with their Phase 1 kind of deal. So 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. So this is why to me, I said to our guys, listen, if we can deliver between $3.90 $4 guys, with this kind of freight environment in 2019, it's okay. I'm happy. 2020, we'll see. But no, we're not increasing our guidance, Walter. So 2020, I think most are taking a cautious view. Certainly, that's the tone that came out of the rail reports. And I think that's where they were kind of pointing everyone. Consensus out there right now for you is in the $420,000,000 $425,000,000 maybe up to $430,000,000 range implying about 5% growth. Is that reasonable? Do you think in a environment where we have a sluggish first half, but a back half rebound, which is what the rails were kind of intonating, can you do 5% in a kind of not a recession, but a sluggish first half and then an improving back half? M and A is the thing that helps us a bit, Walter, because when you look at organically, I mean, we have no growth. It all depends how good our M and A will be late 2019 and into 2020. So if we don't do anything, Walter, let's say we don't do any M and A, this is not reasonable. I mean, $425,000,000 it's out of the question. But as you know, the proof is in the pudding. Saying that we're not going to do anything never happened. Right. So with that in mind, just say you have $1 free cash. Now as you look into the 2020 kind of framework, where do you want to spend that dollar? Do you want to put it all back into your company? Do you want to focus on a few tuck ins here? I mean, your balance sheet looks good. Or are you increasingly focused on valuations 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? Yes. So let's say there's no big whale for us in 2020, Walter. We're going to do about $200,000,000 of M and 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 and A to say that we're going to be at $4 a share or $4.20 M and A is always out of that equation. But based on what I can see, based on our pipeline, based on the market condition, I think that a $200,000,000 investment in 2020 is reasonable on M and A for us. And barring any large acquisition, the other $200,000,000 goes into buyback, is that right? Yes. And final on CapEx then, you were guiding us I think $200,000,000 to $225,000,000 net. Any change in that? And any indication for 2020 as to what your CapEx spend would be like? It's about the same, Walter. It's about the same. What we're trying to do is it should do more with less, okay? So this is why we are able to sell some real estate. We buy back real estate when it makes sense like the Toronto terminal for Bytran. 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 logistics operation, our CFI Logistica in Mexico. So that's the focus. But 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. So those guys are back. If you look at our MD and A, you'll see that the average age of our trucks and the U. S. Truckload now is really where it should be. So there's not going to be a major push in 2020. It's going to be just replacing, okay, in a normal fashion. Okay. That's great. Thank you. The 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 now that the smaller players really jack prices high in 2018 and now to the point of being 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 we're not falling it's not the bottoms are falling out like it might be for some of the smaller peers. No, absolutely. I mean, if you look at our results, Walter, I mean, pricing the problem that we have, if you talk are you talking truckload or LTL or PD and C or This was truckload for sure and a little bit of some of the smaller guys, they were a little bit all over the map, but yes. Yes. Well, the big problem we have in truckload in Canada is very simple, is the driving situation in Ontario. I mean, the freight market has been soft. So and those guys keep on bringing new Canadians into this truckload market and hiring those guys through a driving model. So this is to me the big pressure. And for sure, the shipper, they like to use those guys because it's cheaper for them. So that's the kind of pressure that we see on rates right now. And also our answer is that, listen guys, I mean, 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. So, well, we don't see we see pressure on rates. We see more pressure on volume also. 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. And like I said earlier, October has not been the normal October that we normally see. But 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. But like you said, probably 1st 6 months is going to be not so good. Maybe the back half of twenty twenty will probably be much better. Appreciate the color as always, Elias. Thank you. Your next question is with David Ross from Stifel. Just a quick follow-up there on the comments about the tone in October and into 2020. Is that much different than you would have thought a few months ago? Well, to see the truth, David, I'm a little surprised about October. I thought that October, which we would start to see back to normal freight environment, but we're not seeing that yet. So I mean, maybe November will change the trend or maybe it's going to have to go into 2020. We don't know yet, but what we're seeing is still a soft environment. And if you look at the guys that came out this year so far in Q3 with the USCL, I mean, some of the guys are down 8%, 5%, 10%, volume wise, I'm talking about. So us, we're down also, but not so much. So we'll see. But 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. And then 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. How are you thinking about dealing with insurance at CFI and TCA given all of the jury rules, other issues. Yes. Yes, absolutely. Absolutely. Yes, absolutely right. And this is a fact for both Canada and the U. S, okay? So in Canada, we see a lot of pressure. The market for insurance is tightening up so bad. I mean, we saw a guy that just got a 75% increase in insurance premium. So the way we service Canada, us, is different than the way we service the U. S. So in the U. S, I mean, we don't use our captive or whatever. So we use really the insurance market. Our focus in the U. S. Has been safety. So 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 happens. So we've invested in forward facing camera because when we bought CFI, there was no camera on the trucks. So by the end of this year, according to what Greg is telling me, is that 100% of our fleet will be equipped with those facing forward facing camera. So 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. So safety is big. We've also invested within our new trucks with all the safety like collision avoidance, lane change, assist and all that. So that's been the focus for us in 2019. There again, I mean, we want to be renewing our policy in U. S. Our retention is quite high in the U. S. But the idea our focus as Dave is, okay, premium will be what the market is. And what do we do to do better is to have less of these accidents. So the quality of your drivers. So 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. So as you look at CFI, Greg was telling me that we probably have like 6 or 701,000,000 miler within CFI. So driver with experience help us. Also the turnover. So we're trying to focus on driver turnover. Turnover is another factor that is a negative, okay, in terms of insurance claim because you've got new guys, you've got guys that don't know the customer, don't know the area well, and they make a mistake and they, oops, we were involved in an accident. So I agree with you, Nate. The pressure on the rates, on the premium from the insurance company is great in U. S. And the same in Canada. And as our focus is, guys, listen, I mean, 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 Government, a lady that runs the safety department. She's really working hard in trying to educate safety and all that. And I feel good that we're going to be in a position to really reduce that. In Canada, I mean, our teams are very experienced there and we're doing a great job. Now we were hit with some claims from one of our operation from 4 or 5 years ago in 2019. But what we've seen so far, I mean, we are really under control in Canada. So we feel good about that. Now 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. And then on LTL, the quality focus there has been terrific as we've seen in the margin expansion. But when does the growth focus resume? When do you feel comfortable enough there to try to add more volume back to the work? Yes. Growth the problem with growth 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, etcetera, etcetera. 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. But I'm telling you, every LTL company that I look at right now, they're not highly profitable. There are some in Canada that are probably highly profitable, comparable maybe to us, but these guys are not for sale. I mean, these guys are running a good operation. So they're trying to grow their business slowly. But us, I mean, our focus is really on the bottom line. So I don't think that if you exclude M and A, you're not going to see top line growth in our LTL in Canada. No. But I think M and A is the solution like we've done in the past. I mean, if you look at what we've done, we bought Cavalier, we bought Normandin over the last 18 months and it's been fantastic. But in terms of top line, we're back to square 1. I mean, we're flat. Bottom line, we're flat. Top line, we're down. Excellent. Thank you. Your next question is from 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? And secondly, how your strategy differs in both of those markets pertaining to e commerce? Thank you, Alain. So the problem we have with our e commerce is that one player, okay, which is the largest player in North America. I mean, we basically don't service this customer or this company, because we made the decision that these guys are not part of the solution. So 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. So we have some great brick and mortar guys that have finally were able to understand how about the ecommerce market works and we're trying to grow with that. But 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. And are we making money on doing that? Probably, no. They came up with their numbers just a day or 2 ago. And in terms of delivery, their cost is just going to the roof because we're leaving me. We could do a good service, but we can't work with a customer that says that your margin is my opportunity, right? So there's no future for us in trying to work with this guy. So this is why for us, we're trying to work around the largest e commerce guy and trying to grow faster. We could grow our e commerce at least by 100,000,000 dollars a year easily if we sacrifice the bottom line. Well, I said to my guys, we can't do that because us I mean, if we don't have any bottom line now, why would we have investors? The guy would say, well, they'll say they're running a great company, but they don't make any money. So I mean, 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. And then just one more question here quickly. Your overall business in Mexico seemed to have shrunk quite considerably, albeit it's a small number. But can you just talk about how that market is shaping up as we enter 20 20 and your growth strategy down there over the near term? Thank you. Yes. So 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 investments are huge. So we see a lot of potential there, okay? But so far, it's the results are not there 100%. Well, we keep on investing in our CFI 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. Now for sure, our focus is always to run a very profitable operation. So, if there's no money there for us, mean, we're going to shrink. We're going to adjust ourselves. So we're down. 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 ourselves accordingly. One of the things that's very important to TFI is the return on invested capital. I mean, this is key to us. And somebody comes to me and say, hey, we're going to invest $1,000,000 and make 2 points. No. Why would I do that? I mean, I'm going to take my $1,000,000 and invest in, I don't know, maybe RBC or one of those great Canadian banks and make 3 or 4 points in dividend. Why would I make 2%, take all kinds of risk? 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, 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. For that U. S. Margin profile to improve, is it really just cost cutting and maybe repricing some underpriced contracts? Or do you need to be bigger there? Like is M and A part of the strategy to maybe get scale to have a margin profile that sounds like it could be double digit? And is that necessary? Is that necessary? M and A is not necessary, but it would be a good plus. But really, the job has to be done by us, Kevin. I mean, we have to do the job in the U. S. Like we did in Canada, right? So don't forget that when we bought this company Dynamics in 2011, those guys were 1% to 2 point guys. They were happy with 1%, 2% bottom line. So it's a huge culture change. We had we've been doing a better job in Canada and trying to change this culture. And in Canada, we're running a double digit EBIT company now for the last 2, 3 years. So but Canada is smaller, okay, is smaller. So 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. So it was much easier for us to change the culture and the philosophy in Canada. So what we're doing now is through all these M and A, okay, because don't forget, the U. S. Excuse is that, well, we are competing with Beavax and those guys don't want to make money. And we're competing with Dycom U. S, those guys don't want to make money. That it's true. So those guys are gone now. So yes, but there's others. Okay, fine. But in the meantime, we have to change a little bit the culture and be more focused about being hungry for making money. And 5 points to me, it's not making money. It's not. So I mean, the guys, they understand that we have to do a better job. And the guys are really focused. So this is why I had a meeting with them last week in Dallas. And she is 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. Now 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. And 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 2%. So we have to work with our customer, 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. Now, don't forget, it's when you have BeavEx as competition and those guys says, well, real estate for us is not a problem. So we'll we'll we'll rent more space for it to please the customer. And us, we say to our guys, no, no, no, no. We no, no. Real estate, no. We'll work off your dog. So now, BeavEx is gone. So those guys that didn't understand that, no, no. You don't want 5% because don't forget, BeavEx 200,000,000, those guys are running at like 80 locations. It's completely stupid. I mean, we run us about 60 some location right now within our last mile in the U. S, which is plenty. And we could add more volumes. So if ever there's another potential acquisition in the last month, for sure we're going to look at it. That's helpful. And then just turning to your specialized TL, I recall maybe a quarter or 2 ago in terms of conference calls, you had 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 and A in there, but it is a one division, as you noted, that's shown a degradation in that OR on a year to date basis. Just wondering, are you seeing that pricing power? If I were to take out M and 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've been you were talking about a couple of quarters ago into the bottom line within specialized TL? What's happening, Gavin, 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 state tariff is 1. The level of uncertainty in the global economy for our customers to invest or not to invest. So it's been a tough haul for us with the side bed business in mostly in Ontario. I mean, we do side bed in Quebec, but not so much compared to what we do in Ontario. We feel good. I mean, Steve Brookshaw, that's his strength. I mean, he used to run the flatbed division and he's highly involved working with Christine, the leader we have there. I mean, we have a fantastic team. So we're going to turn the corner there. Now at the same time, we got hit with those strike GM. Okay, you say, well, the strike is only a month old. But it's affecting us because don't forget, when the guys feel that there could be a strike, whoop, they slow down. They slow down because they don't want to get stuck with too much product. So this strike hopefully gets resolved. So but it will affect us for the rest of the year. And hopefully, in 2020, we'll be back to normal. At the same time, we have those guys at mag, Volvo mag that decided, oh, no, we're going on strike. So again, that affects our aluminum shipments to the U. S. It affects some of our steel shipments to the U. S. With those strikes. So those guys are saying, no, let's stop. Don't send us anything. So this is why if you look at our specialty truckload, we did very well with our M and A in the U. S. Our Chilean Olive acquisition, fantastic. If you look at what we've done in Quebec, the Bracer acquisition turned out to be good. We had a little bit of issue with the one that we did on the cement hauling business. So 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 need. So we're going to adjust ourselves there. But we have a plan. We know what needs to be done. So when I look at my OR in my special TTL at 87 and I look at the van division in Canada, let's say 83, there's a disconnect there. I mean, it's not normal that your van guys are doing better than the specialty guys. Right. Absolutely. So this is what I'm saying is that our van guys are doing fantastically well. Okay? Perfect. I'm very happy with that. Now with like I said earlier, with this drivering situation, it keeps on growing. It's like a cancer, that could affect our van division. But at the same time, our specialty PL guys are doing a fantastic job. So what I see probably in 2020, maybe if this dry brain cancer continues, we could have pressure on our OR with our VAN division. But 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. So those guys should be closer to an 84, an 85. And we know where the problem is. The problem is, is mostly on the Canadian side, in Ontario flatbed and into our some of our specialty operation in Quebec 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. Bedard. Well, thank you very much, operator, and 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 of our business principle. I 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. So we're excited about the opportunities ahead. And I look forward to updating you again on our progress. So 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.