Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the TFI International second 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 will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. Before turning the meeting over to management, please be advised that this conference will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I'd like to remind everyone that this conference is being recorded on Friday, July 26th, 2019. I will now turn the conference call over to Alain Bédard, Chairman, President, and CEO. Please go ahead.
Well, thank you, operator, and thank you everyone for joining us this morning. Yesterday, after the close of trading, we released our second quarter results. If you need a copy of the release, please visit our website. We continue to have a record year due to our steadfast commitment to executing on the fundamentals of the business, regardless of the economic cycle. This remains the case at TFI International, despite the recently declining freight trends. This focus on the fundamentals allow us to drive strong and consistent free cash flow and earnings per share that we know our shareholders appreciate and that allows us the flexibility to optimize our approach to the business. As a reminder of what this sharp focus entails, during the second quarter, our team constantly drove operating efficiencies. We pursue an asset-light business model.
We maintain our strong balance sheet, and we sought accretive business acquisition in a highly disciplined manner, completing three during the quarter. I assure you this focus will not change given our aim of generating not just growth, but profitable growth, all in the interest of creating and unlocking shareholder value, and whenever possible, returning excess capital to our shareholders. Taking a look at our second quarter results, our overall revenue grew 2% year-over-year to CAD 1.34 billion, the highest quarterly revenue in our company's history. More important to us, given our focus on profitability, not just the top-line growth, operating income from continuing operation was up 21% to CAD 149 million, and our adjusted EPS from continuing operation on a diluted basis was up 19% to CAD 1.18. We had two largely offsetting one-time items this quarter.
First, we recognized a gain on acquisition of CAD 11 million related to the BeavEx transaction in April that you'll see in intangible items. Second, we took a CAD 12 million legal charge net of tax recovery related to an accident in 2012 in our legacy rig moving business that you'll see in discontinued operation this quarter. Our strong operating results this quarter stem from the continued growth and profitability of our business. Let's have a look at each segment now. Our P&C represents 13% of total segment revenue, and revenue before fuel surcharge was flat at CAD 159 million. Operating income held constant at CAD 30 million, and the operating margin was 18.9% versus 19% in the corresponding period year before.
This stable performance came despite a general slowing in the freight environment, which we believe reflects our commitment 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 19% of total segment revenue and generated revenue before fuel surcharge of CAD 219 million relative to CAD 239 million the prior year. Most importantly, our operating income climbed significantly to CAD 30 million, up 22%, and our operating margin jumped 340 basis points to 13.8%. This strong performance reflects a 14.6% increase in our revenue per hundred weight, excluding fuel surcharge, as we continue to focus on the quality of our freight. Our truckload segment represents 49% of total revenue and generated revenue before fuel surcharge of CAD 570 million, up a solid 9% over the prior year period.
Truckload operating income expanded significantly, up 21% to CAD 67 million, as our operating margin increased 120 basis points to 11.8%. Our adjusted operating ratio were 87.1 for the Canadian truckload, 87 for the specialized truckload, and 90.2 for our U.S. truckload. The U.S. truckload figure represents a significant improvement of 430 basis points compared to our earlier performance. Logistics and last mile represents 19% of total revenue and generated revenue before fuel surcharge of CAD 245 million relative to CAD 247 million in the prior year's second quarter. Our operating income benefited from a one-time gain. The BeavEx acquisition was CAD 29 million, or CAD 18 million net of this gain. Our Canadian last mile operation, led by Kal Atwal, have over time produced a significantly higher margin than in the U.S.
We're pleased to have announced earlier this month that Kal will now be responsible for our U.S. last mile operation in addition to Canada. Let's turn to our capital allocation. We've invested CAD 78 million in business acquisitions during the quarter, and we returned CAD 85 million to our shareholders, including CAD 20 million of dividends and CAD 65 million of share buybacks. As of now, we've executed on the entire buyback authorization for the 6 million shares that was first granted in September of last year. Earlier this week, our board approved management's request to increase the maximum number of common shares available for repurchase under our current NCIB by 1 million shares, and we have approval from the Toronto Stock Exchange.
Going forward, our capital allocation plan remains consistent as we intend to buy back shares and extend our track record of identifying attractive acquisition opportunity, executing on them in a highly disciplined manner. In terms of our full-year outlook, we're pleased to increase our guidance for full-year adjusted and diluted EPS from continuing operation to CAD 3.90-CAD 4, up from previously stated range of CAD 3.80-CAD 3.90. With that, operator, I would be pleased to take investors' questions. If you could please open the lines.
Thank you. Once again, that is star, then one, in order to ask a question. Your first question comes from Jason Seidl with Cowen. Your line's open.
Thank you, operator. Good morning, Alain. I wanted to focus a little bit on your trucking segment in the U.S. Clearly an excellent job by you guys in an extremely tough environment when we look at some of the other results. Can you go over some of the aspects of that 430 basis point improvement and what really drove that?
Well, as we said, Jason, we have a fantastic team now running our U.S . Truckload operation under the leadership of Greg Orr. Like all the discussion we're having with Greg, it has always been turning around, we got to be lean and mean, as we always say, the tiger is always the last one to survive in the jungle. We know that the freight environment in 2019 is not the same environment as it was in 2018. That being said, we've also said that with Greg and his team, we said, "Guys, we got to work on the cost because this is something that we can control." We cannot control the market. Market, you got up and down and all that.
If you are lean and mean and you control your cost and you're doing a better job on that, you would bring the results like the guys are doing now. What have we been working on is the same story is. Let's get the miles to the driver. Let's get quality miles to our driver. Let's make sure that we use the asset to the utmost limit that we can use them, the trucks and the trailers. Let's make sure that we don't have equipment sitting at the fence like it used to be the situation a few years ago. Let's work on our fuel economy on our trucks. Let's make sure that our maintenance cost is in line. If I look at history, and I could say today that our CFI team on the maintenance cost is as good as our Canadian operation now.
We still have some work to do at TCA. Basically, the MPG, the usage of the equipment, the miles and all that, these are all things that we've been working on, okay, with Greg. We are investing in some technologies, because right now TCA financial system is not the same as CFI. By the end of this year, okay, our TCA management team will be running the same Lawson financial software that our CFI team. Now Greg, it's easier for him to oversee both operations. We're also looking at our TMS to run because we still run in a very old platform, both TCA and CFI. This is going to be a major investment of ours into 2020. Once we're done with Lawson, we're going to be working on the new TMS. That'd be the CFI, TCA, TMS for the U.S.
The focus there has always been, guys, okay, let's take advantage of the market. Market is up, okay, fine, but let's never forget about cost. We got to be very cost-conscious, efficient, improve operation, and this is what we've been done. If you look at that now, we're combined operation-wise about 90- point something, 90.2, I think. It's quite an accomplishment if you just compare it to a year ago, and if you compare it to two years ago, this is just magic. How is that possible, okay? Our team, we're very proud of our team now in the U.S. that are running our truckload operation, very proud. Like we are proud of our Canadian team because if you look at our special ty TL and our van division in Canada, we're running an 87% OR in also a difficult environment there.
No, that was a clearly a good job in the quarter by you guys. How should we think about that OR sequentially in that truckload division moving forward? Are there still costs to take out when we look at the back half of this year? Is this something, hey, it's a difficult market, if we can maintain this, that's great?
Well, the way we see it, Jason, is that our plan remains basically the same. We see the rest of the year being soft, okay, in the U.S. and the same in Canada. The freight environment is still going to be soft in our mind. Hopefully, I'm wrong and it's going to be stronger. This is why our guys like Greg Orr and Steve Brookshaw and Ken Tourangeau, those guys are really focused on let's make our operation even more efficient than they are today. Now, like I said earlier, we cannot control the market, but what we can control is our cost. Our focus is going to be, guys, let's get costs even better than what we have today. It's an ongoing, always try to do better.
Based on our plan and based on our guidance, okay, we're improving our guidance on an EPS by CAD 0.10 only, okay, which is not a lot because we're conservative. In this plan, it's based on the fact that our truckload will perform, okay, about the same way as they're performing now. Hopefully, the market does not create too much of an issue for us.
Yeah, I'll knock on wood for you here. Next question, I just want to jump to the LTL before I turn it over to somebody else. Obviously, you said you improved the freight quality a lot. I know you guys before really focused on cost before streamlining that network, taking some of the cities out. I wanted to know how much of it was freight quality, how much of it was the cost turnout? Also with your freight quality, how much customer turnover did you have, and what is your mix now versus before?
Yeah, that's a very good question, Jason. In terms of our focus on quality of freight, our philosophy over the last two years has changed tremendously because Canada, it's a big country and you need density because serving a customer with LTL costs a lot of money versus, let's say, a P&C shipment. You got to make sure that you got some density. What we've been doing over the last two, three years is that our network has been focused on dense areas of Canada, okay, which we've accomplished. At the same time, we've introduced tools, okay, like FreightSnap and all these tools to make sure that there's no cheaters in our system. All the pricing, most of all the pricing is done on a per weight basis.
Somebody tells you it's 1,500, then you're in a rush, 1,500 lbs, and it's actually 2,000 lbs. Now we're doing a better job on that, making sure that all the accessorial, all the different stuff is invoiced to the customer, like it should be. Also, what we've said to our guys is that, you cannot be in the business of hauling minimums at, let's say, CAD 50 for a pallet between, let's say, Toronto and Montreal. This is not for us. This is a loser. We've cleaned all these shipments that don't fit the network, that don't fit the philosophy of the company. We're not in the business of practicing delivery. With us, we're in the business of making money, serving customers on behalf of our shareholders. That's the vision of TFI. This is the cleanup.
If you look at our revenue, our revenue is down, okay, for two reasons. One is some freight that doesn't fit the network or doesn't fit the philosophy of the company, and also the fact that LTL in Canada is shrinking because my customer of LTL are being affected by the e-commerce. The brick-and-mortar guys, the mall guys are being affected. The revenue has to come down in the LTL. This is why we've always been active on the M&A side. We should be announcing a small transaction in this segment very soon in Canada. At the same time, our focus has been on the intermodal because this is a cheaper solution for shipping across Canada from east to west. This is what we've built with Vitran, with NFF, and with Clarke over the last few years.
This is really an asset-light operation for us because line-haul has been done by the rail guys, and most of our P&D operation, I would say 99%, is done through an owner-operator or an agent. Again, this is the focus of, listen, let's propose to our customer a cheaper option if they want, which is the intermodal. If the guys want to be over the road, well, they got to pay a fair price because us, we need the fair return. In terms of customer churn, Jason, not so much. I mean, yes, for sure, we have a huge U.S. shipper that went on an RFP, and the guy says, "We're not making a lot of money. We need a cheap carrier." Well, I say, "Listen, thanks, but no thanks.
Deal with somebody else, and let's see what happens." Some customers that have left, okay, because of rates issue, some of them are coming back because they need the service.
Well, that's great, Alain. I appreciate the time, as always.
Pleasure, Jason. Take care.
Our next question comes from the line of Konark Gupta with Scotiabank. Your line is open.
Thanks, and good morning, everyone.
Good morning.
Morning, Alain. Just have a few questions here. One, you have beaten expectations on EPS, Alain, in the first half, and the industry is calling out for a normal peak season in the second half, obviously. It looks like you're obviously not done on the margin improvement. Any thoughts on the room for further upside in your revised guidance? What would be the key puts and takes in that could influence your guidance?
Well, you see, that's a very good question because us, we're very conservative. Yeah, if I listen to our model, okay, we could say maybe 4%, 4.20% or something like that, but there's so many things that are uncertain, okay, right now. In the U.S., for example, this China thing there with the trade. There's a lot of things that everything looks good when you look at it, the freight environment in the U.S. is still soft. Us, we're very careful because we don't control the market. We don't control the activity on the market. This is why we're careful, okay, with our forecast, and we say, "Listen, yeah, sure. I mean, CAD 3.90 to CAD 4 is doable." Can we do better than that? Probably. We'll see. Us, we like to understate the fact and overdeliver.
I don't remember exactly the right phrase, but underpromise and over-deliver.
Yeah.
That's the phrase I was looking for. We're not in the business to create mirage, and we're saying, "Okay, this is what we think that is attainable, doable. Hopefully, we do better than that." Right?
That makes sense, obviously, and clearly, we have seen that. Please continue to do that. Second on the margin. They were quite strong across the board and especially LTL. Looks like the pricing was very, very good there. My question is really, first, the pricing that you're seeing in Q2 on LTL side especially, is that sustainable in the second half of this year? Are you intentionally letting volumes go elsewhere if pricing does not make sense?
Absolutely. You're absolutely right. The reason that our pricing has improved so much is because we let go a business that didn't make any sense, that low margin. When I say low margin is when we talk to a customer and at the end of the day, our bottom line is 3%, we say, "Listen, Mr. Customer, with these rates, our profit is 3%." I cannot invest a truck or a trailer or an employee to service you for 3%, because I would be stupid to do that because the best thing would be to buy, let's say, Scotiabank's stock, and I would get more than 3% in dividend. Right?
Yeah, that one makes sense.
That's our thinking. Things change. There's always an evolution in the business. For instance, if the shippers' average weight two years ago was 1,100 lbs per shipment, now he's down to 850, okay, because his business has slowed. For me, I'm getting less money, and my cost is as much or maybe even more than it was two years ago. We have to address that. We're talking to some customers, and we're saying, "Guys, we need to improve the rates or have somebody else do the work." If these guys are in business just to break even, okay, good for you. Us, we're going to do something else.
Yep, that makes sense. That's great, Alain. Lastly on TL. Your U.S. TL business obviously continued to show improvement on OR side, which you were kind of expecting, I guess. What caused weakness in Canada and specialized in the second quarter, and then would you expect the U.S. to hit the mid-80% OR at some point this year or maybe next year?
Okay. Let's talk to Canada first. What has affected us really badly in Canada is our flatbed division. Our flatbed division in Ontario, mostly Ontario, is really suffering right now because of, we had first the story of the steel tariff. Steel tariffs created a mess in our flatbed because we're the largest hauler of steel in Ontario, flatbed. That was not good news for us. Excuse me, those tariffs have been removed now, but you can't turn a big ship on a dime. It will take months and months before we go back to normal. Probably we're going to be still suffering in Q3 and probably into four. Our flatbed has been affected badly. This is one of the reasons why we're running just an 87% OR, which is the same as our van division.
Normally, we should be running in Q2 an 83%-85% OR in our specialty truckload. That was part of the business that was affected badly. We've invested in a great company in the U.S., which is highly seasonal. Aulick is really highly seasonal, so it's a beach hauler. These guys are not really busy. We're busy, but not that much busy, but it becomes really crazy busy, okay, starting, let's say, August, the end of August into early in 2020, like January and February. This, again, it's something that's not showing up. That should improve in three and four. The flatbed has been a little bit of a rock in our shoe in Canada because of the steel tariff, because the rest of the business, our tank division is doing very well. Our stainless steel division is doing very well.
Our ball division is doing well. It's really the flatbed that has affected us. In terms of where do we see Q3 and Q4 on the U.S. side, I've always said over an average of 10 years, you have to be running a 90% OR because you're going to have some great years at 85%, and you're going to have some more difficult years at 93% or maybe 94%. I think that right now we're in the middle of this not great, not bad, so it's average. For me, if we can be steady at around 90% or maybe 88%-90% for the rest of the year, I would be a very happy camper.
Okay. Well, that's great, Alain. Thanks so much. Congrats on great results.
Thank you.
Our next question comes from the line of Fadi Chamoun with BMO. Your line's open.
Okay, thank you. Good morning, Alain.
Good morning, Fadi.
First question. Can you talk a little bit about the dynamic in this last mile in the U.S.? What do you think the issues are, and how do you go about fixing that?
Yes, absolutely. If you look at the way we run Canada, there's a huge difference into the EBIT of our Canadian operation and the EBIT of our U.S. operation. There's many reasons for that. Reason number one is that the U.S. market, we have way more competition from companies that are not doing well. BeavEx is one of them. We took on BeavEx just a few weeks ago. East Connection was also one of them. East Connection has been closed two, three months ago. There's another one that will probably fold within the next month or two. The market environment in the U.S., there's a lot of companies that are owned by people that probably don't like to make money or don't know how to make money in the sector. That's reason number one.
Reason number two, this is why we ask Kal, our Canadian guy, to help Scott, which is a great Scott Leveridge runs our U.S. operation. With the acquisition of BeavEx was not making any money. We said, "Kal, could you help our friend Scott there?" Okay. The market is starting to clean up. It's going to be a little bit better, but we have to shed costs. We have to improve our technology. We have to do a lot of stuff. Let's build a stronger team with the Canadian supporting and helping the U.S. team and vice versa. In my mind, okay, we have to improve the U.S. operations by at least 400 to 500 basis points, which means bottom line, CAD 20 billion-CAD 30 billion improvement over the next two years.
This is with the help of the market getting improved in terms of competitors that don't like to make money or don't know how to make money. I think that the crazies there are in charge of the asylum. Nobody's running the show. The fact also that we, us, have to work on our costs and be more efficient. As an example, our real estate cost in the U.S. is going at about 5%-6% of revenue. In Canada, we're running at 2%-3%. You cannot run a last mile operation at 5%-6%. As we know, cost of industrial space is just going through the roof with increases of 20%-30%-40% more because the demand is there. Us, we have to operate in a more efficient way. Right?
This is what the team effort's going to be to reduce our operating costs and at the same time, hopefully, that some competitors smarten up and start building a team so that they are focused on making money, not just growing volume. We could grow the company 20% in the U.S. easily, but at 2%. Us, we're not in the business of 2%.
Okay. It looks like there's a plan to go after this. I'm guessing the benefit of all these actions you're taking are probably more a 2020 story.
Well, it's now, okay, but it's going to take us at least a year to 18 months to bring the U.S. operation to at least closer to Canada. Canada, it's always the same story. We try to always do better. Okay. Let's say Canada, we're running at 90% efficiency, U.S., we're running at 50% efficiency. We got a lot of work to do on the U.S. At the same time, though, we have to digest BeavEx.
Okay. My second question is on the pricing. Can you talk a little bit about how the pricing environment is in truckload, conventional truckload, dry van in the U.S. and Canada, and how it's played out in the last few months and how you see that in the back half of the year?
Pricing is steady. We got a little bit of pressure, but globally, it's about steady. The problem we have is that the freight environment is soft. For sure, guys with lots of trucks and no freight, they get nervous and they call the world to get freight. For now, it's still okay because us, what we're trying to do is to fill the demand, the empty trucks that we have every morning, with customers that we already deal with. We're not on the web trying to find loads and here and there. That's our focus right now. We believe that this market environment is probably, now some guys are saying it should improve Q3, Q4. Our plan, us, is that there's no improvement. Hopefully, there is. Pricing environment in Canada is okay. It's not great, but it's okay.
We feel a little bit of softness on the East Coast, like Ontario, Quebec. We have a situation in Canada with what they call the Driver Inc. syndrome, where we have unfair competition from some companies in Canada. That creates a little bit of pressure on rates. Besides that, we feel good. We have our costs really under control. We're still working on them on the Canadian side. For sure, where we have some opportunity is with our specialty truckload, because we took on a lot of M&A in our specialty TL, both in Quebec and in Ontario. For sure, when we're buying a company, those guys are not running an 87% OR. Okay, so if they're good, they're running a 92% OR, a 93% OR. Some of them are running a 95% OR.
This is why our guys, like Steve Brookshaw, our team, are really busy in shedding costs in all the M&A that we've done over the last 12 to 18 months. Yes, we could see some improvement in our cost basis in our specialty truckload within the next six to 12 months. Right?
Okay. Great. Thanks a lot.
Pleasure.
Our next question comes from the line of Walter Spracklin with RBC Capital Markets. Your line is open.
Thanks very much. Good morning, Alain.
Morning, Walter.
Focusing in on your outlook, you've changed your tone quite a bit here. I think you're noting, you mentioned a mixed economy, the potential for more challenging trucking conditions, and I'm wondering, just looking at the volume, I know a lot of the volume that went away, you sent away on purpose and getting rid of bad volume is always a good thing. How much of the volume decline that you saw across your divisions was actually economically driven, that is, wasn't de-marketed volume, it was just lower same store volume because of a weaker demand environment among your good customers?
Well, let's talk about P&C. What we're facing now in the P&C is our customer in the mall, in the brick-and-mortars are slowing down. Okay. Our e-commerce customer are going up. You look at my revenue, my revenue is flat, but I'm trading mall for e-commerce right now. This is what's happening, okay. My LTL, okay, what we've done is, like I said earlier, we shed the business of all these guys that could not afford a carrier that wants to make money. This has been the focus and we're CAD 12 million less in revenue in the quarter. A lot of that had to come from the Kingsway, TST Overland combination a year ago.
That's still as a comparison, we're comparing that and the NFF acquisition that we did about a year and a half ago, where we bought a company at CAD 80 million and today the comp and losing CAD 8 million-CAD 10 million, and today it's a CAD 50 million making CAD 5 million-CAD 6 million. This is ongoing, and at the same time, like I said earlier, the LTL, because of the e-commerce, my customers are suffering. To have a 3%-4% negative growth in the LTL, to me, it seems like normal because business is changing. On the truckload side, we don't shed really customers there. We did that in the U.S., until probably like late 2017, early 2018. Right now in the U.S., I mean, it's just business as usual. We're happy with the customers we have.
We're trying to improve our mix of customers, but there's no real major change in our customer base. The same thing with our Canadian truckload. I mean, we've got some good customer. The only area where we see a little bit of change is in our special ty TL, where we have an issue in the cement hauling business with some Driver Inc. there. This phenomenon that we have mostly in Ontario that is really unfair, we have that. Basically the rest of our steel or lumber or chemical or food grade business, it's really steady. It's really trying to improve our costs on a day-to-day, because if you look at my improvment in my LTL, this is not the market. Market rates did not improve 13%, 14%. No.
It's just that we got rid of all these guys that are cheap that want you to be a 2% guy. We said, "Thanks, but call somebody else," because us, we manage our capital, and we can't invest capital for a guy that wants us to be a 2% guy.
Makes sense. You continue to be a good free cash flow grower. Do you have an updated guidance on that for 2019 in terms of your free cash flow?
Well, this year we're buying back a terminal in Toronto that's going to cost me CAD 38 million. Okay, the Vitran terminal in Toronto. We're also investing CAD 10 million, a little bit more than 10, CAD 10 million to CAD 12 million exceptional in Calgary for our Canpar, Loomis hub in Calgary. That's going to open up late in the year. That being said, and that being in our free cash flow for this year, the net will be about CAD 400 million.
400, yeah.
After paying for those CAD 50 million of special one-time major investment. In 2020, we're building also in Calgary a new intermodal hub for our Vitran, Clarke, Quik X operation in Calgary. That's going to be, we own the land, but the building is going to cost us between CAD 15 million to CAD 20 million. This is going to be 2020, though.
When we look at your net CapEx for 2020, we should at least see it hold in given some of the one times you did this year. You'll do a few more one times next year.
Yeah.
Not a big change in your CapEx for next year, is what you're saying?
No.
Okay.
No.
Okay.
This year, the one time, because of the building in Toronto and the equipment in Calgary, is about CAD 50 million. Next year, we're buying back another terminal in Montreal, and we're building a new one in Calgary, which is going to cost us about CAD 50 million. It's CAD 50 million this year, CAD 50 million next year, which is exceptional, which is building. That being said, even with that, investing the cash, we're still left with about CAD 400 million of free cash flow after paying for those CAD 50 million investments.
Right. When you look at your free cash flow then after that CapEx, and let's say after dividends are paid, you've got a dollar of free cash flow left. What are you earmarking in terms of buyback versus acquisitions? How would you expect to divide up that dollar after, whether it's through more dividend growth, what kind of mixture of that dividend growth, buyback, and acquisitions are you targeting?
Well, first of all, I think that we will change our dividend for 2020. Right now we're at CAD 0.24 a quarter. I think my recommendation to the board will be in October at around CAD 0.27, CAD 0.03 more. Because our policy has always been to get at least 20% free cash flow back to our shareholders in terms of dividend. Now, after the dividend, our philosophy has been, there's no big whale. There's nothing major happening in 2019. There may be something more of size in 2020. This is why we've asked the board to approve that 1 million shares, which we're going to do right now until the end of September, and we've also asked for CAD 7 million for 2019 to 2020. That will come within the next few weeks as soon as the TSX approve it and all that.
Unless there's a big, big whale for us in 2020, which we're working on, but you never know, that could be 2021. Unless we have that for sure, the focus is going to be reduce the share count. We love to buy our stock at more than 10% free cash flow a year. We love that, so this is what we're doing now. We love to do that. For sure, if things remain the same and there's no big whale in 2020, we're going to buy back another 7 million shares to bring the share count down to 75 million shares.
Great.
We'll for sure do probably like CAD 200 million - CAD 225 million of small tuck-in. We've got so many opportunities for growth based on the recommendation of our great operations team that we could easily spend next year at least CAD 200 million on good tuck-in M&A.
Okay, sounds great. Thank you very much, Alain, as always.
It's a pleasure, Walter. Take care.
Our next question comes from the line of Cameron Doerksen with National Bank. Your line's open.
Yeah. Thanks very much. Good morning. Maybe just follow up on the M&A you just discussed, the potential for tuck-in. Given that maybe the freight environment in North America has gotten a little softer here, are you seeing-
Yeah.
Some, I guess, more favorable valuations in the things that you're looking at?
Absolutely, Cameron. You're absolutely right, because there's two things that helps us. First of all, the valuation, let's say the four or five times or whatever it is, has come down. For sure. Your valuation factor is on an EBITDA that's lower than, let's say, 2018. It's a double whammy for us as a buyer of companies. This is why, like I was saying to Walter, for sure, we're going to be investing at least CAD 200 million on M&A in 2020. You should see us between now and the end of the year with maybe just a few deals, because we did about that this year, and we have to digest what we bought.
Probably three and four of this year is going to be much quieter than one and two, but we're getting ready for a good M&A year for 2020 of about CAD 200 million. Maybe a big whale that's going to change, like a CFI changed the company in 2016, late 2017. Maybe. We're working on that. You got to be patient and you got to be focused on what you're trying to do.
Right. Absolutely. Maybe second question, just on the P&C segment. The margins there continue to be very good, but I wonder if you just talk a bit about the competition, because if I look at one of your big competitors there, Purolator, they made a big announcement not too long ago about significant investment in their network.
Yes.
Including an expansion of capacity. I'm just wondering what that means, do you think, for the competitive market, and also, what does it mean for your requirement to invest more in that business?
You see, Cameron, the competitor that you talked about, they made a choice. They made a choice that they'll piggyback on the largest e-tailer in North America. Us, we made the choice of not investing for those guys, like FedEx. FedEx said, "We're not going to invest for those guys." We're saying the same thing. We're servicing that guy in small markets like Victoria, Regina, and all that, but we're not investing for that guy, for let's say, Toronto, Montreal, or Vancouver. Us, we're investing for other customers. This is why we're investing in Calgary right now for our new hub for Canpar, Loomis. 2020, we're going to be working on Edmonton, because Edmonton has to be done after Calgary, and we've already started for Toronto, because we have to do Toronto in 2023. We are investing in customers where you can make money.
If I have a guy that says to me, "I don't make money in my distribution." You should not. Or if the guy tells me, "Well, your margin is my opportunity." I don't really like that kind of statement, so I'm not going to work for you. Okay. This is why us, we're way more conservative than the other guy, and we're investing with the knowledge of we don't want a 50-year payback on the investment. It's a little bit long, so it's got to make sense. If you think about Calgary, what we're doing is we have a payback of about three years on the Calgary. Three, four years, depending on who you listen to. Makes sense. Better technology, more efficient. Like Toronto, it's going to be the same thing because our JCC center is very close to capacity right now.
The first step is that we're going to do a move with one of our satellite, and then we're going to do the JCC center Phase 2, probably like 2022, 2023. We are investing, Cameron, to answer your question, but in a smart way for customer where we can get a fair return.
No, that absolutely makes sense. That's all I had. Thanks very much.
Thank you, Cameron.
Our next question comes from the line of Benoit Poirier with Desjardins. Your line's open.
Hey, good morning, Alain, congratulations for the good quarter.
Thank you, Benoit.
Yeah. Just to come back on the M&A, I understand that you don't expect a lot, still modest M&A for the back half of the year. Just looking at big whales, are there any particular segment where you believe a big whale could be catch eventually in 2020, 2021?
If we look at the last mile operation, okay, we did our friend BeavEx, which added about CAD 100 million to our revenue in the U.S. We're looking for sure to beef up our last mile operation. It's tough for us to do in Canada, but I think we could do more in the U.S., okay, and we're working on that because we believe that the last mile operation that we have is the most efficient way to service e-commerce. Okay. We have a next day operation in Canada that service e-commerce, but this is based on customers' demand and all that. It's a great way to service the e-commerce, but is it the most lean and mean way? We don't think so. If the customer has some distribution center in the major cities, last mile is the way to go in our mind.
That being said, this is one of our focus in the U.S. One thing is for sure, LTL, like I said earlier, is shrinking every year because of the e-commerce. That's also an area for us to keep an eye open if we could catch something of size in that sector. On the specialty truckload side, we've started slowly in the U.S. We bought two good companies, Schilli and Aulick, very happy with what's going on there. As you know, our mix in Canada between regular van and specialty is about 50/50. In the U.S., it's about 90/10, or 80/20. We want closer to a 50/50 mix in the U.S. That's also an area that we're really looking at. There are some good companies there that could be interesting for us, so we keep an eye on that.
The only P&C, it's tough for us to do something in Canada because there's not a lot that we could put our hands on. If you exclude the big guys, there's not a lot of guys left to do something on the M&A side. This is why P&C is probably a little bit more difficult, but LTL, last mile, and specialty TL is really where our focus is. We're working on a few things, and like I said earlier, patient is the name of the game in our world of M&A.
Okay.
You got to take your time.
Okay. LTL, would it be fair to say that it would be only Canada, or you could maybe look at the LTL in the U.S. as well, Alain?
Well, like I said, for sure Canada. We're looking on the Canadian side because we're the largest player in the LTL. If a nice opportunity comes up in the U.S., absolutely, we'll look at that. We have a great partner. That's the way we service the U.S. today. Maybe one day, if you could buy the partner, I don't know. It could be an opportunity on the U.S. side, absolutely. We like the LTL world, okay, in the U.S., it's a market that is way more, how would I say it? Less players, more discipline than the Canadian market.
Okay. Very good.
More discipline. The U.S. is more disciplined than the Canadian market because there's less players.
Okay. Just on BeavEx, could you talk a little bit about the integration of BeavEx versus your initial expectation? How does it go on this side?
It's still early, Benoit. What the guys are saying is that right now we're addressing a lot of issues. Those guys didn't make any money, okay, for two reasons. Reason number one is they had too much real estate, too many staff, too many of too many. Their costs were through the roof, number one. Number two is, as normal, when you have a weak management team, you also have shitty rates with customers. That's the other issue that we have to address slowly. We're in discussion with some customers that took advantage of BeavEx because it's just normal. If the guy doesn't know what he's talking about, then you can take advantage of the guy. The shippers are smart, okay? We're working on that now as we speak.
This is why with Kal and the support of all the team there, it's still early because we bought the company just a few weeks ago, but we're busy. We're busy fixing situation. Everybody knows in the U.S. that when we're running five to eight points behind the Canadian division, there's something wrong. There's something wrong because in Canada, we don't have a BeavEx that was not doing the right thing. In the U.S., we had BeavEx, we had Velocity, we had this guy and this guy and East Connection and this. We have to work better on the cost. The integration of BeavEx to what I know so far, it's going well, and it's according to plan.
Okay. Alain, when we look at the overall valuation of your stock, currently trading close to a five-year low, obviously valuation is much lower than it used to be. You've been disciplined in the past looking to make some potential divestiture. You've done it on the waste side. Do you see any opportunities right now to create value for shareholders, or you prefer to grab some M&A opportunities given that the valuation is more attractive? How do you look at some potential divestiture given your current valuation?
Well, there's two ways to answer that. Number one is I'm happy, okay, because it creates an opportunity for us to buy back our stock. Like I said earlier, we should probably reduce the share count by eight million between now and the end of 2020, which is about 10% of our shares. That being said, you're absolutely right in the sense that if people don't see the value of TFI, then what you do is you buy back the stock, or at the same time, you could divest of an asset like the waste, like you said, that was sold for about 11 times EBITDA when the company was traded at maybe six or seven at the time.
For sure, if you look at the way deals are being done, okay, I will just say an example of when Dicom Canada was bought by GLS, which is owned by Royal Mail. You look at this transaction and you say, "Wow." Then you put the same valuation to one of TFI's business and you say, "This doesn't make any sense." Yeah, it's something. My job is to make sure that we allocate capital properly and then we're on plan. Also, when I see an asset like the waste, and we may have some other assets within TFI that are so undervalued based on market evaluation today, that maybe it's something that we're working on. Time will tell.
Okay, perfect. Just a quick one for me. You mentioned an update on the free cash. What about your CapEx, Alain? Is it still CAD 200 million-CAD 225 million is kind of the good number for this year and next year?
Absolutely.
Okay, would it be the same in 2020, Alain, in terms of CapEx?
If there's no huge transaction, it will be in the same ballpark. We don't anticipate to reduce our CapEx because some of the truckload guys in the U.S. are saying, "Oh, we're going to reduce our CapEx." No. We're not reducing our CapEx, okay? The only way we will reduce our CapEx is because the business does not warrant investing in a truck because the profitability of this account does not make any sense.
Okay, perfect. Thank you very much for the time, Alain.
Pleasure, Benoit.
Our next question comes from the line of Nav Malik with Industrial Alliance. Your line is open.
Thank you. Good morning. I just wanted to follow up on the capital allocation, and I know you're being aggressive with the share buybacks, but what about in terms of debt repayment? What are your thoughts on paying down debt versus the share buybacks?
Well, you see, our approach to leverage has always been the same. We like to play between 2 and 2.5. Right now, we're at about 2.25. With all the buyback that we've done, we bought back, what, about 6 million shares so far, trailing 12 months. So we feel good about that, and as long as we play between the 2.5 and 2, we feel really good. Maybe what can happen is, and the same thing in the past, if there's a big whale in a transaction, that could push, let's say, the leverage to 3 or maybe 3.25. Okay, what we do is then we have to be careful with the buyback because then we have to spend more of our capital repaying our debt.
Yeah. I guess that's my question in terms of the balance between share buybacks and debt. It certainly seems like you're being very aggressive on the share repurchases. I'm just wondering why not allocate some more capital, some more of that free cash flow towards debt repayment rather than share repurchasing.
Well, because the cost You see, my shares cost me a fortune right now in terms of the dividend and the yield versus very low interest rates. That's why our decision is let's focus more on buying back the share versus reducing the debt. We're working on something right now that, again, is going to lower the cost of our debt. We feel good. If you go back in history, because we always look at history, and you go back into the 2008 major recession. Our revenue went down 20%, our EBITDA went down 20%. Our debt at the end of 2008 was CAD 800 million. Our debt at the end of 2009 was CAD 675 million, if I remember. We went through all this storm. Okay? We feel very good. Now, let's say that the same thing happened now.
Excluding IFRS thing there, TFI's EBITDA would be what? Let's see, CAD 800 million goes down 20%, goes down to CAD 650 million. Our debt is CAD 1.7 billion today, so CAD 650 million times three. Our leverage would go up to very close to three. If there's a 20% drop in revenue, then there's a 20% drop in CapEx, which is just normal. Your debt comes down. We feel good. We do all these scenario now.
Okay.
We're not in the business of not knowing where we're going. I've done that for 40 years. We have a vision. We can make mistake. Yeah. Right now, when I look at the stock price at CAD 38, I'm so happy of buying it back. We trade at less than 10 x earning. The normal average of 10 years between 15 and 17 for a high-quality company.
Yeah.
To me, wow. I've got some shareholders in the U.S. that says, "I think stay in Canada, don't come to the U.S. market because we're buying your stock and we're just laughing all the way to the bank. Don't get into the New York Stock Exchange. Don't do that. Stay in Toronto. We're buying the stock and we're just laughing.
Yeah, fair enough. Okay. I just wanted to move to the U.S. truckload side. Very impressive results in the quarter, certainly in terms of your improvement in the operating ratio. I'm just wondering if you could comment, some of the U.S. truckload carriers were talking about an oversupply of capacity potentially correcting itself or potentially correcting by year-end. Are you of the same view? Maybe you could comment on how you're seeing that market unfold.
Yeah. If you look at the Class 8 trucks that are being sold and the cancellation order and all that, this is the stupidity of our industry, is in the good times like 2018 on the rate side, we buy more trucks, we add capacity, and then we end up with the 2019 market, okay, being soft for a few reasons. One, because of the Chinese tariff, there was pre-buying in Q3 and Q4 of last year. If you pre-buy Q3 and Q4 of 2018, then you got too much inventory. Well, you got a lots of inventory in Q1 and Q2. That affects the trucker. Soft environment, some small truckers panic, okay, they see, ooh, I've got new trucks coming, and it's the stupidity.
What the truckload guys in the U.S. are saying is that this should resorb, okay, early into next year or maybe late into this year. I'm not a magician. I cannot say that. I don't know. The only thing I can say is my team under Greg Orr, those guys are focused on cost and becoming the AA team in terms of being lean and mean. This is the focus. If those guys are right that the market will start to improve late in 2019, we'll take advantage of that. We're not hoping for that. Our focus to us is let's work on something that we control, which is us, our cost. That's how we manage our business. If these guys are right and the market start to tighten up and the rates starting to get better, for sure, we'll adjust ourselves to the market.
Okay, great. Thanks very much for the color, Alain.
Pleasure, Nav.
Our next question comes from the line of Kevin Chiang with CIBC. Your line is open.
Hey, good morning, Alain. Thanks for taking my question. Just one for me. You talked a lot about growth through acquisitions here as a way to maybe offset some of the potential softness that could be coming down the pipeline. When I think back to, I guess, the freight recession a few years ago, there was some difficulty in integrating some of the assets you had acquired there. You had to put in a little bit more capital to get it to work, and we're obviously seeing the benefits of that today.
Just wondering, when you look at your due diligence process today, and given the outlook's a little bit more uncertain, is there anything you're doing differently to make sure that the earnings that you're buying are stickier or that the assets you're buying are of the quality that you think that they should be, so that there isn't some sort of unforeseen negative surprise when you start folding these in? Has anything changed over the past few years, post the freight recession we had back in 2015 and 2016?
You see, Kevin, when you do M&A, there's always risk.
Right.
You could do due dil for two years, okay? You think that you're safe 100%, but you're never safe 100% because there's always something that may happen that was unforeseen. Okay? What you have to look at is, what's your average over 10, 20 years of What's your batting average? Nobody bats for 1,000. If you bat for 400, you're great. Okay? If you look at TFI's history, when we bought CFI, okay, sure, we were disappointed. We were disappointed. In our due dil, we use all kinds of people to help us with the due dil. There's some information that in M&A, the seller is always very cautious because you're competing with him, which is customer information. You know?
If you look at the CFI acquisition, the big problem we had there, number one problem, is we had about CAD 60 million of freight that did not fit the network, with terrible rates, and it took us close to a year to get rid of that. Right? That's something that we could have done another three years of due dil, This is information that is never available because you're buying and you're competing with the guy. He's not going to show you his customer list. Right? There's always things that may happen. Us, we have an experienced team, and I think that the proof is in the pudding. We've done a lot of acquisition. If you look at some roll-up in the U.S., some are good, some are still looking good, and some don't look too good.
If you look at TFI over 20 years, we took this company from CAD 100 million, losing CAD 10 in 1996, to CAD 5.5 billion today, and making what, CAD 400 something?
Right.
This was done through smart M&A, because this is my job. This is what I've done when I was with my previous employer, and this is what we've done at TFI. There's no certainty on M&A. You could do whatever you want. There may be some surprises, but we got the A team, right? Our team are looking at that and saying, "Hey, Alain, we're going to fix it." CFI was more difficult because we didn't have a lot of bench strength in the U.S. Now I could say that we have a hell of a team. We have a great team in our van division in the U.S., no question about that. We could take on more. On the Canadian side, we're second to none.
That's fair enough. Great color there as well. If I could just ask one last question here on the EPS guidance range. I know there's been some moving parts, and you acknowledged that in your opening remarks about the market being a bit softer, that you're folding in some M&A.
Yes.
If I were to look at the buckets from the CAD 3.54 of adjusted EPS you had last year, moving up about, let's say, the midpoint of your guidance, about CAD 0.40. How would I break that up? When I do the quick math, is it like CAD 0.20+ from M&A? Maybe I'm wrong there, let me know. About CAD 0.10 on IFRS maybe, and the rest is organic?
No. IFRS is out of there.
It's not as, okay.
We don't talk about IFRS.
Okay.
IFRS for us is like stupid accounting.
Okay.
No, we don't talk about that.
Okay.
With our banking deal, it's completely excluded IFRS. We don't even talk about that. Okay. For us, when we talk about the CAD 0.40 improvement.
A lot of it comes from our U.S. TL.
Right. Okay.
Okay?
It seems about half the benefit would be about U.S.
Half would be-
Half the benefit is organic? Yeah. Okay. That makes sense.
Yeah. Our Canadian M&A is not as profitable. It's profitable, but it's not as profitable as our existing business. Because like I said earlier, we buy a company that's a 92 OR or a 95 OR, they're doing good. Us, globally, our specialty is 87. If we buy 95, we've got an opportunity to bring those guys at least to 87. That takes time. This is why Steve and his team there are really busy, okay, bringing all these acquisitions closer to 87. This is the beauty of having such a strong team in Ontario on our specialty TL, but that takes time. It does not happen overnight. The only problem we had so far with our specialty, I said it earlier, is our flatbed division that was affected by the political environment between U.S. and Canada on the steel.
Well, that tariffs are gone, but tariffs have been gone for a month and a half, but that will take us six months to get back on our feet with the customers.
Makes sense. Thanks for the color, Alain.
Pleasure.
Our next question comes from the line of David Ross with Stifel. Your line is open.
Yes, good morning.
Morning, David.
Yeah, I just wanted to touch on the last mile segment. You talked about having a differentiated strategy there, thinking that, I guess you were taking a more efficient approach than some of the other big guys that have taken more of an asset-based approach. Could you, I guess, flesh out a little bit more what you're thinking, bigger picture from a last mile strategy in the U.S.?
Good question, David. Our approach is, number one is, if we could take on like a BeavEx or something like another BeavEx. This is step number one. Step number two is we're beefing up our U.S. team with the Canadian leadership to work more towards our cost. Number 3 part of our strategy is we need more of a sales team that's going to be in a position to really work closer to customer so that they can understand that our proposal is the same as the proposal of the largest e-tailer in North America. We do the same thing as these guys are doing for their own product. We run with an owner-operator model.
We service more than 65 different market in the U.S., so we have a huge coverage, but we're probably one of the best kept secret in the U.S. because our sales team's effort was probably not focused in the right direction. This is why we brought Kal, the Canadian guy, that done a great job in Canada, in helping Scott, and Scott is an experienced guy, company man, and Scott's focus is going to be, let's lead the sales team in the right direction so organically we can get more organically than what we're getting now. Let's have Kal focus on the M&A side, working with the ops guy, working with Scott and our ops team there to be leaner, more efficient. Also working with our CFO to make sure that we have better tools to manage cash and to manage costs on the admin side.
It's a huge effort because if I look at TFI today and you say, Alain, where you see more potential of improving? I would say last mile U.S. is number one. This is why we're beefing up the team. Then number two would be specialty truckload because we bought a lot of 95 OR company. Steve's got a lot of work to do between, let's say, six months ago and another 12 months to bring these guys into the 85 OR, 83-85 OR where we should be. We're not there because of two reason, M&A is one, and the flatbed is hurting us a little bit. Hopefully our flatbed, we have a good plan there and we'll get the results back on track and the M&A that we know it's just a matter of time.
For the sales force that you mentioned, do you think you need a separate last mile sales force or are the salespeople capable or the right people to sell last mile logistics, truckload, other services that TFI might offer?
No, us we believe in really trying to sell something that you understand well. Our sales team it's got to be focused in selling the last mile within our last mile group. Having our truckload guys selling last mile at the same time that they sell, we don't believe in that. I know that some guys are talking about the guy sells food, he sells brick, and he sells mortar, and he sells everything for the house. Us, we're really focused sales team of last mile, focused on e-commerce, growing that and also having the market and the customer understand that our proposal is the same as the largest e-tailer. Our costs are even better because we're lean and mean. Well, we're going to get leaner in the U.S., we're really lean and mean in Canada.
Last question on the last mile. Are there any holes in your network or areas that you're looking to beef up as you look to have a national U.S. product?
That's a good question. There's some areas that we could be a little bit more present. We're really strong on the West Coast on the High 5 all the way from, let's say, the Canadian border down to California. Strong there. If you look at the East Coast, we're really strong in Florida and New England, we could be a little bit stronger. Boston maybe, but we're really strong New York going all the way Carolinas, we could be a little bit stronger. Florida, we're good. You look at Texas, we're solid there. The Midwest, Illinois and Pennsylvania and all these areas, we could be a little bit stronger in that Great Lakes kind of operation there, like Detroit. We're there, but we're not really a big player there. There's some pockets there we still need to do better.
Basically, I would say that we're probably 75%-80% of where we should be in terms of market coverage. The focus is really, Dave, to really be leaner and meaner in the areas of where we're growing, try to grow organically with a stronger sales force, more focused on trying to explain to potential customers that our recipe is great. We're the largest e-commerce, last mile guy, e-commerce. We're not hauling fridge and stoves with our last mile. Yes, we have a small division called PPM that does that for a few states out west. Us, we're not hauling fridge. Our last mile is parcel like what the largest e-tailer is doing.
Excellent. Well, that's all very helpful color. Thank you very much, and congratulations to the TFI team on the terrific operating results.
Oh, they did a great job. Thank you, Dave.
Our next question comes from the line of Nauman Satti with Laurentian Bank. Your line is open.
Hi, it's Nauman here for Mona. Good morning, everyone.
Good morning.
Alain, if you could comment on the e-commerce revenue, is that still growing at 15% and 16%?
Yeah. Our e-commerce is still growing. I don't remember, I don't have that next to me, the last numbers that we came out with, for sure, our e-commerce is still growing, but growing profitably. Because we could grow 40% our e-commerce if we want. Grow at 2%, like I said many times, it's not us. We're not going to do that. Our focus is, yes, growth, fine. It's okay. We're going to make money.
Fair enough. Just one more from my end. Could you speak to the driver wages of the cost on that side of the U.S. side as compared to what it was last year?
Yeah. Well, last year was a year of correction. There was lots of catching up to do for the driver's salary. Okay. At the same time, the freight environment was booming, and there was lots of freight, because don't forget, early in 2018, you got the ELDs implementation. That had an effect for let's say the first, what, three, six months. Then there was this tariff with China. There was this overbuying of product because of the tariff that everybody knew that was supposed to come on, which it did. 2018 was really a great freight environment year, and also it was also a great year for the driver because we were able to improve the salary of those guys. 2019, it's a different world. It's a different environment.
The market is way softer. What you see is that you got more stability in the drivers' wages. On the Canadian side, it's different world. We increase salary every year by 2%-3% on our driver. It's got nothing to do with the market. It's just that this brings us stability in Canada. This is why our turnover in Canada for our truckload division is next to nothing. It's about 10%. Whereas, in the U.S., our turnover is about 80%-90%, which is about the same as the environment. This is the U.S. This is the way it's been done there.
Fair enough. Thanks for color on that, and congratulations on your results.
Thank you.
No further questions at this time. I'll turn it back over to you.
Well, thank you, operator, and thank you everyone for joining our call this morning. We greatly appreciate your interest in TFI International. Hopefully, you gather from my remarks today that as we continue to move through 2019, we will remain focused on seeking opportunities to create value, unlocking it for our investors, and whenever possible, returning excess capital to our shareholder. I look forward to updating you as the year progresses, and thank you again for being with us this morning, and have a great day. Thank you.
This concludes today's conference call, and you may now disconnect.