Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the conference call announcing TransForce's XPO Logistics truckload acquisition. 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 call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated.
I would like to remind everyone that this conference call is being recorded on Friday, October 28, 2016. I will now turn the conference over to Alain Bedard, Chairman, President, and CEO.
Please go ahead.
Well, thank you, operator, and good morning, ladies and gentlemen. Yesterday, after the market closed, we announced that we have acquired XPO Logistics' North American truckload operation. We are very pleased with this development and look forward this morning to discuss-- to discussing the very significant strategic and financial benefits that this transaction brings to TransForce. With this transaction, we take big steps forward on two major strategic objectives that we've been talking about for some time now: increasing our U.S. revenue and gaining critical mass in the U.S. truckload. As a result of this transaction, nearly 50% of TransForce total revenue will now originate in the U.S., and nearly 50% of TransForce total revenue will be generated in our truckload segment.
As we have discussed over the years, we believe that achieving these two goals can open the door to other corporate and capital market transactions that can unlock shareholder value much further. We are investing in truckload at precisely the right time. I've always said that M&A is about buying right, and this is no exception. At $530 million of revenue, $150 million of EBITDA, and a purchase price of $558 million, we are acquiring a very well-run business of scale with all of these strategic benefits, as well as a blue-chip customer base for less than 5x EBITDA. We expect this transaction to be immediately accretive to earnings. We are also gaining important access to the Mexican market, and we expect to benefit from the significant cross-border trading activity across North America.
Finally, we will be reviving the iconic CFI brand under which this business has historically operated, and we will be running the business as a standalone entity. I would like to take this opportunity to welcome Tim Staroba and the CFI team to the TransForce family. We're very excited about this important transaction for TransForce and are happy to take any questions you have at this time. Thank you. Operator?
At this time, I would like to inform everyone in order to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Mona Nazir of Laurentian Bank. Please go ahead.
Good morning, and congratulations.
Good morning, Mona. Thank you.
So just a couple of questions for me. If individuals from the XPO or the truckload side are on the line, they could answer potentially as well. Just looking at the history, after XPO bought the assets from Con-way, they went through a process and looked to potentially divesting the truckload division for about a year. There were 3 bids earlier in 2016, and then inevitably, they decided to hold on to it. I'm just wondering, what was the change factor that led us to this point? Was it solely price? Was it their focus on core operations? Was it a requirement to reduce leverage or a combination of all of the above or something else?
Well, well, you see, Mona, I cannot really answer for XPO, but what I could tell you is that, you know, you're right. They ran a process a year ago, and I don't know how many bids they got, okay? But me, a year ago, if you remember, I was really busy selling Matrec, you know? So that's why a year ago, I didn't really look at the file. And, because think about it, I could never have done this deal if, if I would still be the owner of Matrec. Okay, so this is why my focus at the time was to sell Matrec at, at the best price possible. And if you remember, a lot of people were very skeptical. Oh, he's gonna sell that for CAD 600 million, if he's lucky.
Our focus was to sell the company at the right price, which we did. You know what? After this has been done. The reason we sold Matrec is not because it was a bad company. It was a fantastic company. It was a diamond, but we had to sell it because it was poorly valued, right?
Mm-hmm.
So that is behind us, and then, okay, we're in 2016. The truckload market is in a very, very difficult position in the U.S. We know that. I mean, if you look at all the truckload numbers of Q2, Q3, even the best-in-class truckload company are down 15%-20% in their earnings, right? So I know I always said it, it's you're buying bad news.... That's what I've done. So, I mean, this process, I mean, in XPO's mind, I can't tell you what these guys have in their mind. What I can tell you is what's in my mind. And what's in my mind, and I've said this for about a year now, is we want to build a North American truckload company with a strong presence in Canada, which we do have. We're second to none.
We also want the Mexican connection because we believe that this is important, because the trade between U.S. and Mexico will keep on growing. The trade between Canada and the U.S., we don't know, okay? It's still not growing that fast, but between Mexico and Canada, we know it's growing. And for us, it was pretty difficult because in the past we had, okay, Transport America. Transport America is small in Mexico. It's mostly a U.S. domestic carrier. I mean, CFI is about 8-9 times the size of Transport America in terms of load that goes through the Mexican-U.S. border. Okay? So that has been the thinking all along, and this acquisition of CFI is just one step in a process, okay, that will take place over the next 2 or 3 years to unlock value for our shareholders.
And I'm really happy, you know, with the shareholder base that we have, that these guys have been supporting us for 20 years. Right? What we're selling, we're not selling dreams, we're selling reality. You know, we're selling now with this CFI acquisition, a bigger portion of our revenue will be dependent on the U.S. economy, which is, you know, still the number one in the world. Right?
Okay, that's very helpful. And then just secondly, you have a history of taking acquisitions and making them more into an asset-light model, which is your strategy. I'm just wondering, what's the strategy with this? It's fairly asset-heavy. Is the structure gonna remain in place, or are there some sales that could take place?
Well, you know, CFI is run by a fantastic management team. I have to tell you that. Because those guys today run 20% asset-light, okay, which is unlike unheard of in the U.S. already, because, you know, they have a large fleet of independent contractor, owner ops, whatever you wanna call them, okay? And they've been growing that, and they will keep on growing that. So already, these guys, I mean, are already in the same mindset as we are. So more than 20% of today's revenue within CFI is generated by an asset-light organization. They have a, they have an asset-light operation in Mexico with 14, I think it's 14 offices, okay, that do truckload and LTL within Mexico and across the border. Yes, for sure.
I mean, talking with team, I'll be there next week, okay, and we'll see what we can do, okay, to keep on improving that. But I can tell you that at least I'm not preaching to an audience that don't believe in that. They are already best in class in that sector, you know, thinking about asset-light. How can we do more with less, right?
Okay, thank you. I'll step back into you.
Okay. Thank you, Mona.
Thanks.
Your next question comes from the line of Walter Spracklin of RBC. Please go ahead.
Yeah, thanks very much, and congratulations on that. That's a great deal.
Thank you. Thank you, Walter.
So, starting with the EBITDA, I mean, it looks, you know, this is 20% EBITDA margins, clearly a lot higher than what... Not, you know, you know, high, toward the higher end of the range of what we see with truckload carriers. You're getting it, as you pointed out, less than 5x. Is there any, you know, I was checking XPO's disclosure, and it looks like that's the level they were targeting. In fact, they were saying it could grow to 140. Correct me if I'm wrong, but there's no synergies built into that number. That's not a real, you know, there's not a lot of adjustments made to that number. That's pretty much a-
No.
a run rate number right now?
No, no, Walter, this is the reality. I mean, you see, what has been done is that this, the proof, the numbers were approved by KPMG, and us, we hired Deloitte to just to make sure that KPMG, you know, don't forget, I come from KPMG, so these guys would make mistakes, right? So we hired Deloitte just to make sure that everything is good, okay? Because it's an important transaction for us. And yes, synergies, there's nothing in there. I mean, we believe that there will be some synergies for sure, but it's not in the number.
They've been talking about $140. Do you think you could get it to $140?
You know, we're, we're talking to our guys in the U.S. right now. We're, we're going on the road, what we call is the Road to 88. Okay, if you go back in time, you'll see that CFI's OR, when it was CFI, prior to the Conway acquisition, those guys were, have been always running an 88 OR for 10, 12, 15 years. And we believe that, that those guys are very close to that, and they'll probably beat that in 2017.
Hmm.
The quality of the revenue, okay, the quality of their people, the fact that these guys run a lean and mean operation. I mean, the head office is in Joplin, small town, good people. I mean, lean and mean thinking, not spending money for nothing. I mean, it's this, this is, you know, this is a great company. So, it was $140, it's still early, Walter, to say yes or no. But beat $115, I'm convinced that, you know, I haven't seen their plan. We'll get their plan by the end of next week. I'm there Monday, okay, so I'll know more. But, you know, it's gonna be between $115 and $140.
But what I could tell you is that my experience tells me that on the synergies between, let's say, our Canadian truckload operation, Transport America's operation, and us now, CFI, for sure, there's between, I don't know, $6 million, which is a very minimum, minimum, minimum, to $15 million, maybe $20 million. Okay, that's my experience, but I don't have any details yet, okay? We're just starting to dig, okay, with these guys, and we're comparing what we have. I just finished our plan with Transport America yesterday, I think, or the day before, when I was in New York. So, yeah, it's gonna be a fantastic thing there for us and, you know, for the company as well.
It looks like you, you really like the management team. Any lockups there that you've tied them down with or anything like that?
No, no, it's not. We don't do that, so I mean, what we try to do, us, Walter, has always been, we try to create an environment that the guy will be happy to live in. I mean, Tim is new over there. He's a new leader. He's been there a few months, six, seven months. And then now he's living in Joplin, and we'll build around. But you know, the middle management, when I look at all the VPs there and their tenure, it's 10, 15, 20, 30 years. I mean, they've been working at that company. So the turnover, okay, is really compared to other truckload operation in the U.S., it's really low. And you know what?
Because their average length of haul is a little over 850 miles, okay, which is big, right? I mean, on average in the U.S., you'll see, like, America is about five something, 550, maybe. You know, and the drivers, they love, you know, miles. So if you can give them on average about 850 miles, you know, about close to 20% of our drivers are part of a team, okay, which is really good, eh? Because don't forget, we're running into Mexico, so you need team, you need to be there, you need to be on time.
So when I add it all up and you got all this for less than 5x, I mean, I've already gotten a lot of questions, as you know. You know, you've answered one of them, is the EBITDA, you know, a solid EBITDA numbers or anything expected built into it. So I guess the question becomes, it's a fairly attractive price for that level of, that high-quality margin, what looks like high-quality revenue. How do you explain, you know, getting it at the price you got?
Well, Walter, I mean, I told you, I'm a very patient man on M&A, okay? I'm not patient with the, with numbers, okay, with results of our division. No, that I'm not. But M&A, you got to be patient on buying and on selling. So it took us a long time, okay, to have a, an agreement with the seller. I mean, those guys are good. The seller, those guys are not a bunch of stupid guys. I mean, they are, they're probably brighter than us, eh? So it's, I think, I can't talk for them, but, you know, I, I think that their vision is, and has been, to say, "Hey, we don't want to be in the North American truckload business.
Yeah.
You know, in bad times, like it is now, it's not easy to find a buyer, okay, that's gonna buy it for cash.
Probably had some motivation to get their debt down, too, I guess.
Well, this is a question for them to answer, not me.
Yeah.
I mean, but I can tell you that these guys are really good. They're not stupid. You know, maybe there's gonna be more discussion between, I mean, this company and us. I mean, we could help them in other sectors, and this is why, you know, it's maybe it's the start of a, you know, a relationship where we could help them, they could help us. Because don't forget, they are a customer. Their LTL division is a customer of of CFI.
Interesting. Last question here on strategy: How does this affect your end game now? I mean, now you've got scale in the U.S. truckload. Clearly, you've got scale in Canada. Could these be two separate spin-outs? Could, you know, how do you look at your end game, with regards to that?
Well, like I said in my opening, I mean, for sure, this changes our, you know, our market strategy in terms of equity. I mean, right now, as you know, we are listed over the counter in the U.S., so that means that it's not really important. But for sure, I mean, the truckload is one sector that we see some opportunity. You know, on the dedicated side, CFI is very small. Dedicated for CFI is about 2% of revenue. Really, really small. Transport America, on the other side of, you know, the other company that we own-
Yep.
Their dedicated is about 30%-40% of revenue. You know, this is good because it brings you stability, okay? So there's opportunity on the dedicated side, and even more important than the dedicated is the specialty truckload. Because if you look at our Canadian operation, Walter, you see that we are second to none in the east on the specialty truckload with our flatbed operation, with our tanker, dry and liquid, our dumper operation, you know, with our Quebec and Ontario operation, you know, with the acquisition of Contrans two years ago. And that's something that, you know, we have a, on the flatbed side... It's small what we're doing right now in the U.S., and we see opportunity there to grow.
So I mean, if you look at TFI down the road, it's gonna be, I think, a huge North American truckload company with, with a good PNC and LTL. Now, this is always the same story. I mean, we love PNC, we love LTL, we love our logistics division, but we want a fair price, eh? And we, we don't want to split the company, but if push comes to shove, okay, down the road, maybe TFI will stay as a, you know, a truckload company, and maybe the, the other part will be separate because of valuation issue.
But for now, no. I mean, but to get into the U.S. equity market, I mean, that, that's a possibility because now, like we said, 50% of our revenue is U.S.-based. And, and, you know, it's a different market. It's a much more important market there.
You know, in Canada, there's only two real trucking company that are public. You know, so it's tough for the investors to compare. We are very different than the other guy. Us, we are solid in the U.S. and in Canada. And in the U.S., you got way more companies to compare. So you compare profitability, you compare cash flow, right? And also, I have to point you out that, yes, CFI runs a 23% EBITDA margin, okay? And if you compare that to TFI, I mean, you say, shit, I mean, they're doing way better. But don't forget, at TFI, we don't buy trucks, we lease them, right? So we don't have that depreciation on the truck.
And just on that and two modeling questions here. What should we put in our model for CapEx? And are there any restructuring costs we should book, not restructuring, but one-time kind of transaction costs here that we should be prepared for?
No, Walter. I mean, there's no one-time cost. I mean, no.
Okay.
But on the CapEx side, if you look at the revenue of the company, what we believe is a fair number today is about $60 million.
Okay.
Yeah.
Okay, that's all my questions. Thanks very much, and congratulations again.
Okay. Thank you, Walter.
Your next question comes from the line of Kevin Chiang of CIBC. Please go ahead.
Hi, Brad, thanks for taking my question. I have one, and congratulations on the transaction here.
Thank you, Kevin.
Maybe just a couple of follow-up accounting questions. On the D&A, incremental D&A, as it relates to this acquisition, is there a number you can point us to? I'm getting something closer to $50-$60 million as well, in terms of depreciation to be adding back. Is that a-
Yeah.
-ballpark number?
Yeah, yeah, yeah, yeah.
And then it-
Based on what we have today, you're right.
Okay. Okay. And then I know for your EPS number, you'll probably add back amortization of intangible assets. Any number we should be thinking about there?
I don't know that yet, Kevin. I mean, I'm not sure of that, until, I mean, the accountants, KPMG, review the transaction and all that. So I can't really tell you the number, but I could tell you this, though, is that this is gonna be, in my mind, highly accretive to our earnings. Okay?
Right.
I mean, it's a. You know, are we gonna reevaluate the real estate there? I don't know. I don't even know if there's, you know, I know that they have a huge site in Joplin, they have a huge site in Laredo, but it's still too early for me to answer that question, Kevin.
Okay. And just, you mentioned earlier that there's a target to get to an 88 OR. It looks like they're running at about 90%, give or take. To get that additional 200 basis points, do you get there through primarily cost-cutting, even if the volume environment is pretty tough, or is that predicated on expectations that 2017 will be a better year in the U.S. truckload market?
No, we're not selling dreams, Kevin. I mean, we don't hope for, let's say that this is gonna happen. Us, we, we are realistic people. We know that the market right now is difficult, okay? And the only way we're gonna get to 88 is with cost.
Okay.
Because cost, we can control. The revenue, the market, the quality of the revenue, you know, the, the, the price of, of steel, the price of oil, we don't control that, us. Okay, so we don't-- we, we're not in the hope business, we are in the reality business. And, what I could tell you is that it's, it's gonna be based on improvement of, of cost, okay, working also with America, working with our sister company in Canada, understanding better the market, buying power, okay? For sure, that, that's gonna be something that's gonna help everybody, would it be on fuel or equipment, eh? So it's all that, but it's nothing to do with... We hope that the market in 2017 is gonna improve. No.
Okay.
You know, if, if it does, we're gonna be very happy.
Okay.
You know, this is like the Canadian economy. If it got, if it does get better in 2017, that's gonna be great.
Yeah.
But we don't build our plan on hope.
Right. Right. It'll be a nice tailwind if that, if that materializes.
Yeah, if it happens, so be it. That's good.
Just last one for me. If my calculation is correct, looks like your leverage ratio moves to kind of in the high 2s from 2.1-
Yeah.
2.2 at the end of Q3 results. I think in the past, you've mentioned you're comfortable sitting around three times, but just your priority is around free cash flow here. Do you look to deleverage on the back of this acquisition or buyback is still a priority, even post this deal?
...It depends on the price. I've always said it. I mean, we're gonna be active buying back our stock if we see that it's poorly valued. Okay, that's number one. Number two is the leverage. It's gonna go probably, like, in terms of dollars, our debt is gonna probably close around, depending on the U.S.. dollar, because there again, I mean, we're, we're at 1.34 now. Just a month ago, we were at 1.30, 1.31. But it's gonna be between 1.5-1.6. So with a trailing twelve of about CAD 600 million in EBITDA or something around that, you know, we're gonna be at what? 2.6, 2.7, 2.5. It's just gonna be hovering there, right?
So we're still, you know, a long way from the three, and, and we will be generating in 2017, now that we have this acquisition done, probably, you know, $275 U.S. or about CAD 340. So for sure, debt is gonna go down. If stock stays at an acceptable level, okay, we'll pause on the buyback for now to bring the debt down because, you know, there's other opportunity that we're looking at. We just closed, you know, a small specialty truckload operation in Quebec. Nice family-run business. That's gonna be a nice addition to our, you know, to our, to that segment of our business. We're just buying now a small logistics company in Ontario, okay, that we take over November first. So we still have a lot of small acquisition.
On the P&C side, we will probably do one or two transactions before, you know, Q1 of 2017. So it's still the M&A. I said it. I mean, M&A for us is, it's always the same story. You know, we have a big year, and then we have two years that it's, like, more quiet. We pay down debt, we reduce, okay, our interest costs, and we integrate, and we get, you know, the benefit of these acquisitions. And then, so if you go back, 2011 was a good and great year of acquisition. We bought Dynamex, we bought DHL Canada, and then 2014 was another great year. We bought Contrans, we bought Transport America, we bought Vitran in those years. But 2015, 2016, well, small deals here and there.
2017 is gonna be a very important year for us, and it's gonna be, you know, a transformational year also, both on M&A and vision of the company. It's gonna be a great year. And all that was possible because we were able to sell our Matrec division, which I'm really on one side, I'm not happy about selling Matrec because I really love that company. I really love that company. We had a great team, but, hey, we had to do it because the valuation wasn't there. But at least on the other side, that gives us the opportunity to add a diamond to our truckload division. Because if you do the math, very simple math, okay, he sold Matrec CAD 75 million in EBITDA, okay, for, let's say, around CAD 800 million.
He's buying CFI, which is about 150 CAD today, no synergies, for about 730-740 CAD. Now, you're gonna say, "Well, yeah, but there's lots of CapEx." Well, no. I mean, Matrec, we had about $30 million of CapEx, and CFI is about 60. Sixty U.S., so let's say at 30%, 80, you know, CAD. So, you know, if you do the math, I think it's a great deal. And we have a super team over there in Joplin, highly dedicated. There's, you know, they're professional at what they do. And, you know, it, it's been, you know, a, a transition since they, they were bought by an LTL company, right?
Right.
But we're going back to the root. It's now CFI, and that is a diamond of a company.
As always, Alain, thank you for the color. Have a good one.
Thank you. Thank you.
Your next question comes from the line of Cameron Doerksen of National Bank Financial. Please go ahead.
Yeah, good morning, and congratulations.
Thank you, Cameron.
Just a, I guess a couple of housekeeping items, mainly for me. One, just on the Mexico exposure, it looks like the percentage of revenue that comes from the cross-border Mexico is about 35%. Is that a good number?
Yeah, it's around 30%, Cameron. So, because you've got, you've got, Mexican domestic type of operation, and you've got the transborder operation, but you could say it's about 30%. We will do about, it's gonna be huge. I mean, already these guys, a combination with, with America, I mean, we'll do more than 50,000 loads a year crossing the border between north and south. You know, it's, it's huge. And don't forget, these guys have been in Mexico, for the last 30 years. They're not new to Mexico, those guys. They've got partners. They've got more than 50 partners in Mexico. If, if you go to Mexico, you'll see some of our partners already have CFI Logistica on their, on their trailer. They're proud to be associated with CFI, those guys over there. Okay?
They've been there for 30 years. It's not something new.
Right. Are there potential, I guess, maybe revenue synergies from running, you know, trucks from Mexico all the way up into your various operations?
Well, for sure, for sure, Cameron. I mean, if you look at Ontario, Quebec into Mexico, prior to this acquisition, I mean, we were not able to do anything. I mean, we had to go through other carriers, okay? But now, with this kind of connection, I mean, now we are equipped. Now we have the solution for our customers, for sure.
Okay, perfect. And just on the, you know, on the CapEx, I guess maybe I'm trying to get a sense of how it's going to maybe trend. Do you have an age of the fleet for what you're buying here? I mean, is it relatively young, or is it something that needs to be revamped?
Well, let me tell you this. I mean, if you look at their fleet today, 2012, they don't have any trucks. I mean, they may have a few trucks that are 2012. So their fleet is 13, 14, 15. So the average age, you know, is into the norm of the North American trucking industry.
Okay.
trailer fleet, it's, you know, it's about the same. So it's a company that was really well-funded by, you know, very, very dedicated people.
Okay. Just two quick modeling questions. On the tax rate, I'm assuming, because this is an increase in U.S. dollar earnings that you'll generate, that your average tax rate might go up?
Yes, but don't forget that we fund that through our Luxembourg operation. Okay? So it's not as important as, let's say, 38% or 39%. I can't really tell you, Cameron, because I'm not really a tax man, but I know that the funding is going through our subsidiary in Luxembourg, and what those guys call the double dip, I think, is what they call that. So it reduces the tax rate that we have with our U.S. operation, but this is not something new. This is something that we've been doing with Transport America and Dynamex, okay, since day one. This is a tax planning, as these guys would say. So yes, for sure.
If you look at our tax rate today of, I don't know, maybe 26-27%, because it's U.S. earnings, okay, our tax rate will probably go up. But to that, I can't really answer you how much. I'm not really good on, on the tax, you know, but, for sure, we'll give clarification as soon as we can on that, probably with our Q4 numbers, okay, Cameron, we'll be in a position to say exactly what it is, because this is also something new for us. So we're learning, okay, the Mexican thing there, I mean, because it's, it's first, although these guys, like I said, they've been there for a long time, but this is all new for us.
Okay. Just final question, just on the financing rate to get a new facility. What is the sort of average, you know, interest percentage interest cost for you on this new bond?
It's the same as the banking deal that we have. So our $1.2 billion deal that we have, so this new term loan, it's exactly the same condition.
Okay. And do you know what the actual sort of average, percentage rate is?
Well, so-
Because there's a variability to it, right? So it's driven off the BA or LIBOR.
I would say, you know, it's public. I mean, we know that we're going to be probably in LIBOR plus 170, okay?
Okay.
Because we have a two-tranche in there, we have a two- and three-year tranche. So, talking with Craig and Martin, I know that we bought protection on that, okay, to protect the rates in U.S. dollar and the interest rate as well. So I would guess that if you look at our average cost of fund, which is, I think, about 3.7, okay, this is not going to change. This is going to be, you know, in the same kind of neighborhood.
Okay. That's great. That's all I had. Thanks very much.
Okay. Thank you. Thank you, Cameron.
Your next question comes from the line of Fadi Chamoun of BMO Capital Markets. Please go ahead.
Good morning, Alain. This is Devin, pitching in here for Fadi. Thanks for taking my question.
Okay. Okay, Devin.
Can you provide some color on a revenue base for the XPO Truckload business? We're just trying to get a sense for how much of the revenue is derived from line haul service for the XPO LTL business.
Okay. Yeah, that... Well, that's a good question. I mean, that has been going down every year, okay? I would tell you that today, it's less than 8%. It's about 6%-7% of the total revenue of the Truckload division. But they also haul for other LTL or P&C companies. One of them is, you know, a great company as well. So it's the same thing as America, right? Because America also hauls for, you know, LTL and P&C companies as well.
Okay. A lot of my other questions have been answered. Thanks for your time, Alain.
Okay. Thank you, Devin. Have a great day.
Your next question comes from the line of Jason Seidl of Cowen and Company. Please go ahead.
Thank you, operator. Hey, Alain.
Hey, good morning, Jason. How are you doing?
I'm just doing fine, sir, on the road, but happily dialing into your call here, and congratulations. Wanted to ask a couple of questions about how you see your TL operations in the future. You know, you said I think you're about $850 million now in the U.S. Do you plan to continue to grow that U.S. Truckload exposure beyond that? And is that something you may need to do if you split up the companies?
...Well, for sure, Jason, we will be growing our U.S. truckload business because this is, I have a good feeling about that. And like I was saying earlier, I mean, we see also a lot of opportunity in the specialty truckload in the U.S., because if you look at CFI in America, I mean, these, these are van operation, but we have lots of experience us in other type of operation than vans. So we have experience in flatbed, in tankers, and all that. So that is also an area of opportunity that we're gonna be looking at in the future in the U.S. And over and above that, CFI's dedicated revenue is, is very small. It's about 2% of the revenue. America is about 30%-40% of the revenue comes from dedicated business.
We believe that this is a good market for us to invest. So if we see the right opportunity, for sure, we'll be looking at that. So to answer your question, yes, truckload for us is 50% of our global revenue. It's gonna be $850 million and probably closer to $900 million for TFI. So it's definitely an area of growth. But at the same time also, we're growing our LTL because we're gonna be, you know, closing a small deal in Canada, where we're buying a CAD 40 million Canadian LTL company. We're looking also at a small company on the P&C side, both U.S. and Canada. So we keep on growing, even, you know, the LTL and the P&C, which the, you know, globally, they still represent 50% of our revenue today.
So it's not just about truckload, it's also every time we see a good fit, a good opportunity, I mean, we're gonna jump on it. Like, like, I think this, truckload, CFI was a great opportunity for us. And like I said earlier on the call, some people ask me, "Well, why didn't you look at it last year?" Well, last year, we were busy doing something else. We were selling the waste. We can do that. But now, okay, we were in a position to really look at this, great company and, and the seller.
I mean, those guys are smart, and, and I think they made it clear when they bought the, the company, that their interest was more into the LTL than the truckload. So we knew that at one point, this asset, this company, would be sold, okay?
So that's why we looked at it, we made the proper analysis, and we end up saying, "You know, it's, it's gonna be good for, for the team there. It's gonna be good for us.
Well, it seems like your patience have paid off because this is a very reasonable price for this asset. Alain, when you look at 17, you know, you seem to be, you know, somewhat optimistic about what CFI could do for you. Is that optimism, you know, based on some things that you guys can step in there to do? Is that optimism based on where you see the truckload market going? I'd like some more color into that.
Yeah. I think, Jason, no, we don't hope for the... We hope the market will get better, but in our plan, we never have hope. You know, we were always very conservative. So it's not the market that's gonna improve, Transport America, and CFI. It's all about cost. It's all about opportunity that we see, okay, at first in the, you know, the easy synergies, about buying power, okay, about, you know, best practices, how can we improve? So I'll give you just an example. So, within CFI, they have a 24 hours a day, 7 days a week call center, if something happens, if there's a truck breakdown, et cetera, et cetera. If you look at Transport America, they have the same service, but it's not 7 days a week.
So for sure, you know, when they're not doing it, they're using a third party. So that's just a small example of what we could do together, okay? It doesn't make any sense to have two kind of call center. I mean, it makes sense to have only one, and that's just one example, easy one, to say, "Hey, guys, here's one area where we could save money." For example, they have a huge terminal in Laredo. Transport America, they have a small terminal that they rent. CFI, they own the terminal. So that's another example of all these small things that you could save here and there, but when you start, you know, do the sum of all these small things, you know, you get to some very impressive number. So that's the way we see it.
Now, if the market improves sometime in 2017, okay, because a lot of guys are not buying as many trucks as they used to, if the economy gets better in the U.S., well, this is a tailwind that we will benefit, okay? And people will say, "Well, his timing was right." But really, the decision to buy this company was not about the timing of the market. It was about, this is a great company. I mean, they've always... This is well-run. They have some good customers. They run a good business. And with Transport America, okay, that opens up, you know, new possibilities.
The Mexican connection is really important to me because, you know, more and more, Ontario, Quebec will trade with Mexico, and before CFI, we, you know, we didn't really have a good solution for our customers there. Now we have the solution, we have the possibility. So it's all about cost and opportunity, Jason.
Well, I appreciate the color. That's all I got, and congratulations again.
Okay. Well, thank you, Jason. Have a great day.
You, too.
Thank you.
Your next question comes from the line of Benoit Poirier of Desjardins Capital Markets. Please go ahead.
Hey, good morning, Alain, and congratulations for the acquisition.
Thank you. Thank you, Benoit.
Yeah. Just wondering, is the acquisition closed, or when would you expect the closing, if it's not occurred yet, Alain?
It's closed. It's already done, Benoit. We took over the company at midnight-
... Okay. So, yeah. Okay, okay, that's great. And, and just in terms of depreciation, wondering in terms of percentage, would it be closer to 10%, or you said earlier, $50-$60 million? Is it U.S. dollar or Canadian dollar, Alain?
No, I'm talking U.S. dollar all the time, Benoit. So, yes, it's, that's the number that we have in mind, is $60, right? Because don't forget, like I said earlier, already, okay, CFI, 20% of the revenue comes from an asset-light operation. So it could be our logi- their logistics operation, it could be because they're using owner op. So they are in very good shape, okay, on this, in this regard.
Okay, okay, perfect. And do you have the book value right now or a sense on what could be the intangible, even if you don't have the full picture yet, Alain?
I didn't really look at that, Benoit, but I know it's not gonna be huge, okay? Because, don't forget, they, they own, okay, the trucks today, okay, so they own about 2,500 trucks, and they own about 7,000 trailers, and they own four or five properties. So I don't think that the intangible is gonna be very important. So the effect on the EPS of depreciation of intangible, I don't think it's gonna be huge. So this is why it's gonna be really highly accretive to our EPS in 2017.
Okay, perfect. And just in terms of free cash, you already gave some color. So assuming that you stop share buyback in 2017, would it be fair to say that you would bring back the debt to EBITDA in the low 2s by the end of 2017?
Well, absolutely, because, you know, if 2017 is the same kind of year like we went through in 2016, like I said on the earnings call, we believe that excluding CFI, we will improve CAD 20 million, okay? Plus the CFI cash flow of CAD 17 million, that puts us in a great position to probably reduce our debt, if we don't do any other M&A acquisition in that CAD 300 million, okay, you know, for the year 2017. So that's gonna bring us down back to very close to 2, maybe 2.2, 2.25. True that, we're also buying some small companies in Canada and in the U.S. We'll be announcing, well, the small ones we don't announce, like we bought one in Quebec last week. We didn't announce.
It's small. It's CAD 2 million in EBITDA. We are closing one, next Monday in Ontario. It's another 2, 2-something in EBITDA. Well, it's EBIT because they have no DA. You know, we're gonna be closing another small LTL company, one before the end of the year. The EBITDA there is zero. I mean, so it's, it's because, you know, a lot of people don't make money in the LTL. So it's, it's, it's good for us because it's gonna be, you know, a standalone, but, we'll be able to work with the management there to, to try to turn this thing around from zero to something more acceptable. So we'll still have some, some small M&A during the course of, at the end of 2016 and early into 2017.
So that's why I'm saying our debt to EBITDA, we're gonna be around the 2.25 or something like that.
Okay, perfect. And just in terms of critical mass, obviously $850 million, what type of, how, how much revenues would you like to see before considering yourself like a critical mass, which is enough to, to kind of divest or IPO this truckload segment? And would you include the Canadian portion as well, Alain?
Yes. Well, first of all, I believe in Canada and the U.S. and Mexico as being one. To me, it's a North American truckload operation, okay? So, so that being said, if you look at our global revenue, I mean, 50% is truckload now. So it, it's got size. I mean, CFI was about, in terms of size, number 19. So if you combine 19 with America, we're probably number, I don't know, 13, 14 or 15. So we have size now, but I see other opportunity. So really the intention of splitting or selling or doing something like that, I don't see that for 2017. I see that 2017 is a year that's gonna be even more M&A. Maybe, maybe 2017 is also a year where, you know, our shareholder base may change, right?
That, I think that's also a possibility. But splitting right now, no. We'll keep on growing both sides of the equation, the truckload and the LTL and parcel. We see some great opportunity, but really, what I think may happen is, you know, if you look at the IPO market in the U.S., it's very, very quiet. It's just starting to, you know, to get back very active. Schneider, a great U.S. truckload company, I think, announced that they will do some kind of an IPO early in 2017. And we'll see, I mean, that's one of the largest truckload operation in the U.S. So I mean, we're looking at all kinds of possibility, Benoit, to unlock the shareholder value.
You know, what we're trying to do is not base that on hope, and we hope that this is gonna get better. Well, we know that the e-commerce is gonna get better. That we know. We know that the truckload market in the U.S., you know, is shrinking in terms of offers. So the pricing, the market will improve, and we're buying that, I think, at the right time. It's not about hope, it's about reality and opportunity.
Okay, perfect. And just, in terms of revenues, is there any kind of risk that you could lose, let's say, potential revenues for some strategic reasons, Alain?
No, there's no, there's no risk at all of that. I mean, I mean, these guys have been in the business for a long time, and, you know, it's, it's, it's gonna be run like the rest of our important company. It's a standalone thing. I mean, Tim, he's our man. He, he's the leader there. I'm gonna be with him next week with, with our other of our team members. And no, no, I mean, I don't think so. I mean, we had some good discussion with them. I, you know, what I can see is that it's just gonna keep on growing. I mean, you know, if, if you- if Tim would be talking to you, he would say that our goal is to be $1 billion, okay?
I said, "Tim, okay, well, one step at a time, Tim, for sure." I mean, we'll grow this business, but, hey, but that's their goal. These guys are hungry for business. They want to build that CFI company that, you know, up to 2007 was the star of the truckload. Like, there's some great truckload company in the U.S., running an 85 OR and running an 82 OR, and we say we're on the road to 88, but really the goal is to be as good as the other great guys.
Okay. Hey, congratulations again for the move, Alain, and thanks for the time.
Thank you, Benoit.
Your next question comes from the line of David Tyerman of Cormark Securities. Please go ahead.
Yes, good morning, Alain. I'll keep it short, since this has been going on a long time. I just, one housekeeping, the sales number you provided, is that- does that include fuel surcharge or not?
Oh, let me, let me check. You know, that's a good question. Is it ex-fuel or not? Let me... Give me a minute.
Okay.
BA. You know, that's always confusing. BA. No, ex-fuel, trailing twelve months, okay, at the end of September, is $44.80.
$480. Okay. So the other number includes fuel, it sounds like then?
Yeah.
Okay. And then the other question, just sort of a broad question. You've got a lot of brands. You've always had a lot of brands. I'm just wondering the logic behind having a TA, having a CFI. I don't even know if the one you did down in Texas still has its own brand. Wouldn't it be more logical and cost-effective to bring them all together and have just one head office, et cetera?
Well, you know, I think, David, that's been the success of TFI, is what we do is... And, and if you look at, what has been done in the U.S., I mean, you've got one great company that bought a truckload operation and kept it separate, and they're doing well. You've got another great truckload company in the U.S. that did the opposite, okay? They bought another truckload company, and they merged it, and it's not been doing too well. They lost driver, they lost this, they lost revenue, they lost customers, et cetera, et cetera. Our approach has always been, you know, if you have critical size and mass to be standalone, okay, what we're trying to do is you stay standalone, okay? We'll be talking because now you're part of the family.
So we talk and we exchange information, we exchange data, we can compare, and, and for sure, we exchange best practices. And, and whatever we can do in terms of the back office, sure, we'll do it. But the most important thing in a, in a company, it's in transportation, it's its people, okay? So it's the sales force, it's, it's the driver, okay? It's the management team. And you listen to those accountants, and they will say, "Oh, yeah, combine the two, you'll save a lot of money." I remember when I started trucking in 1993, KPMG did a nice study, okay, for Kingsway at the time, and they were supposed to save CAD 6 million. Well, they didn't save CAD 6 million, they lost CAD 10 million.
Okay.
Because they lost customers, they lost drivers, they lost this, they lost that. So, you know, sometimes the theory does not reflect the reality. So our experience for the last 20 years, David, has been, hey, keep something like an asset like Transport America and CFI. In my mind, they have a great management team. They have their own culture. What you're trying to do is to improve those guys, okay, with, you know, better information, whatever areas of weaknesses we're trying to improve, working with this great management team.
We also, for sure, we'll look at the insurance, and we'll look at the banking, and we look at the CapEx and, and, and the investment in trucks and trailers on the price and the fuel. Everything that, you know, we could help them, okay, with volume, for sure we do that.
But the day-to-day operation, I mean, in Joplin, in my mind, versus, let's say, the day-to-day operation in Minneapolis for America, I mean, this stays. And we've been proven right. I mean, even in Canada, you look at the Contrans before we bought them, that's the way they used to do it. If you look at Mullen, a great company, that's the way he does it, too. So if you look at failures, you got Air Canada and CP. It's been a disaster when those two companies were put together. It took them 20 years to get back on their feet. So our experience, if it's small, that's a different story. But when you have critical mass and size, you know, it makes a lot of sense.
If you look at what we've done in our P&C in Canada, well, we have Canpar and Loomis. Those two companies are separate. They have separate sales force, they have different customers, but where it makes sense, we combine. So for instance, we combine sorting, okay? That makes sense. But we still keep, we combine the back office, that makes sense. But vis-à-vis the customer, okay, he wants to deal with Canpar, well, you deal with Canpar. The other one wants to deal with Loomis because they love Loomis, okay?
So you deal with Loomis. And, and we're gonna be doing the same thing, you know, in, in our truckload. If you look at the number of brands we have in our truckload in Canada, I mean, look at the contrans. I mean, they have, they run about 8, 9 brands, even contrans.
I mean, they have Archer, they have E.C.L., they have Glen Tay, they have Laidlaw. I mean, and in theory, you know, it makes sense, okay, to have only one brand, maybe for marketing and all that. But for us, we're in there for the shoulder, we're in there for the cash flow. The image is, it's important, I agree with you, if you're UPS and FedEx, but us, we're not one of the most recognized brand. And so what we're trying to do is the culture of our employees, the culture, the way things are being done, we don't change that. Why fix something that's not broken?
Okay, very good. That's very helpful. Thank you very much, Alain. It looks like quite a good deal.
Thank you, David.
There are no further questions at this time. I will turn the call back over to Mr. Bedard.
Well, thank you all, and thank you for your interest in TransForce, and we'll talk to you soon with our Q4 numbers early in 2017. So thanks again. Have a great day. Bye.
This concludes today's conference call. You may now disconnect.