TFI International Inc (TFII) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the TransForce Income Fund first-quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, April 25, 2007. I would now like to turn the conference over to Mr. John Lute.

Thank you, operator, and good morning, everyone. Thank you for joining us today to discuss the results for the first quarter of 2007 for the TransForce Income Fund. The results for the quarter ended March 31, 2007 were issued via news release on Canada newswire yesterday, April 24, 2007 just prior to the Fund's annual meeting.

Unfortunately Alain Bedard, the Chairman, President, and CEO of TransForce, has caught a virus and speaking at the annual meeting in Calgary yesterday wore out his voice, which is the one thing you really need to have on a conference call. On this call, Sal Vitale, the Chief Financial Officer, will review the highlights for the quarter, as well as discussing the financial results. Following his comments, we will open the lines for questions. Analysts and portfolio managers are welcome to ask questions over the phone and the operator will be providing instructions.

A recording of this call will be available until May 2, 2007, and that recording can be accessed by using the dial-in reservation numbers listed on the earnings release. Business, media, and unitholders are welcome to listen to this call and media are free to use management's comments and responses to questions in any coverage. However, we would ask that you do not quote callers unless that individual has granted their consent.

After Sal finishes with his remarks, the operator will poll for questions from analysts. If any media want to ask follow-up questions, please contact me after this call. My number is 416-929-5883. It is also on the earnings release. Unitholders' questions should be directed to Sal Vitale after this call.

Before Sal begins, I need to read this statement. The following discussion will include a review of developments that affected TransForce's performance during the first quarter of 2007 and may include forward-looking statements and estimates. Such comments will be affected by and involve known and unknown risks and uncertainties, which may cause the actual result for the Fund to be materially different from those expressed or implied. Now, I'll turn the call over to Sal Vitale, Chief Financial Officer of TransForce Income Fund.

Thank you, John, and good morning, everyone. Thank you for joining us today. We appreciate your patience in waiting for this call, but as many of you know, we held our annual meeting yesterday in Calgary. It was the first time we have had the meeting there and it was appropriate, since Western Canada has grown to be such an important part of our business. The day before, on Monday, we had the official tour of the new CF Managing Movement facility, which will handle much of the growing business. That was another big day for us.

We reviewed the first quarter at the annual meeting, but we're happy to do it again. The growth in the first quarter of fiscal '07 continued the trend relative quarter-over-quarter growth, following the record results for 2006. During the first quarter of 2007, we increased quarterly revenue, EBITDA, completed the previously-announced acquisition of Westfreight Systems. I am pleased that were able to improve our year-over-year quarterly results in key areas, considering that the first quarter is traditionally slower than the balance of the year.

I will review the financials in detail in a few moments, but first, let's have a look at some of the key features of the quarter. During Q1, we completed the previously-announced acquisition of Westfreight Systems. As you may recall, Westfreight is a specialized, over-dimensional and heavy haul transportation service provider. It's annual revenues are approximately $47 million. It has complementary LTL and truckload van, as well as flatbed service, serving the oil and gas industry. Its primary service lanes are between Alberta and the Texas and Oklahoma regions.

This acquisition is a really great fit for TransForce, because it strengthens our existing capabilities, offering in the heavy haul and full-load segment of the energy sector, and complements Canadian Freightways cross-border less than truckload service to the energy sector. The President of Westfreight, Lance Griffin, will continue to lead the company, along with his entire team.

Secondly, there was the work that went into the new Calgary facility this week. It is a huge improvement over the old facility. This state-of-the-art site is home to the new Canadian Freightways Managing Movement service center, shop, and executive offices. The facility has incorporated cutting-edge safety, security, and green sustainability measures into its design. It has capacity for 132 trailers and 50 tractors. It has an excellent investment -- it is an excellent investment in our (technical difficulty) none four years ago.

As we said before, we sold the old Calgary sites and put the proceeds towards building this larger, more-efficient, and more-accessible center. Which takes me to the third point. This year, we expect our overall CapEx to be about the same as the year prior, however, it is more heavily weighted towards the first and second quarters and less heavily weighted in the second half.

Now let's look at the numbers. Although the first quarter is usually slower for us, we're pleased with our results for the most recent quarter. We saw a 7% increase in quarterly revenues $464.8 million, compared with $433.8 million last year. The increase in revenue for the quarter was a result of acquisitions made in the past year, such as in the oil field service area. These acquisitions account for $74.2 million of additional revenue in Q1 versus last year. The remaining decrease is explained by softness in our LTL, our truckload, and our flatbed operations as well.

EBITDA, which is equivalent operating income on our financial statements, was $52.7 for the quarter, up 7% from last year. This increase is mostly attributable to significant acquisitions, which brought in an extra $3.3 million of EBITDA over the last year. Cash flow from operating activities before non-cash working capital came in at $45 million this quarter, versus $41 million the year prior.

As I said, the Fund's sustaining CapEx for 2007 are more heavily weighted towards the first half, although year-over-year, we expect them to be in the same range as 2006. In the first quarter of 2007, net CapEx came in at $13.1 million, compared with $4.6 million last year. As a result of this, total distributable cash was $31.1 million, compared with $33.2 million last year.

During the first quarter of '07, the Fund also increased its regular monthly distribution to $0.1325 per unit, or $1.59 per year. As a result of higher quarterly CapEx and higher rate distribution, the Fund's normal distribution payout ratio came in at 102.2% for the first quarter, compared to 87.8% last year.

Summarized financially, the first quarter showed continued steady growth across all financial indices. Revenues were up year-over-year, so was EBITDA, so was cash flow. Our balance sheet remains very solid.

Looking ahead, although 2007 will be a challenging year by all indications, our businesses are adjusting reasonably well. We will continue to invest in their performance where appropriate. The new CF Managing Movement facility is an example of this. At the annual meeting yesterday, we spoke about two related things, growth and diversification. I do not intend to repeat all of that, but I just want to highlight a couple of things.

One, we are committed to growth in order to create value for our unitholders. To grow in the Canadian industry, we had to diversify into new operating segments, into new regions, so that we could have a broad customer base. However, we do not intend to move beyond our core capabilities in transportation. We intend to be national leaders in each of our four operating segments.

This strategy is working and unitholders have benefited, particularly by our movements to the West. The Western Canadian economy continues to be strong and TransForce is investing in this region to ensure that unitholders continue to benefit from this economic growth. As we complete the first quarter of '07, we can tell you that we will continue to pursue strategic and disciplined acquisitions for growth and diversification. We are delivering value to our unitholders and we remain dedicated to executing this strategy.

Now, I will turn the call over to the operator, so that we can take your questions.

(OPERATOR INSTRUCTIONS) Aleem Israel, Cormark Securities.

Starting on the LTL business, your tonnage was down 9% in the quarter and rates were up 8%. Has the rest of the market adjusted their rates downwards and so that is why you're seeing significantly lower tonnage levels here? I guess what I am getting at is the market, overall, down 9%?

Our indications, Aleem, are that our volume is down. As for the rest of the market, I really couldn't comment. But our volumes are definitely down year-over-year and it is consistent East as well as West. Our base 2006 LTL business out West also showed a little slowdown, about 2%, excluding Byers. It is consistent and in the East, it is also consistent at about 2%

Okay. And, so, have you been moving rates down in the LTL --?

No, the percentages I quoted to you are revenue percentages. Volumes are obviously down. The rates seems be holding. We do not believe in fighting on pricing. We have so far stayed firm on pricing and that is demonstrated in our results.

On the specialty services side, your organic growth in the quarter was about 14%, it looks like. What was driving that?

Well, you have, excluding the acquisition of Westfreight, which is also in there, the growth that is it in -- organic growth in that sector comes from our waste management division, which is growing and improving over last year. We have our dedicated business, which is improving. Our supply chain into our automobile business is improving, and so we're proud to say our load brokerage divisions are improving, as well, with new business. So good organic growth in that sector, even if you -- once you back out the acquisition of Westfreight.

And how much of that organic growth would be the waste management?

About $1 million, $1.5 million.

Is that more on the pricing side or have you picked up new --?

No, it is operations. As you know, since last year, we have improved the back office. We have cut down on the back office and brought that all into our back office here at TransForce. Operationally, we're making huge improvements, with the new President at Matrec, Marc Fox, who is looking at all areas of the operations which were really not addressed in 2006. And our focusing 2006 was related to back office and getting good measurement.

Okay, but on the revenue side, was it pricing still driving?

Pricing is improving, somewhat. As we renew those contracts, it is improving, but I would say it is mostly operational improvements.

Okay, on truckload, Kruger, which is one of your major customers, announced the shutdown of those four sawmills in Quebec. How much is Kruger of your total sales and how much to those four mills represent, in particular?

I do not have that exact figure with me, but it is definitely part of the overall softness we're seeing in the East, here, that has been with us now for -- for a couple of years now, we have been talking about softness in the East. So long as the U.S. dollar continues to be weak, that is going to continue to be a big challenge for us and the market will have to adjust in terms of its capacity.

Okay. Then, lastly, on the Westfreight segmentation, how are you breaking that out by segments, in terms of how that business is allocated between -- ?

We're including that in our specialized services

100% to there?

100%, because the LTL and truckload is very small. It is really mostly over-dimensional and flatbed, but because it is so tied in to the oilfield, we have left it in with the specialized services.

Okay, great. That's all I had, thanks.

Walter Spracklin, RBC Capital.

Just want to focus on tying in your growth plan, particularly on the acquisition side, with your balance sheet. You're up around 2 times. Now, you've added another $90 million in debt. How much room do you have, in terms of where you would like to -- what you're targeting for coverage ratios and so on, available to you, in your opinion, for acquisitions without borrowing any other kind of different financing?

Well, as we have said before, this new facility does allow us to go beyond our current debt level. Although, we are that our, I would say, the outer range that we have been at in terms of overall debt level. We are able to go beyond that. Given the condition that we are in with our equity markets, we have no appetite at the moment to go to equity, so for the time being, we will continue to use the facilities that allow us to go well beyond the current levels in order to continue to grow.

Obviously, the debt levels will rise. In Q2, you will see that we have drawn down on part of the additional accordion and so so long as the acquisitions make sense for TransForce and that they are accretive, we will continue to grow using the debt facility. So it is not a question of whether we can go any further. We certainly can. And It is beyond our traditional levels, no question.

Okay, the only concern here is I'm calculating negative -- organic growth declining down negative 5% for your whole business, now. The East, as you had mentioned, has always been down. Now, the West seems like it is getting soft at a time when you're starting to rise through your historic debt levels, with no real venue for equity. Alain had talked about, before, getting a little bit more, I guess, creative with some ways of raising capital here. It sort of signaled to me that there were some asset sales in the works. Is there any update on that?

There is no update that I can give you right now. There is nothing imminent that is underway. Certainly, we have other assets that can be looked and addressed in order to change the balance sheet in terms of its leverage, but that is not imminent as we speak. The slowdown in the West is really, in our mind, is temporary. All indications are that it will turn around sometime late this year, early next year. So that being said, yes, all indications are that the first three quarters this year are going to be slow, but we are still looking at good fits for acquisition that will ultimately benefit TransForce, as a whole. In the East, we certainly have challenges with the strong Canadian dollar, but for now, there is no imminent transaction regarding assets.

Okay, no, you just mentioned you have been signaling and it was quite clear, your message here, that you are in a slow down the next three quarters. You're running at over 100% payout ratio. I'm just wondering, why did you increase distributions in the first quarter?

We're going to be heavy, as we said, the first two quarters of this year on CapEx and the reason we're doing that is because we have good reason to do that. We're investing in our oilfield. We're removing older units and in doing so, we're going to be reducing our overall maintenance costs. So that is something that we're not going to slow down on.

We're also investing in other areas of the Company that require CapEx, so we're going to be heavy in the first two quarters of this year. However, we're going to come in for the whole year more or less where we were last year on a net CapEx basis. And the reason we increased the distribution in Q1 is in looking at the '07 year, our current view of the '07 year still has an excess, in terms of distributable cash. So we felt it was appropriate to increase it when we did, knowing that even with the current view of the year, we will still have an excess.

Okay, last question is just on fixed costs and G&A. That was up 12% compared last year and ahead about $79 million ahead of what we were looking for. Is there any in that quarter that is probably a one-time, or should we start looking at a higher quarterly run rate in your SG&A fixed costs?

No, I would tell you that I think the biggest driver of that is as we acquired LTL, we acquired Byers last year, late last year, LTL has a higher fixed cost component than non-LTL, so most of that is driven by the change in business mix. Our base G&A is unchanged from where we were last year.

That's great. Thanks very much for that color.

Byron Berry, Dundee Securities.

Much of what I wanted to ask has already been answered, but I'm going to ask a question a slightly different way. In terms of pricing increases you experienced that you experienced in -- that you were able to apply in LTL, what is the visibility for that on a go-forward basis? Are those price increases going to stick? Can you give some color as to why they will or won't?

All indications on pricing is that they will stick. Our pricing really has not decreased. It has actually improved, so I think going forward, particularly in the LTL and Parcel, those pricing increases will stick. The challenge there, currently, for us is volume. In Truckload, no question, there is severe pricing pressure, especially in the East. It is tremendous. That will continue, so long as the capacity in that segment of the industry is not tailored down across the industry. There's going to be people out there that are going to be simply competing on price.

Our approach, as we've said in the past, is not to do that. We would prefer to pull the capacity and take our trucks off the road in order to maintain our pricing, but it is still very difficult. It is very fierce, and so there is tremendous pressure on pricing. Any pricing increase in that sector is going to be very unlikely. We are starting to see pressure, as well, in our flatbed operations, particularly around the construction segment, and so there, too, pricing is going to be very tough.

Maybe I could drill down just a little bit on that and ask how were you able to apply the price increases? Is that based on competitive bid situations, or is this fuel surcharges being baked into this number?

No, in LTL every year, the Trucking Association essentially provides that guidance for the industry. So, traditionally, they have provided increases of four to 6%. Of course, not all that sticks and that is based on labor costs, fuel, but not all of that sticks. I will tell you that in LTL and Parcel, more than likely because of the fixed cost component that is required to be in that industry, those costs are going to continue to rise. So the pricing will apply. You probably won't get the full recommended rate increase, but you will get some. Where as in Truckload and Specialized Truckload, very different, very different and much more competitive.

Thank you very much.

Nav Malik, Scotia Capital.

Just a bit further on the pricing here. I just wanted to know how does that price increase in the LTL compare with previous periods? Is it stronger or weaker?

It is pretty comparable. The recommended price increases that we've seen the last three years are pretty steady between four to 6%. That is not what sticks. You may end up, depending on where the customer came in and what the current conditions are, part of that will stick. You may go from two, 3%. It is never the full amount will stick, at least it has not been our experience. But there will be price increases for sure in LTL and Parcel.

You may have already mentioned this, but I might have missed it. On the volume side being down 9%, could you just -- what region did you see the volumes? Was it across Canada?

In the East, our revenue is down roughly, year-over-year it is roughly 2% in the East, our revenue number. Volume in the East was down roughly 7%. Pricing was up 8%, so net-net, we came out roughly 1.5, 2% behind last year. In the West, excluding Byers, the base business, in terms of revenue, was down roughly 2%. Same indication there -- volume is down about 10% and pricing is up 9%. The other thing in the West, which I should note, is we lost an important customer late last year in the West and that volume is going to be replaced, but it is going, obviously, take some time. As we speak today, we're still seeing some of the impact of that in the West.

Okay, and that is on the LTL side, or that was the parcel delivery?

No, that is also in LTL.

Okay, but you also mention in the MD&A that you lost a customer in your parcel delivery segment.

Yes, in parcel delivery, that is not as big a customer, not as big customer, but yes, that is also impacting us. There you see pricing, again, is improving over volume declines.

Okay, then just lastly, I was wondering if you could maybe provide some details. With respect to the lease buyouts, $39 million roughly, could you maybe just outline what you would you expect to save in terms of lease costs?

That is a good question. We invested over $30 million to acquire two terminals, one in Toronto on Dixie and the other one being the Canpar Montreal terminal here. Those will save us approximately $3.2 million in rent per year and they are core strategic locations for us that will also allow us to, particularly the one in Dixie, will allow us to consolidate operations into that one terminal, again, getting us out of other leases that are in other operating divisions.

Okay, and then in terms of interest on that, roughly about, I guess on the debt would be roughly about $2.5 million of interest that you are -- so, there is a bit of the net savings from that?

Yes, our current -- we're bordering at 6 and change, so there is going to be a savings.

Okay, thanks very much.

Benny [Young], BMO Capital.

If I could have follow-up on the capital lease, again. Obviously, you just mentioned how though you are not really spending lease part, it will definitely your capital lease going forward. So we are looking at the $0.4 million acquisition under capital lease more like the rate going forward? Can I assume that?

You're talking about capital leases on our rolling stock?

That's right. It's much lower, you've been trending down.

You're going to see very little of that going forward, because we're simply going to be applying our current debt facilities to acquire the rolling stock and we will be doing less capital leases going forward.

And then last question, in your disposable cash statement, obviously you have scheduled that payment now, because of some of you're refinancing is a lot lower than last year's. Do you expect this to continue for the rest of the year, around the $1.45 -- ?

Is not going to be any higher than that, because as a result of the refinancing that we did in Q4 of last year, we took out $60 million plus of capital leases and conditional sales-type leases on closing of that deal. And so, obviously, the scheduled payments have dropped as a result and as we go through this year, we're going to be taking out some other scheduled debts. So if anything, you'll see that number drop somewhat. Not too much, just a little bit. But it certainly won't be any higher than that.

Okay, thank you. That's all.

Gentlemen, there are no further questions at this time.

Thank you, Frank. Since there are no more questions, I want to thank everyone for participating in this conference call. For any of you who joined while the call was in progress, a recording will be available until May 2, 2007, and you can access that by calling 1-800-558-5253, or in the Toronto area, 416-626-4100, and entering pass code 21336826. Thank you all and have a good day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your purchase and ask that you please disconnect your lines. Have a great day, everyone.