TFI International Inc (TFII) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the TransForce Inc. third quarter 2009 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 Friday, October 23, 2009. I would now like to turn the conference over to Mr. John Lute. Please go ahead sir.

Good morning everyone. Thank you for joining us today to discuss the results for the third quarter of 2009 for TransForce Inc. A news release detailing the results for the three and nine month periods ended September 30, 2009 was issued by a news release on Canada NewsWire this morning.

Alain Bedard, the Chairman, President and CEO of TransForce will discuss the highlights and reviews the company's financials. Following his comments we will open the line for questions from analysts.

Analysts and portfolio managers are welcome to ask questions over the phone, and the operator will be providing instructions. We ask that you please only ask one question at a time followed perhaps by one follow-up question if necessary, and then go back into the queue with any subsequent questions. This will allow for all participants to get their questions answered in a timely manner.

Business media and shareholders 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 However, we would ask that you do not quote callers unless that individual has granted their consent.

If any media want to ask follow-up questions, please contact me after this call, and my number is 416-929-5883. It's also an earnings release. Shareholder questions should be directed to Alain Bedard.

A recording of this call will be available until midnight on October 31, 2009, and that recording can be accessed by using the dial-in and reservation numbers listed in the earnings release.

Now, before Alain begins, I need to read this statement. The following discussion will include a review of developments that affected TransForce's performance during the third quarter ended September 30, 2009 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 results of the Company to be materially different from those expressed or implied.

Now I will turn the call to Alain Bedard, the Chairman, President and Chief Executive Officer of TransForce.

Thank you John, and welcome to everyone joining us today on the call. I'm going to keep my remarks brief and leave as much time as possible to field your questions. I'll review the third quarter's financial results, and then we will open up the lines for questions.

So before I get to the result, I want to provide a little background regarding the operating environment. Those of you who follow our industry know that it continues to be a challenging time. Manufacturing and exports continue to be down in eastern Canada, and central Canada too, while Alberta energy sector continues to struggle in the west.

We are also witnessing a run-up in the value of the Canadian dollar, and I am concerned about how this will impact any recovery in the manufacturing sector in Canada.

As you would expect, demand for our service is down, okay, with this economy being so bad. Although we are going through a little bit of some kind of a small pickup now.

Against this backdrop we have continued to focus on what we can control, and these efforts have produced tangible results. In the third quarter, I'm pleased that we were able to maintain our EBITDA as a percent of revenue at about 13.7%. This percentage is consistent with what we have achieved in 2008, the same period. It's also a testament to our people's ability to adjust our operating costs and administrative expenses in the face of declining revenues.

Yes, demand is down, but we have applied maximum effort towards protecting our key margin. That has two parts. Controlling costs is obviously one, and it's very important. But just cutting expenses is not how we run a business. So business would be easy if that is what it's all to it.

The other part in a very difficult environment is maintaining our revenue, holding onto as much profitable revenue as we can, and we are working hard towards that goal, and we are also gaining some new business at the same time.

While these efforts protect value for our shareholders today, they also position us to create even more value when the economic climate improves.

So let's review our results for the third quarter ended September 30. Total revenue were CAD451 million, a 24% decrease from CAD595 million the third quarter of 2008. Revenue excluding fuel surcharge decreased 18%. This year over your decrease in revenue is the result of a lower demand for our service in a tough operating climate.

The decline in revenue was evident across our four operating segments. Our LTL, which contributes to 29% of TransForce total revenue, quarterly revenue was CAD129 million compared to CAD169 million a year earlier.

Our package and courier contributed CAD67 million in revenue or 15% of total overall revenue compared with CAD76 million in 2008.

Our revenue from our specialized services was CAD106 million or 22% of revenue compared to CAD76 million a year earlier.

Finally our Truckload, our largest segment, contributed 35% of total revenue, okay. Our revenue for the quarter was CAD160 million compared to CAD215 million the prior quarter of last -- the quarter of last year, 2008.

While EBITDA decreased 25% to CAD62 million from CAD82 million a year ago, as I mentioned earlier, TransForce EBITDA as a percentage of revenue was largely unchanged at 13.7 versus 13.8 in the third quarter of 2008. Again, this is largely a direct result of our cost, okay, reduction effort.

Cash flow from operations before net changes in noncash working capital balances related to operation was CAD51.9 million compared to CAD66.9 million in 2008.

Earning before income tax was CAD25.2 million compared to CAD38.4 million in the third quarter 2008.

Previously TransForce made a commitment to lower debt and related expense. We are exactly where we need to be in meeting that commitment. We are on track to meet our 2009 debt reduction target of CAD100 million.

Net income was CAD17 million or CAD0.19 a share compared with CAD26.5 million or CAD0.31 a share a year ago.

During the quarter TransForce also paid a CAD0.10 dividend per share.

Now let's turn to our year-to-date results. Through the first three quarters of 2008 -- '09, total revenue decreased 21% to CAD1.4 billion from CAD1.7 billion in the same period of 2008.

EBITDA decreased 19% to CAD166 million versus CAD206 million in the first three quarters of 2008.

Net income declined to CAD38.1 million or CAD0.43 a share from CAD64.9 million or CAD0.75 a share a year earlier.

Our people have done an excellent job of controlling costs and servicing our customers in an economy that continues to struggle.

So at this point I'm going to turn the call over to the operator so that we can take your questions. Operator?

(Operator Instructions). Walter Spracklin, RBC.

Thanks very much, good morning. Just looking at your business by business, it seemed your specialized services was down quite a bit, and you touched on that with Calgary. Just wondering if you could give us some sense of the pricing in each of your divisions. But as a follow-on to that, a lot of money has been raised in the equity markets right now out in Calgary, CAD1.5 billion over the last week or two. These companies aren't known to sit on cash for very long. What's your sense of the deployment and what areas that might be deployed in? Are you poised to potentially benefit from that out in your western operations?

Well, you see, if we look at our energy sector, it's the worst quarter that we have ever seen, and we did have three quarters, because year over year we are about down 50% on the revenue. So it was a disaster of a quarter in terms of activity over there.

Now, I think all the energy analysts in Calgary, okay, they all go to one fact that we are probably at the inflection point on price of natural gas, and like you said, with all this money that's being raised, now we could see a little bit more of activity. Probably not in the last quarter of 2009, but that could be a possibility early in 2010, which is normally our best quarter in that sector.

Now in terms of margin, if you look at what we have done, okay, across the board, okay, except for our specialized services, which in there we were, with all this revenue going down, we were able to maintain to a certain degree, because our waste management business did better than last year, but our energy did much worse than last year. So we're not that far from where we were, but if ever energy comes back sometimes early in 2010, that will help this sector.

Our parcel is not too bad. Volume-wise we are down a bit. But we were very close to being as good as we were last year in that sector.

Our LTL, we are suffering a bit in the east, but we are suffering big time out west.

Now, this -- the fact that the energy sector could start to -- waking up within the next 12 months is also -- it's going to help our LTL sector, because we are down big time in western Canada. I mean, our -- we have a -- for instance, our Byers division, even our CF division have been affected tremendously. Our volume is down twice as much in western Canada than it is in eastern Canada in our LTL. So --

That actually is a good segue into my next question. When you look at your businesses, when you look at your package and personal courier, your LTL, truckload, and even in -- within your specialized services, what are the areas of focus for you? And where do you want to concentrate your acquisitions? Where do you want to put your energy and time in growing the business?

And then on the flipside, what are the ones that might -- you'd consider perhaps noncore to your operation that you might look at ultimately divesting?

Yes. Well, you see, our focus has been always on the LTL and parcel. Now, if you remember, we've announced that we will be acquiring the retail division of ATS, so that's going to bring our -- this division, the parcel up about CAD120 million. And there we know that we could do good.

Our LTL, we know that the business has dropped tremendously, but this is going to come back.

Our Matrec division is doing very, very good, so we are very happy with that, although we bought that company a few years ago, and it's -- we are never going to be a BFI or a waste management company, but we see a niche there where we could grow even a little bit more into the eastern Ontario market where we have a landfill there. So there's some possibility of growing.

Our [Roland] divisions in Quebec are still growing through a small acquisition here and there.

Really the energy sector is the big question mark for us. We are doing very good on the oilsands side of the business. We're doing quite well on the US side. It's really Alberta where we are getting hurt pretty badly. And don't forget that we are a trailing -- TransForce is trailing two major supplier in there. We are number three in terms of size over there. So this is a question mark for us. We have to see exactly what's going to happen in 2010.

So really our effort, our time is invested -- mostly parcel, LTL.

Truckload -- in my mind, it's a business that's going down and down and down because of the Canadian dollar, because of the manufacturing, because most of that business is -- was built on the trans-border business. And that's a business that's really -- is disappearing because our manufacturers in Canada have a very tough time competing with the high-value Canadian dollars.

So it's -- to me it's going to be much clearer by the addition of ATS and what we can do between ATS, ICS and Canpar. We have really -- like Mike Andlauer was saying, the power of three now. Our coverage is going to get better, our density is going to get better.

And the LTL side, the day that the west gets a little bit better in terms of demand -- if energy starts to pick up again, if consumer have more confidence that this period of losing jobs, like we did big time over the last 12 months, is over, then the consumer will start to come back, so that's going to help our LTL.

So I think that the most difficult part is going to be the year 2009. And I am quite confident that we will do much better in 2010.

Now, you've got some good critical mass now in your package and courier, you've get good critical mass in your LTL. ATS is under your belt now, you've got some excellent potential to reduce some of the overhead and admin costs there. When you look out -- and you said -- you indicated that we might be at a bottom here, and the west can pick up if the consumer comes back. Do you have a view on where either your EBITDA or cash flow -- what you consider to be up 5%, 10%, 15% in that kind of scenario? How do we look at your cash flow generation in a recovery year?

In a recovery, the recovery in my mind is going to be slow. It's not going to be a big V where we went down and we are going to be up big time. So in my mind, so everything that I read and the feeling we get from our customer is that slowly we are going to come back.

So let's say 2008, EBITDA for TransForce was 280. This year we will probably run between 220 and 230 because really ATS is going to be under our belt probably by mid November because we are still waiting for our buddies in Ottawa to stamp the deal, which they will, but it's going to take a little bit more time. So the effect in 2009 is not going to be really there. But we will gain that ATS under our belt for 2010. So let's say we close between 220 and 230 in a very difficult year, with ATS. In my mind, we should be over the 250 mark for 2010.

That's great color. I appreciate it. That's all my questions.

Nima Billou, Bloom Investment Counsel.

Good morning. First of all, I just wanted to give you credit where credit is due. You guys have done an excellent job on cost control, given the current environment. So I just wanted to first of all pass that along.

Thank you. Thank you.

But with respect to the cost control, I know some of it is efficiencies in IT systems. But if some of it has to do with people, are you kind of hitting a limit because of not wanting to cut to the bone in preparation for a rebound? Or is there still --

Yes.

-- chance for improvement and to keep up if the environment gets a little worse in the near term?

Yes. Yes. It's a very good question. It all depends on which sector you're talking about. If we talk about truckload, we don't see that business really coming back to the level of 2006. So those are permanent.

If you look at our, let's say, parcel business, really this is -- relates to technology. So these people will never come back. And even now we are looking at another wave of changes between our parcel business within the next two, three months. And those are permanent changes because of technology, because of tools.

For instance, if you take the example of ICS, we still sort very manually in that sector, compared to Canpar, or let's say compared to ATS. So there's still a lot that we could do there to bring our cost structure down.

LTL, the big issue there is really in a small town where we have to do something. We have to consolidate more of our business with one or two of our carriers within our group. Now, that's one of the reasons why we have to let go one of our guys. The President of CF had to be replaced in the summer of 2009 because that job was not being done.

Now I could tell you that that job is being done. I am working very closely with Darshan, and that job is being done. So that sector of consolidation out west, we are doing the same thing. We have done that in Quebec and in Ontario as a first wave early in 2009, but there is still room of -- on the improvement side there.

So to answer your question, TransForce religion has always been to question ourselves on a day-to-day basis in what can we do to make the company better tomorrow. The only difference is now, since -- on the acquisition side has been quite quiet because of all the circumstances that we all know, about a year ago I decided -- with the bankruptcy of Lehman I decided to jump in on the operations side, which I was a little bit away for the last four or five years, and I'm working today very closely with my guys trying to find better solutions and reducing our cost structure.

So it's always been an ongoing process, but we put more pressure now. And you know the beauty of TransForce is that we respect the culture of the company. A lot of our businesses are standalone, so that is a fantastic recipe. Now, there is a little bit of a -- a weak side to that is that we are not a UPS or a FedEx. So we have a little bit -- so we are working on a back office to reduce our costs but keep our identity.

Thanks very much for the detail. One follow-up question. You had mentioned the acquisitions, and the Andlauer situation was a very unique situation, there's a lot of scale. You love this job, but there's always been the question of succession planning. You're bringing on Michael Andlauer, he is still providing operating expertise. I know you can't comment specifically, but is there a thought maybe down the road to maybe going after the healthcare business and bringing him in as a guy underneath you?

Well, a lot of that depends on Mike. I am buying a big part of his business. I really like the guy. I have lots of respect for what he has done. And I think that Mike is going to stay very close to us in the near future.

So it will all depend, but at least you're benefiting from his operating expertise for the retail business.

Absolutely. That's the -- the strength of TransForce is that we buy good companies. And good companies are always run by good guys and good teams. So we always get better. With Mike and his team we are looking at things that he has been doing, which are very good. And we can learn from that.

And the same thing will apply to ATS, where, okay, we're -- within our own division like ICS and others, there's a lot of things that we do that may be a little bit better than the way he was doing it. But -- because he was by himself. So that's always the power of growing your business with strong companies. Our philosophy is very different than some other company that wants to buy a rundown, (expletive) company, you won't pay a lot, but what are you getting? Right?

Well, let's hope you continue for a few more years yet. Thanks a lot.

We are having lots of fun. Although the year 2009, I want to forget all about it. But I mean (multiple speakers)

I think you and a lot of people.

Yes. Well (multiple speakers) it's going to be soon over, eh?

Yes. Well, thanks very much for the detail.

Youssef Abboud, Clarus Securities.

Just one question and a follow-up. If I look at your TL business, and I would like to focus on quarter over quarter because it's more important than year on year, it actually went up a little bit. However, your -- the LTL business show a dramatic decline, and you explained why. Now, the -- so the TL business may not be as good -- or may not be as bad, I mean, if I compare quarter on quarter, and I want you to give me a flavor here.

And on the LTL side, is it possible the reason of the decline, apart from the economic situation in the west, is it possible that you're not giving up pricing and you -- intentionally you're losing volume because you don't want to give up on pricing and margins?

Yes. Okay. To answer your question on the truckload side, okay -- yes, it's true because we have been gaining -- out west we are not doing too bad, and our island division in Ontario has gained more business lately. So Ontario truckload, which is mostly our island, has done a much better job in terms of growing the business than our Quebec-based truckload operator.

In terms of the LTL, okay -- yes, you're right on that that too -- is that we have lost business in a sense that if a customer is really not going to be contributing because we are having too much either competition or the customer is going through a very difficult time -- because some of our customers, we have to be careful about the payment.

So if we see a customer that is in risk of going bankrupt, we could pull away from this guy. We are not going to wait and see because, like for instance Smurfit and Abitibi, I got stung there for CAD2 million. So this is why we are very careful with some of these guys, and we say, hey, you know what, we can't service you because you're too much of a credit risk. So we see a little bit of that in the LTL.

The other thing also that affects our LTL in Quebec and in Ontario and in western Canada is that the minute those plants are being shut down -- you know the way it operates, LTL in Canada, is that you move out of Toronto with an LTL load, or you move out of Montreal with an LTL load, or Calgary with an LTL, or Edmonton, but then you get into a region, like for instance Sudbury, so Toronto/Sudbury you've got an LTL, but our of Sudbury you've got to get a truckload to get back, because there is no LTL out in -- and in Sudbury. So if all the plants are closed, then you also lose revenue because you're coming back empty. And this is something that we've been (multiple speakers). Eh?

So it's a seasonal factor because plants close in the summer?

Absolutely. Absolutely. So that was one of the effects that we are going through right now, so then what you have to do is you have to turn around and adjust your rates, because take for example Sudbury, or the Maritimes, where everything has been closing down -- or Val-d'Or or the Saguenay area. So we have to turn around and adjust ourselves, but that takes time. So it (multiple speakers) our revenue.

So (multiple speakers) some improvement on that front.

Hopefully -- our feeling is that we are working really on the cost side to bring more density, even more than what we've got today. But on the backhaul side, we are dependent on the region that we are servicing and depending on the backhaul provider that sits over there now. If all the backhaul providers are all closed down, then we have a problem, and then we have to sit down and say, hey, if you want to ship an LTL shipment into that area, there's no backhaul, so we have to adjust our rates.

Just one last question is regarding the margin and the cost cutting. Now, this is -- as I understand, these are permanent. So these --

Yes.

These are permanent. Shall we expect further margin improvement? Is there a possibility for further margin improvement over the next few quarters? Or this is it?

No, it's not it. It's not it. It's not over. We are still working on that. I am involved. Like I said earlier, on the M&A side it's very light for us. We are doing ATS. So compared to let's say two years ago where I was involved about 25%, 30% of my time supervising my own Presidents and people, today it's the opposite. And the rest was for M&A.

Today it's the opposite. Most of my time today is spent on working with my guys, analyzing all the situation, touring the terminals. As a matter of fact, I'm leaving for western Canada. I'll be there next week. I have toured some of our terminals in Quebec. I will be touring our network in Ontario to see what we could do working with our managers, with our top guys over there.

And that's an ongoing process, because I don't see M&A activity being very strong for us in 2010. So my job is really to sharpen up the costs even more.

Got you. Thank you very much.

Jason Granger, BMO Capital Markets.

Good morning. Just looking at your truckload business a little bit more here, so it does seem that if we exclude fuel surcharges, looking at your truckload division, Q3 versus Q2, the rate of decline year-over-year moderated somewhat, down I guess about 17%, 18% in Q3 versus a 22% decline in Q2.

But going forward here you've touched on the run-up in the foreign exchange and the weight that that could -- on the manufacturing sector. How should we be looking at your positioning in your truckload business longer-term. You've been right-sizing your fleet. Do we look for you guys to continue to sort of right-size the fleet there? Is there a lot more room to go in terms of right-sizing the fleet? And where do you look to fill in that revenue in other areas of your business?

On the truckload side, I think we are still going to go down because we are still closing plants in Canada, and the market is still very, very competitive for freight in that sector. As a matter of fact, it's now getting very difficult to get it to the US, if I take the trans-border business and come back. There's lots of demand for freight from the US into Canada in the truckload sector, but there's not much going southbound. So that business keeps on going down and down.

On the domestic side of our business, there again, we have lost a business to fierce competition. In Ontario, as you may not know, there is a major carrier in Ontario that went under the protection of the court, and it seems like these guys don't understand that you can't work for nothing and blame the customer. But they took the bite, and those guys are competing with stupid pricing. So we have to pull away.

So to answer your question, yes, we did better in three in terms of losing business. We've lost less in percentage in three than in two, but it's not going to -- if you look at four, we are still going to be losing business there, Q4.

Now, the costs in Q4 should get somewhat easier, we would expect. That's the quarter that you guys started losing that, revenues in truckload last year.

Yes. Well, we started losing since 2007. Probably mid or late 2007. So 2008 we lost business there and we kept on losing business because it's disappearing. Now, in our specialized truckload, it's -- it may not be as bad as it is in our regular truckload sector. But I don't anticipate -- let's say our truckload was down 18 points in Q3. Q4 year-over-year we may do a little bit better. I didn't have a chance really to look at that yet.

Okay. Looking at the cost side of the business, you've talked about the margin expansion and then taking costs out of the system. How much opportunity do you see in Q4 in terms of taking costs out of the system? Earlier you had been talking about oilfield services getting more aggressive on taking the costs out of your rig relocation business. And also removal of less than truckload terminals. Did we see much impact in Q3? Or is that more of a Q4 event or a 2010 event?

No. You'll see more in Q because you know the way it, is we have to inform the employees, so it takes a little bit of time. So a lot of that was done in Q3 but will take effect only sometimes in Q4. I'm talking western Canada where we made some changes in Kelowna, Kamloops, Medicine Hat. We made some changes also in Vancouver. We are building a new terminal in Victoria, so there -- it's going to affect the business there. We will be more efficient there as well.

What else? We are looking at Regina right now. So we are looking all over the place really. So it's an ongoing process.

You've seen some of it in three, you'll see probably a little bit more in four, but you'll also see some in one, because we are looking at the same thing within our parcel division, with the type of coverage and now with ATS. With ICS. And Canpar. So this is not over.

So in Q4 can you quantify or sort of give us a range of values, what sort of savings we might see in less than truckload and oilfield?

Yes. On a yearly basis what my guy Darshan sent me, we're looking at least a CAD3 million -- on a yearly basis -- saving, of all the changes I've just talked about.

Okay. CAD3 million per year?

Per year, yes.

Yes. Okay. Any thoughts on CapEx for 2010?

It's about the same thing as what we have done this year. Don't forget our business is down 20%. So down 20%, you need 20% less equipment. But our CapEx this year will run, net CapEx about 55. And the forecast so far that I have seen for 2010 is we will be playing the same neighborhood. We've pre-booked a lot of equipment because of the favorable dollar right now and also because of that situation where they are not selling that many trucks, so the price is quite good still now. And you know the story about this new engine in 2010, so this is why we did a lot of ordering and getting our equipment in Q2 and 1 of 2010.

Okay. And then roughly what is it, a CAD375 million debt facility that comes due in about a year, refinancing on that, are there any developments there?

Yes, yes, yes, yes. In my mind we are going to have a new deal before we get out our annual report. So this is March 15. So I'm not going to wait until let's say October of 2010. I would be stupid to do something like that.

Now, on our syndicate, probably the facility, I'm going to be asking for CAD100 million less versus what I had previously. But there's lots of appetite from the banks. We have some new banks in our syndicate that -- and they were not present in our syndicate, which is -- one is a major Canadian bank that wants to jump in, so I don't anticipate any issues there.

We will be working with a new banking deal that's going to reflect more a corporation than a trust, because don't forget that this banking deal was done four years ago, so it was in 2006, and at that time we were still a trust. So we have lived with that, okay, so this is why we have a stupid thing about the debt, the adjusted debt where we take the rent times five, and that doesn't make any sense to me. So we will have a much better structure of that, and we have I think a good network of Canadian banks that will be supporting us.

And we will probably ask for less credit because we want to make sure that we get the best pricing. And again, like I said before, our target for TransForce is always to play with twice the EBITDA in terms of debt. So let's say, like I said to Walter earlier, we believe that 250 is the number for 2010, minimum, so our target should be closer to five then to six or seven. So we will keep on reducing the debt in 2010.

Great, that's helpful. Thanks for the color.

Okay, very good.

Sir, there are no further questions at this time.

If 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 midnight, October 31, 2009. And you can access that by calling 1-800-558-5253 or 416-626-4100, and entering pass code 21440036.

Thanks, and have a good day.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everybody.