TFI International Inc (TFII) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the TransForce Inc. Q2 2010 results call. (Operator Instructions). As a reminder, this conference is being recorded Thursday, July 29, 2010.

I would now like to turn it over to John Lute. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us today to discuss TransForce's results for the second quarter and first half of fiscal 2010. A news release outlining the results for the period ended June 30, 2010, was issued via Canada NewsWire earlier this morning.

Alain Bedard, the Chairman, President and CEO of TransForce, will discuss the highlights for the quarter and the first half. And he will probably keep his comments quite brief, and after them we will open the lines for questions from analysts.

Analysts and portfolio managers are welcome to ask questions over the phone, and the operator will provide instructions again. And we ask that you please ask only one question at a time, followed by one follow-up question if necessary, and then go back into the queue for any subsequent questions. And 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 However, we would ask that they do not quote callers unless that individual has granted their consent.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. My number is 416-929-5883. It is also on the earnings release. Shareholder questions should be directed to Alain Bedard.

A recording of this call will be available until midnight on August 5, and that recording can be accessed by using the dial-in or 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 second quarter ended June 30, 2010, 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 over to Alain Bedard, the Chairman, President and Chief Executive Officer of TransForce. Alain?

Well, thank you, John, and good morning, everyone. As you've seen in our news release, TransForce reported another quarter of improved performance, with increased operating income before depreciation, EBITDA and adjusted net income.

Behind these numbers was a slight increase in revenues. What this means to us is that there is now a least some stability in the marketplace, and it is possible that we've seen the worst of the economic slowdown. Volumes were up somewhat in the second quarter, although we are still experiencing pressure on pricing in some segments due to overcapacity in the industry. To achieve this result, we continued to manage our costs carefully, using both discipline and ingenuity.

Our LTL segment generated total revenue of CAD138 million in the second quarter, up 3% from the same period last year. For the first half, total revenue was up 1% to CAD265 million, but without the fuel surcharge, it was flat for the quarter and actually lower for the first half. Here, increases in volume were basically offset by a lower US dollar.

Cost reduction helped us to hold the operating margin before depreciation at 11.1% for the half and to increase it to 14.1% for the second quarter.

The Package & Courier segment reported a significant jump in total revenue to CAD94 million compared to CAD68 million in the second quarter of 2009. This is almost entirely the result of the acquisition of ATS in the fourth quarter of last year. Without it, revenue would have been essentially unchanged.

Operating income before depreciation and amortization increased to CAD16.3 million from CAD12.5 million in the quarter. As a percentage of revenue before fuel surcharge, that was 18.9%, down slightly from 19.4% a year earlier.

For the first half, operating income before depreciation and amortization was CAD26.3 million compared with CAD19.3 million for the first half of 2009, and the margin increased slightly to 15.5% versus 15.3%.

Specialized Services increased total revenue to CAD114 million or 9% in the second quarter from a year ago. For the first half, total revenue was up 2% to CAD224 million.

Fuel surcharge was basically unchanged in the second quarter and the first half compared with last year. Operating income, on the other hand, increased by 60% for the quarter to CAD19.9 million and 32% to CAD40.7 million for the half.

The margin for the second quarter was 17.6% and for the half was 18.3%. The increase in revenue was largely the result of improved activities in oilsand and oilfield services.

Total revenue from Truckload was CAD164 million in the second quarter, up 3% from a year earlier. For the first half, its total revenue was basically unchanged at CAD315 million. However, operating income was up 26% in the quarter to CAD19 million and up by 13% to CAD30 million for the half.

The margin increased to 12.8% from 10.2% for the second quarter and to 10.5% from 9.1% for the half. This was the result of two things -- better utilization of equipment with a stability on our prices. The second factor was a continuing effort [on key of our] productivity improvements.

Our commitment to reducing debt level has resulted in a year-to-date reduction of CAD28 million, CAD10 million of which was paid down during the second quarter. This reduced interest expense by almost CAD2 million over the first six months of the year. And we are still on track to lower our debt by about CAD100 million.

So for us, the key figures for the second quarter are a 7% increase in revenue before fuel surcharge compared with a 29% increase in operating income before depreciation and a 106% increase in adjusted net income.

We continue to believe that our efficiency means that we are well positioned to leverage an increase in activity when the recovery takes hold into even stronger bottom-line results.

Now I would be pleased to take your questions. Operator?

(Operator Instructions). Walter Spracklin, RBC.

So, it's interesting -- and you mentioned the CAD100 million debt reduction target you are continuing with. Now, you did announce an acquisition after the quarter, EnQuest/Speedy acquisition, and (multiple speakers) about CAD35 million there. Are you going to update that, or is that CAD100 million going to be --

Yes, yes.

Is that after that or before that?

It is before that. So let's say, because this is still conditional to shareholder approval, so let's say by the end of August, the deal has been approved by the shareholder. Then we have to assume CAD35 million of debt. So we don't necessarily -- there's about CAD3 million or CAD4 million of cash, okay? So we are assuming more debt, okay?

So really, the CAD100 million is before the deal. So let's say we would pay the deal cash. The debt will come down, instead of CAD60 million, it is probably going to be closer to let's say a CAD60 million to a CAD70 million.

Okay, so that makes sense. Okay, CAD60 million to CAD70 million. All right, but no changes in your sort of overall -- you mentioned 2 to 2.5 times EBIT.

Right.

That's where your comfort range is still? Okay.

Yes.

My second question there, I guess, is on pricing. I was wondering, you did talk a little bit on the pricing environment in each of your divisions. But can you talk a bit about -- you did note in your outlook and your commentary a bit of a change in the underlying conditions, and you're a little bit -- you sounded, anyway, a little bit more optimistic.

Is that true? Are you seeing -- are you a little bit more optimistic on your pricing environment? And can you touch on that on each of your segments? So is it the same for all of them, or is it different for--?

No, no, it's different; it's different. If we look at our energy sector, just to start with that, we saw an increased level of activity in Canada. So there, the pricing has firmed up a bit. Or maybe the best way to say it is that the discounting is less than it was, let's say, six months ago.

Looking at the number of wells that are released and things like that for the rest of the year and 2011, we feel that this trend of improving the pricing or having less discounting on the pricing is going to continue for the rest of the year and 2011.

Does that mean positive, neutral or still a little bit negative?

I would say it is positive in the sense that we used to discount our pricing by 20% to 30%. Now we are discounting that by about 10%, 15%, 20% now. So it's much better. So this is why we saw a much better division there.

Now, if you talk about our Truckload, our Truckload -- I mean, where we are doing good there is we have improved yield, improved activity, a little bit better pricing coming back from the US, but basically, finally, we have a stability there on the volume.

We feel that the pricing will probably remain neutral for the rest of the year and hope that maybe 2011, the pricing on the Truckload side of the business, both specialized and the box, should improve probably in 2011.

What I'm reading, what's happening in the US, the truckload market there is really great, but Canada is a different market because our Truckload mostly was built on international trade. And the international trade between Canada and the US has been going down for the last three or four years. So that's why we're a different -- it's a different game here in Canada.

On the Package side, we've never been too much affected there. So we are okay there. We are just trying to grow our business there organically or through some acquisition.

But pricing I would say is neutral. We think, reading about FedEx and UPS, what these guys are trying to do in the US is, they understand that we need some prices to get better over there. And I think that this is going to overflow into Canada.

On the LTL side, I mean, that's where we suffer the most, mostly out West. We are still working with our customer. Price pressure is less today than it was six months ago, but it's still there. Competition is still very aggressive, looking for volume.

But again, there we are looking at the Americas, like UPS and FedEx. And what they've said about LTL -- and I've looked at ODFL's number yesterday. I mean, great, these guys got tons of increased volume. We don't see that here, us. If you look at our volume, it's up a little bit. There, we've been affected by the US dollar. I mean, just TST Overland, it cost us close to CAD5 million, bottom line, just at the US dollar. But pricing pressure is still there, but not as much as it was, let's say, six months ago.

So the outlook, that's why I'm a little bit more positive, not for 2010 really, maybe 2011. '10 for me is going to be another year of getting more efficient, really trying to grow a little bit the market organically, and keep an eye on whatever opportunity is there in terms of acquisition.

Great, those were my two questions. Thanks very much.

Jason Granger, BMO Capital Markets.

Just a couple questions here. If we look at your four segments, looking out, say, 12 to 18 months after you you've had an opportunity to take further costs out of the system and realign operations, remove redundant facilities and whatnot, can you give us a sense of how we should look at normalized EBITDA margins in those four segments?

Sure. I mean, if you look at what we've accomplished so far, our package is one of our best margins. It is our best margin so far this year, last year. And I think that there, our margin could get a little bit better with the work that we are doing with our ATS team there that have done a fantastic job so far, and they keep on getting better. So there, we could improve a little bit there.

ICS, I am very happy. We are still investing in technology. We are going to be opening our new website pretty soon. And Canpar, really the team there is doing a fantastic job there as well. And the only thing that is missing -- and I've said it for the last four years -- is, we have a fantastic terminal at Canpar, but it operates at 60% capacity.

So once I find, really, a good acquisition to tuck in, this division in my mind could generate EBITDA margin of closer to 20% versus what we are doing now -- 20%, 22% versus what we're doing now, maybe 18% to 19%. So I think there's room to get better there.

Our LTL, I mean, we have shown some kind of an improvement there, but we still have lots to do. And there, we have problems with the US dollars. I mean, now, that is basically flat. We are at CAD1.03 versus $1 at parity. So probably the stability is there on the dollar, so that's not going to affect us in the future. We are still working out and getting our operation better with buyers out West, with Thibodeau in Quebec. We are making a ton of improvements there.

So there, we are floating around 14%. I mean, this is not normal. We should do better than that. I think a good target for us will be like a 16.5% down the road a year or two from now.

Our Truckload, it you see a lot of improvement there because of better truck utilization. I mean, the demand, the pricing, like I said earlier to Walter, it's not there where we are gaining, but it's on our costs and on our efficiency. So to me, if I look at what the Americans are doing, a 12% is not good. We should be closer to 14%.

Specialized Services, you look at what energy can do for us, if you look at my quarter, I went from 12% to 17%, just like that, just with CAD10 million more revenue. So there, we should be flying closer to a 20% than a 17% or a 15%.

Okay. And what sort of margins are you getting in your waste management business right now? And then what sort of --

Waste management is, right now, it's more than 20%, that's for sure.

Okay.

Yes.

Okay. And then, turning over to your Truckload business there, your tractor fleet I see came down to about 2300 units from 2500 last year. Where does that get to? How should we look at any rightsizing initiatives in your Truckload business?

I think, Jason, Truckload is done. I think that we are at the bottom of the barrel right now. And if you look at my revenue in Q2, Truckload is still not perfect, but we are slowly getting there. I mean, we are flat.

We just won a major contract for our Highland division, just a little over CAD10 million, that's going to take effect in the fall of this year. So you know what? I think that stability is there, and the revenue should stop coming down.

I thinks that's the first quarter that we're flat on the revenue side for our Truckload, before fuel. And from there, I think that you should see some increases there -- small, but you shouldn't anticipate more volume going down. I think we are at the bottom of the barrel there.

Okay, good to hear. And could you remind us what percent of your Truckload business, what percent of tractors go to owner-operators versus ones you own yourself?

Boy, oh boy, oh boy, that's a good question. I don't have the information right by me, but I would say, Jason, that we are about 50/50, because if I look at Highland, Highland is about 90% or up and getting closer to 95%. UTL is 100% owner-op. And in Quebec, the average that we have is about 80% employee and 20% owner-op. So if you mix the two, you are probably at 60% employee and 40% owner-op.

In my Specialized division, like TST Expedited is 100% owner-op, so it is 200 owner-ops over there. Yes, if you include the Specialized, you're still at about 60/40 -- 60% employee and 40% owner-op.

Okay. Last question here -- earlier on this year, you did the sale-leaseback of the Calgary facility.

Right.

I think that netted you about CAD32 million. There was also talk of potentially sale-leaseback of another facility later on in the year --

Yes.

Is that still up in the air, or any color you can on that?

No, we are still discussing with these guys. I mean, the people we are talking are the same that bought the Calgary terminal, and they have a great interest in the one that we have in Vancouver. But they want more. They want another unit. So we are discussing with them right now for either a unit in Ontario or one in Quebec, because those guys are based in Western Canada. So we thought that they would have only interest for Western Canada, and they said, no, no, no, we want something in the East.

So that's why we are still talking with them. I mean, they went and they visited our facility. I mean, that Vancouver thing is a fantastic site, and we will wait and see. I mean, we are still in talks with them. It went pretty well, pretty good for the first deal we did with them for Calgary. So hopefully, we could announce something before the end of the year.

Okay, great. That's it for me. Thanks, Alain.

Benoit Poirier, Desjardins Securities.

Just wondering about the overall overcapacity. You explained very well the pricing situation and also the margin improvement, but could you break down the overcapacity issue by every segment? It seems that it improved in the LTL. I'm just wondering if it is true or not.

Yes, okay. Well, see, the overcapacity, where I see it most prominent is really in the LTL, because I think Truckload, we have a better stability now. Package, we are doing fine. And really, the big issue for us of overcapacity is still in the LTL, because don't forget, in LTL, you need a pipeline. You need a network.

So once you drop 15% of your revenue because of the economy, I mean, you're stuck to -- I mean, if you look at the LTL in the US, a lot of them were losing money for the last six, seven quarters, except ODFL.

So that is a big issue, and it still there, because if you look at our volume, it is flat. And year over year, we are still flat there, no growth, a little bit of growth within TST Overland, or CF. But Byers is down. Kingsway is up a little bit. So the volume is still not there. So this is why I am saying that in this sector, LTL, that is where we have the worst of our problem with the overcapacity.

Truckload, I think that it's been going down for the last two or three years in terms of demand from the shippers. And now I think we are close to the bottom. We are at the bottom of the demand there. And the dollar is still very, very close to par. So I don't think that this is going to get worse. I think this is just going to get better within the next six months to 12 months.

In terms of our Package, there again, you need a good network. But we've not been hit as bad in the Package during that recession as we have been hit in the LTL. So our volumes were down by 6 or 8 points, so it's not as bad as 15. And now we're starting to see a little bit of a comeback.

Now, the fall is the biggest season for the Package division, so we'll see what's going to happen there. But the pricing pressure there -- the market is okay because, don't forget, we are fighting guys that are like FedEx or Puro to a certain degree, UPS. So those guys, they have to make money, maybe not Puro, because the owner is living in Ottawa. But the others, I mean, they have to make money.

So we are really in competition with good people there. So this is why I think that the overcapacity is not that big of an issue there (multiple speakers) Truckload is basically the same.

Okay. And my second question is more related to your financial position. Obviously, it improved quarter over quarter. You're trending in the right direction. You put your new credit facility.

Just wondering if you could renew your M&A focus sooner than expected. And also, with respect to your CapEx, should we expect higher CapEx for this year? It seems that you're trending higher than CAD50 million so far.

No, Benoit, we are still in line with our CapEx budget. I mean, you can't look just on the quarter. It's like the debt reimbursement, okay? You can't look only in Q1 and Q2. So, no, we are still in line with our debt and CapEx.

In terms of M&A, I mean, we always have an eye open, although the focus is not there and it's still not going to be there 100% for 2010. Really, 2010 is, what we are trying to do is to achieve our plan of delivering an EBITDA of CAD250 million to CAD260 million, and try to beat that. So that is really the game -- reduce our debt and take over this EnQuest, because EnQuest, it's a small acquisition, but it's going to yield fantastic for our shareholders down the road, in my mind, within the next two years. So that's the focus for us in 2010.

Now, like you said, the banking deal is behind us. I think we did very good. You know, when you look at the new spread that we are paying on our debt compared to what we used to pay, a lot of people expected an increase of 200, 300 points. I mean, we are not there at all. But that is more -- we will see more M&A activity probably, Benoit, sometime in 2011.

There is lots of potential. I am discussing with lots of people. But I'm not ready, because to me, this recession hurt a lot of trucking companies, and time is with me. And I'm busy doing something else.

Okay, perfect. Thank you very much for the time, Alain.

(Operator Instructions). Walter Spracklin, RBC.

Alain, I don't want to pin you down here or anything, but I did notice that you mentioned you're looking for CAD350 million to CAD360 million now, and you've obviously been coming in ahead of your expectations this year -- sorry, CAD250 million to CAD260 million. Sorry about that.

Yes, I'm just curious -- with these better-than-expected results, are you targeting, from a guidance perspective, a little bit higher than what you were looking for before?

You know, if you ask me today, I would say, Walter, it is 50/50. A lot of it depends on what September and October is going to look like, because I can't really look at July, because you know, July, it's summer, it's vacation.

So I was very happy with what we've done in June, okay? And I'm very happy with the energy, when I'm looking there. So maybe there's a chance that we could beat the CAD260 million mark. We are working very hard. All my team are very, very dedicated to beat the budget, because last year we didn't beat the budget. And that is a first for me. I mean, our budget last year was CAD290 million, and we achieved only CAD225 million. So it was our first defeat, because normally, I have been in trucking for 13 years now, or 14, and we always beat our plan, always (multiple speakers)

You had a few things working against you last year, though.

Oh, yes, yes, yes. That's true, that's true.

All right. I just wanted an update there. Thank you very much.

Benoit Poirier, Desjardins Securities.

Yes, Alain, just one follow-up. I'm just wondering about the IFRS, whether -- how does -- can you provide an update or more color about the potential impact it could have on you?

Sure, sure. Well, first of all, in the MD&A, we put an update in there, where we stand today. And as we speak now, we don't see any effect of that. We will be on track. And this was discussed at our audit committee yesterday, and so far, discussing with our auditors, KPMG, there is a question about the goodwill.

But also, one thing I could put you aware is that we are also reevaluating about 20 of our properties. And we are just getting some preliminary information there. And there is a huge difference between our book value of our properties, just the top 20 in the market value, because don't forget, LTL operation means lots of land. And we are a big player in Toronto. We are a big player in Montreal. We are a big player in Vancouver. So up to now, so far, no major issues with the conversion to IFRS.

Okay, very good. And maybe another follow-up -- just wondering if you could comment about your customer, how you perceive that they are restocking right now.

Well, that's a good question. Our feeling is that -- I mean, nobody wants stock, nobody wants inventory. And everything is very, very tight right now. So if you look at CN, CP and all the rails, on the commodity side, those guys are booming because it is like all the plants are replenishing on raw material. But for us so far, our customers, whether it be Michelin or whether it be -- you know, all these guys, their level -- the feeling we have is that the level of inventory is still very, very, very low.

Okay. Okay, perfect. Thanks again.

There appear to be no further questions from analysts at this time.

Thank you, operator. Since there are no more questions, I'd like 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 on August 5. You can get that by calling 1-800-558-5253, or in Toronto, 416-626-4100, and entering passcode 21476550. Thank you all, and have a good day.

Ladies and gentlemen, 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.