TFI International Inc (TFII) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the TransForce, Inc. Q3 2010 results call. (Operator Instructions). As a reminder, this conference is being recorded Friday, October 29th, 2010. I would now like to turn the conference over to John Lute. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today to discuss TransForce's results for the third quarter and the first nine months of 2010. The news release detailing the results for the period ended September 30th, 2010, was issued via Canada NewsWire yesterday.

Following our standard format, Alain Bedard, the Chairman, President and CEO of TransForce, will discuss the highlights of the period. Once his comments are concluded, 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 provide the instructions. We ask that you please limit yourself to one question at a time, followed by one follow-up question, if necessary, and then go back into the queue for 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 However, we would ask that they do not quote callers unless that individual has granted their consent.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's also on the earnings release. Shareholder questions should be directed to Alain Bedard.

A recording of this call will be available until midnight on November 5th, and that recording can be accessed by using the dial-in and the 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 30th, 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'll turn the call over to Alain Bedard, Chairman, President and Chief Executive Officer of TransForce. Alain?

Well, thank you, John, and good morning, everyone. By now you have had time to review our earnings release, so you have seen that TransForce continues to deliver solid results, despite ongoing weaknesses in our industry.

In the third quarter we improved our performance in all key measures. We increased revenue, our EBITDA in dollars, as well as in margin in percentage. The 14.9% that we achieved in terms of margins is a first and bodes well for future quarters when the economy is back on track.

These are not easy times for our LTL industry, with overcapacity and pricing pressure. Our Truckload has finally stabilized and our energy and Parcel is growing again. The economic recovery is much slower and weaker than most people had anticipated. Our response is essentially the same as it was back when we saw a recession coming at the end of 2008. We're focusing on improving our operations, thus reducing our costs, investing in technology and people. We're determined to continue to grow the business and returns to our shareholders. TransForce is, as always, managing for the long term with a disciplined approach that is yielding good results.

First, let's look at the LTL. Our LTL revenue was basically flat. It recorded total revenue of CAD132 million in the third quarter, compared to CAD129 for the same period last year. For the nine months period, revenue was close to CAD400 million, compared to CAD392 million in the first nine months of 2009.

EBITDA was CAD13.9 million for the quarter, down from CAD13.9 million for the same period last year. For the third quarter -- excuse me, for the nine months period, EBITDA was CAD39.5 million, down from CAD40.9 million for the first nine months of 2009. The operating margin held almost steady at 11.3.

The depreciation of the US dollar affected negatively our results in the [first quarter] by reducing our net income by CAD1.25 million, a million and a quarter, and year-to-date by about CAD5 million.

We're very pleased with the performance of our Package & Courier segment. Total revenue increased 39% to CAD94 million for the quarter, compared with CAD67 million for the same period last year. For the nine months period, total revenue increased to CAD277 million from CAD201 million a year earlier. So far this year, the increase in revenue comes mostly from the acquisition of ATS.

EBITDA for the quarter was CAD15.2 million, up from CAD12.1 million for the same period last year. The margin was 17.5%, down from 19.3% for the third quarter of 2009.

For the first nine months of the year EBITDA increased to CAD41.5 million from CAD31.4 million for the same period a year earlier. The margin was 16.2%, compared with 16.6% a year ago.

As announced last month, Canpar has won a major contract to supply overnight currier service to the government of Ontario for a period of three years, with two extension options of two years each. Canpar has now hired 125 new drivers and dock workers, 6 staff employees, and invested more than CAD3 million in rolling stock to deliver more than 12,000 Parcels a day within Ontario. The actual run rate revenue is around CAD20 million a year. But we believe that when all shippers are converted to Canpar, the annual revenue should reach CAD30 million.

The Truckload segment is now stable. Total revenue was CAD159 million for the third quarter, down slightly from CAD160 million in the third quarter of 2009. For the nine months, revenue were CAD475 million, equal to the same period last year. Operating income were CAD17.7 million, up slightly from CAD17.1 million in the third quarter of 2009. The margin was at 12.2% compared with 11.6% for the same period last year.

For the first nine months of the year, operating income was CAD47.6 million, up from CAD43.5 million a year earlier. The margin was at 11.1%, compared with 9.9% for the first nine months of 2009.

In the Truckload segment, the decrease in our fixed costs and general and administrative expenses were the key answer to our improved results and margin. We believe that the pricing environment will start to improve in the coming months, even if demand doesn't grow by a lot.

Specialized Services segment generated total revenue of CAD128 million in the quarter, up 21% versus CAD106 million a year ago. This was largely results of a stronger activity in our oilfield and oilsand division, and the completion of the acquisition of the Speedy Heavy Hauling assets, which contributed to CAD7.7 million of revenue in the quarter.

For the nine months period, total revenue increased 8% to CAD353 million, from CAD326 million for the same period last year.

EBITDA for the quarter, CAD25 million, up from CAD16 million a year ago, due to a better performance from the oilfield and oilsand sector. EBITDA margin, 19.6%, compared to 15.3% for the same period last year. Nine months, EBITDA CAD65 million versus CAD46 million last year and, in margin, 18.8% versus 14.5%.

Now, our plan going forward is to simply do more of the same. Our objective is to keep improving our operating margin. We will seize opportunity for strategic acquisition, as we did for Speedy. As the economy slowly recovers, our efficiency cost base will turn higher revenue into even stronger results for our shareholders.

So now, we'll be pleased to answer your questions. So, operator?

Thank you. (Operator Instructions.) Our first question comes from the line of Walter Franklin with RBC Capital Markets. Please proceed with your question.

Yes, it's Walter Spracklin, obviously, but hey, Alain.

Hey, good morning, Walter.

Just touching in on your -- on the Canpar win. That's a great win, by the way, on -- from the Province.

Thank you.

How quickly do you think you can ramp up versus where you are right now? You gave us some good indication as to where you think that business could go to. How quickly can that ramp up?

Well, you see, when you look at this contract, I mean we are now probably running at 65%, 70% of the capacity of the contract. And we did it -- we did that within, what, six weeks. Okay?

Yes.

So, talking to the management there, we have some issues that needs to be fixed on the IT side of it and we're working on it and talking to Jim Houston, which runs Canpar. We believe that within the next two months, okay, we should be running very close to full force with the -- with this contract.

That's great. So, before year-end, we can look at--.

Before year end, yes.

For 2011 a full run rate for that contract.

Absolutely.

Perfect.

Absolutely. And all the training costs and all of that is really a cost of Q3, okay? We don't see too much cost of that, gaining that major contract going into Q4 or 2011.

And there was about just under CAD 1 million in--?

Around CAD 1 million. Between CAD 750,000 to CAD 1 million.

Okay.

Of training. Because we had to hire more than 100 people.

Sure.

So, you have to train then. And also, productivity is always affected when you have such a large account coming into the Company. The other thing is, we have to create about 12,000 new shippers into the Canpar system. So, that take a lot of time and investment.

Your CapEx spend to prepare, I think, was targeted at CAD 3 million. Still around that level?

Yes, absolutely.

Yes. Okay. Alain, you sounded a little bit more negative in your outlook, I think sort of indicating that the economy wasn't coming back to where you thought perhaps it would. Can you -- is that really a third quarter kind of statement, or are you saying that this is probably -- this is going to impact perhaps our 2011 and we've got to rethink how we're looking at 2011?

Well, I think that 2011 is going to probably be a little bit better than 2010, but not by much, in terms of volume. Because when I look at my Truckload, for instance, which is my biggest sector, it's flat, it's been flat. And I don't see it growing too much in 2011. I see profitability getting better. I see pricing improving, okay? But volume-wise, I don't see too much growth in that sector.

Then, I look at my LTL, I see the same thing. Volume will probably remain quite weak in that sector. Profitability will get better, definitely, because we have a major aggressive cost-cutting plan that is being now put into effect. Because I can't live with 12% EBITDA margin with my LTL. It's too low. Okay? And we've got to get closer to the 16%, where we were before.

Now, the dollar's really affecting me, but I don't see the dollar getting any better, the US dollar getting any better next year. So, that--.

(Inaudible) price in the LTL?

Right. So, pricing there is stable, volume is stable. And where we're going to gain to get closer to our 16% margin that we were in our LTL is on the cost side.

Right.

Now, Specialized Services, that will definitely grow for us next year. So, no question about that. Profitability is much better than it was. Matrec will keep on growing. So, that is where the growth is going to come from. And Parcel. Definitely Parcel. We have a very heavy focus on that business. I'm very confident that this will grow in 2011, okay? We're working on a lot of stuff there and I see major improvement in terms of organic growth and revenue in that sector.

Okay. In your Specialized, you said growth expected. Is that in both oil and gas services -- or oil and gas services and your waste management? You think volume will be up in both?

Yes. Waste -- although waste, Walter, is going to be small growth, okay?

Right.

We're looking at all sorts of stuff in Ontario, because we have a diamond of an asset there at Lafleche. Definitely we have to grow around that asset. So, we're looking at some positive growth prospect over there. But the big growth within our Specialized Services will definitely come from our energy sector with the oilsand next year. Large investment there. And our competition, you see that those guys also are getting better on the revenue side. I think everybody is more positive because, even in Alberta, we're drilling more now for oil than for gas.

Right.

So, we'll have some kind of a conversion now there. And south of the border, I mean, the acquisition of Speedy, you'll see us -- how we could do good with these assets.

Yes. You've spoken a lot about 2011 now. When can we expect to hear some sort of guidance, your new guidance levels for 2011?

Well, as we speak, okay, we're working on our budget. We know -- we're starting to get a clear picture of what 2011 will be. So, growth in all the sectors that I've talked to you, stability in the other two. And we believe that we can attain probably 10% growth on the revenue, but more than 10% growth on the EBITDA number to reach -- I think that this is preliminary, okay? But really our focus is to be over the 300 mark in terms of EBITDA and produce cash flow in accordance with that.

Right. Well, that's great color. I appreciate it, Alain. Thanks very much. That's all my questions.

A pleasure. Thank you, Walter.

Our next question comes from the line of David Newman with Cormark Securities. Please proceed with your question.

Good morning, Alain.

Hey, good morning, David.

How are you?

I'm very good. We're gassed up.

Gas (inaudible). You saw that (inaudible)--.

Ready to go. Ready to roll.

Ready to roll.

Yes.

I just wanted to dig a little deeper into the LTL. I guess there's been a little bit of a disconnect between US and Canada and some of the rates that are being taken down there. I mean, what do you need to see? What's their typical lag? Do you need the consumer to come back? Do you need exits from the industry? Are asset values starting to rise? I mean -- and what are you doing internally in terms of I guess consolidating your footprint more?

Yes. Well--.

A big question, but I just want to get a -- trying to get up to -- dig deeper on it.

Okay. So really us, okay? The US and the Canadian market is very different, okay? Because over there, if you look at everybody that came out with their numbers, their volumes is up. If you look at either ODFL or Saia or -- in the US it's a different market versus ours. Ours is flat, okay? And we've been going through a lot of pressure on the prices since probably early 2009.

Our response to that has been on the cost side and efficiency. And we've made a lot of changes to our network over the course of -- let's say from the summer of 2009 to so far. It's not enough. I'm not happy with the numbers. Like I said earlier, a 12% EBITDA margin is not going to -- it's not going to make it. So, we're going back very aggressively. We're discussing with our management right now as we are going through our budget.

And I feel that probably, with 2011's budget, instead of working with a 12% margin, our goal is to be closer to a 14%. So, an improvement of 2 points. That's the goal that we're looking at.

Okay.

Now, that goal has to be attained. If we want to be sure that we'll attain that -- the only thing we're sure of is cost. We're never sure of pricing. I don't see pricing environment in LTL improving by a lot. Although, in the US, everybody is saying that prices are improving, but I don't see it too much in Canada, although Truckload I see some improvement for 2011, but not the LTL.

So really, my game is to work on the costs, be more efficient. And we have to do what needs to be done to bring our costs down because we have to be the tiger, very lean and mean when the market comes back. And I don't see it -- probably late in 2011.

Okay.

On the LTL side.

And typically, when they put through price increases on the LTL side, I mean, how much of it is I guess smoke and mirrors? I mean, they put a posted rate out there and then what they actually--.

Yes.

And there's usually a pretty big discount.

Yes, yes.

There's somebody who did suggest that they're trying to prop up their stock prices to recharge their balance sheets to a certain degree. Do you see some -- do you think some of that goes on, too?

Hey, listen, I cannot talk about the US because we're not in the US.

Yes, I understand.

What I can tell you (inaudible), okay? We never post -- let's say we're going to raise our rate by 5% or whatever. Because this is -- it's very difficult to attain a 5% or 6% or 7% rate increase in this kind of an environment when the volumes are flat.

Okay.

So, to me, if I would tell you that, yes, we'll raise our rates by maybe 1%, by maybe about 1.5%, no more than that. The game, David, is cost. It's efficiency. It is invest more in technology within the LTL to make sure that our cost base is lowered.

Now, when the market comes back, okay, we're the biggest LTL player in Canada. When the US dollar starts to appreciate, maybe in a year, we're going to gain a lot with that. We're going to gain a lot on our Specialized Services, too, when the US dollar starts to appreciate, maybe in a year, maybe when the American starts to raise their interest rates the dollar will get better value. So, that. But today, the name of the game with the LTL is not to raise the rate. It is really to be more efficient and look at our costs, look at everything that we're doing, and what can we do to make it better.

Now, if we look at our EBITDA number of 12% and compare that with a lot of the US players, we're way ahead of the game with flat volumes.

Yes, yes. Yes. No, for sure.

So, our goal is really to get closer to 14% next year. I'm working with all my guys there. Everybody knows that's the mission. Okay? This is where we have to be. Because we achieved 14.9% globally in the quarter in terms of EBITDA versus revenue, but we have to do better than that.

Okay. And a last one for me. At least you have some debt reduction targets out there. Free cash flow targets. I think you're kind of ahead of the game on the free cash flow side. And your dividend expectations given your sort of budgetary thoughts. How are you looking on that debt reduction and free cash flow? And I guess potentially on the dividend side?

Well, the debt, we were affected a bit this year because we had to invest about CAD 30 million so far in our working capital, and about CAD 70 million in terms of acquisition. Now, excluding that, we're really on target. Q3, I was not very happy. We're about CAD 20 million too much in terms of our OR because of all kinds of excuses that we have, because it's summer, it's vacation, it's this, the customers are away, papi, papa. So, we'll get back on track with our DSO.

By the end of the year I see our debt level, excluding all kinds of acquisition, if any, it should be floating around CAD 650 million. Now, our goal is probably to reduce that CAD 650 million or CAD 660 million, closer to a CAD 600 million in 2011.

Okay.

And the rest of our cash flow will go towards the dividend and the investment in new companies. And there's lots of potential that I see in our Specialized Services for 2011 and our Parcel. Definitely a lot of good things that may happen in 2011 there.

Okay. And just a last -- squeeze one last one in. How are asset values looking right now? Are they rising at all so the banks will at some point maybe not be as supportive?

Maybe. Maybe. But it's still quiet in Canada. I mean, a lender is still afraid to pull the plug on a trucker because the assets are still weak, okay? Now, if you want to buy a truck today, the lead time is still very, very short. Specialized equipment, that's a little bit different now. If you want to buy let's say a crane or a Specialized truck for the oil field -- now, they're starting to stretch a bit there, okay? But on the regular let' say trailer or on a regular truck, I mea, the demand is still very, very weak. Now--.

Oh, okay--.

(Inaudible) that is that the lender that is stuck with equipment and lending equipment to a trucker that's not doing a good job, he's not going to lend to another one. Okay? So, the tight credit is really helping us. So, the offer for trucking services is not growing. Now, once the demand starts to grow, I mean, if Economy 101 is true for trucking, then we should see an improvement on the rates.

Very good. Thanks, Alain. Very helpful.

A pleasure, David.

Our next question comes from the line of Jason Granger with BMO Capital Markets. Please proceed with your question.

Thanks. Good morning, Alain.

Hey. Good morning, Jason.

Just looking at your CapEx here, you came in at CAD 34 million in the quarter. I think that was up from CAD 19 million last year.

Yes.

Not surprised to see that tick up. Could you give us a sense of how we should be looking at your CapEx for 2011?

2011, Jason, I mean, we're still finalizing our budget, but preliminary, okay, we're floating the same dollars, about CAD 60 million net of all disposals, yes.

Okay. And you were talking about Package and Courier segment for 2011.

Yes.

Seeing some growth opportunities there. Could you elaborate on that? We've heard DHL retrenching in the US. Could be some more opportunities there, potentially getting more aggressive in 2011. Is that part of the mix? And what other opportunities do you see out there?

Well, you know what, Jason? Our Center in Toronto for Canpar, even with the Ontario government contract, we're operating that JCC, the John (inaudible) Center, at about 50%, 55%, 60% capacity. And the same thing in Montreal. ATS, I've got the same situation. Because ATS, the [Disco Hub] that was built by [Mike Ed Lauer] is a fantastic hub. But, that was built for healthcare and retail. So now, we have only retail there. So, I've got lots of capacity in there. So, definitely, okay. We just took on about CAD 10 million of new business within ATS, all kinds of retail customers that are coming into ATS.

With this contract that we just gained at Canpar, this opens up lots of doors because we have to add all kinds of services that we were not providing in the past. So for instance, if you have HAZMAT, well, you couldn't ship with Canpar. But nowadays, okay, because of that contract -- now, we accept HAZMAT. We accept time definite delivery. So, there are all kinds of new services that our salesforce now will use to build on new business where, in the past, I mean, we were like frozen with Canpar. We had our hands tied because there's lots of services that we couldn't offer. Today, with Canpar, we offer air. A year ago, air was out of the question for Canpar. So, the air, the US piggyback on the ATS and ICS deal that we have with Cargo Jet. Okay. So, this is where I see a lot of potential for 2011. And you'll see we could do a lot more with that sector. No doubt about that.

Okay. Okay. That's helpful. Thanks. And just carrying on with that theme and the Package and Courier, the growth opportunities there, looking forward the next one, two, three years, it seems like there is a focus on increasing the Package and Courier and the Specialized Services to ultimately carry a higher weighting in your total business mix. Those have higher margins, which should bode well for your normalized margin over the long term. Where do you see your mix going to over the next couple of years if we were to look at, say, Package and Courier and Specialized, which I think currently are around 40% of your revenue base. Where do they get to over the next two to three years?

Well, I think you're going to see a switch between let's say the 40% will get much closer to 50%, 55%, and the 60% will get closer to 40% to 45%.

Okay.

Because the LTL market, we are a dominant player. And this is not a market that is growing by a lot, where the package is growing organically. Not much over the last year or two, but it's going to grow again. There's lots of potential in there. Definitely one part of the business that we can offer our customer today is international shipments, and that's something that we're working on to get a good partner that could help us offer that to our customer. This is the high margin part of the business that, let's say today PURO or FedEx or UPS can offer, which us, we can't. So, lots of good stuff there that definitely will -- our focus is on Parcel and Specialized Services.

Okay. Very good. We are hearing some reports from private carriers there of LTL getting squeezed somewhat from career and Truckload. To what extent is that happening out there, do you think?

It's happening. It's happening, that's for sure. Okay? And that's why I'm saying that the LTL market is shrinking.

Okay.

Even in a normal economy, it is happening. So, this is why us at TransForce, I mean, we saw that coming many years ago. And this is why we are in all sectors. So, if we feel the squeeze, then we could move into the Parcel or into our Truckload divisions.

Okay. The last question here. On the capacity front, Truckload and LTL, the theme around supply contraction. We are hearing, particularly in Canada here on the Truckload side, maybe more so in the US, but to some extent still in Canada, more reports of fewer trucks on the road. It's harder to get drivers in the US to rolling out the CSA 2010 implications there for safety requirements which could ripple up to Canada. How much of that are you seeing?

Well, you're right--.

And how much of that -- does that come into the pricing story for you over the next 12 months on the Truckload business?

Well, this is why, Jason, I see that the Truckload pricing environment will improve definitely in 2011. And as I said, I don't see volume growing. We have stability now. Probably volume will grow a bit, but the pricing will definitely improve in the Truckload sector, because of all the reasons that you just said. I mean, the truck seat is being reduced every day, every year. It's tough to get credit for a small trucker. It's tough for him to buy a truck. There's new rules in the US and it will affect the Truckload guys. I mean, there's not that many US Truckload coming into Canada already today. So, think about those guys now coming in less, okay? So, the pressure will be on, no doubt about that, in 2011 on the pricing up. Okay? It's been since 2006 that we're suffering with tremendous pressure on the pricing and we have to do all kinds of different things to maintain our margin. And you see today that our margin is getting just a little bit better. I mean, we're just at 12%. No big deal. Okay? We have to get closer to 15% there. And I think that 2011 is when we'll see some improvement there.

In terms of the LTL, volume will stay flat, in my mind. Pricing pressure will start to diminish in 2011. But to see pricing improvement and pricing getting better, maybe 1%, 2%, but not something major before the end of 2011. Because there's always a lag between LTL and the Truckload guys. The Truckload guys are always the first one to come down and the first one to regain when the market gets better. And the LTL is the last one. Because if you look at our LTL, it was fantastic until 2008, whereas our Truckload started to get bad by the end of 2006 or middle of 2007.

Okay. That's very good. That's it for me. Thanks very much, Alain.

Well, thank you, Jason.

(Operator Instructions.) Our next question comes from the line of Nima Billou with Bloom Investment Counsel. Please proceed with your question.

Good morning, Alain.

Good morning, Nima.

Just wanted to ask mainly about the CapEx, but in a bit of a different way. So, if you're looking at that CAD 60 million for next year, in terms of capital allocation, where are the biggest growth areas? Would it be waste management would be 30% of that and then the oilfield services? So, just wanted to get not a super detailed breakdown, but what are the one, two, three big areas where you're directing much of that growth capital?

Specialized Services, that's number one, Nima. Specialized Services and Parcel. Parcel, not much because the hubs, all the equipment is already there. It's just the small trucks, okay? But really, the base of our growth on CapEx is our Specialized Services. We're maintaining our Truckload and our LTL. No doubt about that. But through all these changes that we've done in our LTL, we're way more efficient today. We have better usage of our equipment because of stability now.

In our LTL, we have a very aggressive plan that's been put in place now. That will put also less pressure on our CapEx because we'll do more with less.

Yes.

Okay? So, that leaves a lot of dollars available for us to grow in our Specialized sector. And this will be around the Lefleche, a landfill that we have in Ontario, around the Granby landfill that we have in Granby, Quebec. This will probably be south of the border after the acquisition of Speedy. We bought about CAD 4 million of assets from another company in Rock Stream, Wyoming, Talco. There's a few good small things that we could buy in the Dakota or in the Colorado area, in the Arkansas that we're looking at to beef up our density there.

So, that is really -- return on capital is the name of the game. So, this is why an asset has to be well invested where we see the best margin. Okay?

Okay. And you've made a mention with respect to supply being reduced and all the barriers (inaudible) to extra supply so pricing should hold in despite volumes remaining depressed. Is there anything you see that volumes could go the other way, like Canada slides even further, or for now you think things are stabilized in terms of the outlook and the movement of goods that you're looking at?

No, I think things are stable, Nima. I think that we've seen the worst, 2009. But, the recovery is slow and it's going to stay slow, okay? So, I think that '11 will be a little bit better than '10 and -- but slowly. I don't think that we're going to have a -- like they say, some kind of like a double dip or whatever. I think that it's growing very slowly.

And for now, I guess with respect to money that you're spending, because I know you want to keep debt fairly stable. I guess any acquisitions would be along the line of Speedy, they would be more incremental than anything large?

Yes. Well, the only thing that we're really focused is not LTL or Truckload. On acquisition, really, we have some targets within the Parcel sector. We have some targets within the Specialized. I mean, no doubt about that. But, LTL and Truckload, we're very quiet on that side.

In Canada there's a lot that we could do with the network we have within Canpar and ATS. And that needs to grow. It needs to grow organically. And we have a super sales team within Canpar and ATS, and it will keep on growing. But, if ever we see an acquisition that makes sense in that sector, we'll definitely jump on it. And the Specialized Services, the same.

Okay. Thanks very much.

A pleasure, Nima. Good day.

Our next question is from Benoit Poirier with Desjardins Securities. Please proceed with your question.

Yes, good morning Alain.

Good morning, Benoit.

When we look at the pricing NCL you mentioned in your report that it was slightly down year-to-date. But, it seems that the industry indicators tell us a different story. Is there any reason why there's -- it seems there's a discrepancy in terms of pricing for the Truckload?

Our pricing, Benoit, is not down, okay? Our pricing is stable.

Okay. Okay, excellent.

Yes.

Okay.

What I'm saying is -- and if you look at my EBITDA margin, okay, it got a little bit better, mostly because of the SG*A where we improved our sector. But, we have stability in terms of pricing, okay, to date.

What I think is going to happen is that pretty soon, I don't know when, okay, we'll start to see change in terms of the pricing, okay, with a little bit more volume. But, there's -- everyday there's less availability of trucks because the small guy is in a very tough position to buy a truck because the GE and all the banks, they just run away from that market. So, nobody's there to finance the truck.

Okay. But, you haven't seen -- let's say you jump back so far?

No, not so far.

Okay.

But, we -- it's always the win. You start to feel it. We don't get any more calls like, hey, if you don't lower your rate we're going to bid the business. That's finished. It's done.

Okay, okay. (Inaudible.)

So, that being said, now, say, well, could you give us a little bit more equipment? And us, the first thing we say, well, it depends because I don't have anymore trucks. So, I'm going to have to take one truck away from the lowest payer and transfer that equipment to you. So, we start -- we're starting to see that movement now.

Okay. Okay. And when we look at your total EBITDA margin on a sequential basis, it was down between Q2 and Q3. And it seems that when we look in the previous two years, typically, there is a sequential improvement in the overall EBITDA margin. So my question, I'm just wondering whether, if we present a new seasonal pattern or is it, say, a different story, or a sign of little weakness in the market, Alain?

No, there's no weakness in the market because I don't -- I'm not sure if I understand the question properly because we came out with an EBITDA of $74 million, okay, which represents about 14.9% of our revenue, okay, which is a first for us. We've never obtained that. And that is way more than last year in terms of dollars or in term of percentage. So, this is why I don't quite understand your question.

Okay.

We're doing better in three than we did in two and it's always the same because in three, okay, we have September, which is a good month for us. We have, also, August, which is normally a good month for us, and we have July, which is not a good month. I mean, the J months are never good, okay, the January, July, and June in the trucking world.

And if you look at Q4, then you have October and November and up to December 15, okay. So, that is a tremendous, okay, good stretch. But, then you're stuck with the holidays in two weeks and this affects your month of December.

So, this is why if you look at last year, we did a little bit less in Q4 in terms of EBITDA than we did in Q3 small. Now, this year with, let's say, the energy sector in better shape, is it possible that we don't go down in four versus three? It's possible.

Okay. It's only because -- and I was removing the derivative impact and the gain on disposal, so that's (inaudible).

Yes, yes, yes, I understand. But, you have to be careful because the FX derivative, okay, you have to be careful because that is some kind of a protection, okay, because when the dollar -- the U.S. dollar depreciates, it affects my operation. So, to protect that, I've got FX derivative.

Okay.

So, you've got to be careful because if you exclude the FX -- the interest, that's a different story. But, the FX, you've got to be careful because that's the reason why we take those suave or derivative products, is to protect, because we can't turn around on a dime, okay? The pricing is all done in U.S. So, we take those contracts to give us time when the dollar, like the U.S. dollar starts to go down, then we have to sit down with the customer and adjust our pricing because of that. But, it takes time. So, this is why we have those FX contracts there to protect us and to give us some kind -- some lead time to transition the pricing to the customer.

Okay, very good. And when you look -- you talk about your free cash flow and that reduction payment, but when you look at your debt to EBITDA ratio, you previously disclosed that you would expect to end the year between $2 and $2.5. So, are you considering to lower the ratio in that direction at the end of Q4, Alain?

Well, what we'll do by the end of Q4 is definitely improve our number of days outstanding on our ARs, which affected my long-term debt by about $20 million, okay. And the Q4 will probably generate a debt reduction by itself of about $3 million because we won't have any major acquisition, okay, or acquisition in Q4. So, this is why we'll probably close the year around the $650 mark. And if our EBITDA is forecasted, then, let's say at $265 or $260, I mean, that puts us in much better shape than the shape we're in today.

Okay, excellent. And maybe the last question, if I may, we look at the package, it provided a very good explanation. I was just wondering whether -- if the Canpar ramp-up is the main explanation for the EBITDA margin is $16.2, which is lower than the last quarter and last year?

Yes.

Is it--?

Canpar explains, Benoit, just a million, okay?

Okay.

That's just a $1 million, okay? And the other thing is that ATS, when we bought ATS the EBITDA margin when we bought the company was about 12%. So, that -- if you add ATS to our mix, for sure it's going to bring our EBITDA margin down. But, what we have to say, though, is that within ATS there's no depreciation. So, EBITDA and ABT is about the same, because there is very little depreciation within ATS.

So, that's why our margin -- let's say last year it was -- I think was 19% and now we're down to 16%. So, there's two reasons, the acquisition of ATS that will bring my EBITDA margin down because when I bought it was at 12%. Today it's more than that, but it's still below what the ICS and Canpar EBITDA margin was in the past.

The other thing, also, that affects me is Canpar, okay? It's $1 million, like I said, with this Ontario government contract. But because it's such a huge contract, you can't get $30 million of business at the same EBITDA margin as you would get, let's say, on a small account. So, that has affected, to a certain degree so far the Canpar EBITDA margin. But, at the end of the day it -- it's still a very profitable account.

Okay. Thanks for the time, Alain.

My pleasure, Benoit.

Our next question comes from the line of Aleem Israel with Acena Capital Management. Please proceed with your question.

Good morning, Alain.

Hey, good morning, Aleem. Long time, no see.

Yes. Can you talk about the October figures, if you have seen any of those for LTL and Parcel in terms of where volumes might be on a year-over-year basis?

LTL is the same, Aleem. I mean, we don't see -- I mean -- and no improvement in the LTL whatsoever. Parcel, we're doing good, okay. I'm very happy with Parcel. I'm very happy with Specialized Services and (inaudible). And our Truckload also is doing better, okay? But, LTL is still not growing at all. And the pressure on our cost reduction program is even more prominent now. And we have to get ready for, let's say, to put this program in place by late 2010 at the latest.

Okay. On the Parcel business, UPS has commented recently that they're boosting North American prices by about 6%. Have you seen them move on that yet, or -- and/or are you looking to follow them?

Well, definitely yes. We always like UPS. I mean, to me, it's the best company in the world, so we're always looking at what these guys are doing and try to follow suit. So, if UPS goes and puts the increase, okay, and it's fixed, definitely -- I mean, us, we'll follow suit.

Okay.

So far, we haven't done anything, I mean, because within our Parcel industry, us -- it's -- we're not like UPS where you come in and you announce, let's say, 5% more to everybody. Us, every month, okay, we have a list of accounts that has to be reviewed and adjusted on -- in terms of pricing.

Right. Okay.

But, when UPS announced that and does what it says, because that's what the UPS normally do, okay, it helps us, okay, when we're sitting down with our customers.

Absolutely. On the Canpar contract with the Ontario government, how much working capital do you need to service that contract?

Oh, it's going to cost me about $5 to $6 million.

$5 to $6 million. And was any of that in the third quarter or will that all be--?

Yes.

Before--?

Oh, yeah. Some -- oh, yeah. In the third quarter we have that, plus we had Speedy that cost me about $8 million in working cap.

Okay. So, out of that $5 to $6 million, how much was already deployed in the third quarter for Canpar?

In the third -- on the Canpar I would say probably half of it.

Half of it? Okay.

Yes. Because, don't forget, we -- you ramp up the account, so you start slow, okay. And--.

Okay. Last question. It looks like you had a conditional agreement on a (inaudible) back in October--.

Right.

For about CAD 40 million. Can you comment on what the cap rate is on that property and where it is?

Under CAD 7.1 million.

Under CAD 7.1 million, okay. And can you comment on where that is located?

This is Vancouver.

That's Vancouver, okay.

Yes.

Okay, great. Thanks very much.

And it's going to close, what, within probably -- well, if it's not before the end of the year it's going to be very early in January.

Okay. Okay, great. Thanks.

And it's the same guys that we've been dealing with, Calgary. So, I mean, they -- we've done Calgary with them, now we're doing Vancouver. So, we know them, they know us.

Our next question is a follow-up question from the line of Walter Spracklin with RBC Capital Markets. Please go ahead.

Thanks very much. Just two really quick, follow-ups here, Alain.

Yes.

You mentioned ATS. When I covered them I also noticed that they were -- they took that all leasing strategy. And I'm curious with the debt -- cost of debt, where it is today. I know you want to bring debt down, and obviously we applaud that. But, there are some opportunities here and I'm just curious as to whether you've looked at taking a little bit more of an ownership approach to the -- to ATS' fleet?

No. To ATS' fleet, no, Walter, because the problem is not capital, the problem is maintenance, okay? And within ATS, okay, we don't have the structure to date, okay, to run a maintenance department. The other thing, also, is that most of the delivery, or the P&D, or the (inaudible) is -- (inaudible) is what, 95% purchased (inaudible). And the P&D is to date 90%, 95% (inaudible). So, really, the equipment within ATS that we lease is very, very small.

Okay.

Now, what we're really looking at though is terminals, okay? So, for instance, ATS opened up in Drummondville, Quebec and that is a TransForce terminal, okay? So, we're looking at moving ATS, whenever we can, into a TransForce facility.

Okay, that's great color. And the second question here, I know you mentioned on the EBITDA -- I hear what you're saying about exclude -- you do the foreign exchange derivatives to smooth that EBITDA--.

Yes.

And that makes sense. The only challenge we have is predicting those changes. And so, we don't--.

Yes.

Actually predict. In your EBITDA estimates for next year, do you build in any (inaudible)--?

No.

Okay.

No.

That's just all I wanted to know. Okay, perfect. Thank you.

Okay. Take care.

There are no further questions at this time.

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