TFI International Inc (TFII) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to TransForce's first-quarter results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. There will be instructions for how to queue up. (Operator Instructions)

Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking, and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Wednesday, May 18, 2011.

And I will now turn the conference over to Alain Bedard, Chairman, President, and CEO. Please go ahead.

Thank you, operator, and good morning, everyone. The news release detailing TransForce first-quarter results for the period ended March 31, 2011, was issued by Canada newswires yesterday. We hope that you had the chance to review it. The performance of the Company for the first quarter was most satisfying. In what was historically has been a seasonally weak quarter, we delivered significantly improved year-over-year financial results. These include growth of 35% in our key EBIT metric.

Also during the quarter, we continued to achieve our vision of strategic growth. In the Package and Courier segment, we took concrete steps to extend our network and strengthen our competitive position. The Dynamex acquisition completed during the quarter and the DHL Express domestic asset purchase, soon to be finalized following governmental approval, reflects TransForce's goal to grow its network. These 2 transactions also represents powerful enhancements to TransForce's ability to increase shareholder value.

The acquisition of Dynamex, a company with revenue in the last fiscal year of approximately $420 million, at a cost of CAD230 million, added a highly respected brand to our Package and Courier capability. It's same-day delivery enhanced service offered by TransForce. One effect of integrating Dynamex into TransForce network will be to open future opportunity for us in the highly fragmented US market. Importantly, this transaction is asset light, so there's almost no depreciation and capital expenditure.

Our asset purchase and strategic alliance with DHL Express Canada represents, again, a logical extension of our network strategy. Once completed, we will achieve greater density and penetration in our fastest growing segment in Canada. TransForce is purchasing the assets of DHL domestic business, and operating them through a newly established subsidiary, Loomis Express. The partnership makes Loomis Express the exclusive partner of DHL that will provide transfers to global, international reach market. Experience has demonstrated that this kind of partnership offers a strong, competitive advantage, and a major stimulus to growth. We will invest approximately CAD20 million for the domestic operation, and in return we expect Loomis to annualize revenue to exceed CAD275 million. We firmly believe that the benefit to our shareholder will become evident within a short term.

I will briefly review our first-quarter financial results, which improved in every important metric. Total revenue increased 20% to CAD561 million. If we exclude the fuel surcharge, the revenue rose 19% to CAD509 million. Approximately CAD70 million of this revenue was contributed by Dynamex and Speedy Heavy Hauling acquired in August of 2010. The important measure of EBIT grew by 35%, and amounted CAD24.4 million in the first quarter compared with CAD18.1 million the year before. It represents 4.2% of total revenue versus 3.9% the previous year. Despite Dynamex's lower margin, reduced profitability in our LTL and a significant spike in fuel costs during the quarter, we still managed to widen our operating margins.

Net cash from operating activity before net change in non-cash operating working capital, reaches CAD45 million, representing an increase of 19% over a year earlier. Adjusted profits for Q1 more than doubled to CAD12.2 million, or CAD0.12 a share fully diluted, from CAD6 million, or CAD0.06 a share last year. Adjusted profit excluded the after-tax effect of change in the fair value of derivative and of items that are not in the Company's normal business.

TransForce's positive performance in the first quarter was achieved in an economic environment that is still not yet fully recovered, and in which featured an increasingly strong Canadian dollar. It was our disciplined emphasis on cost containment, as well as our persistent focus on providing value-added services that enable us to deliver such results.

I will now look at our first-quarter results on a segment-by-segment basis. In the Packaging and Courier, we generated revenue of CAD135.6 million before fuel surcharge, compared with CAD82.9 million last year, a 64% or CAD53 million increase, mainly driven by CAD45 million contribution from Dynamex. EBIT in the Package and Courier doubled to CAD9.3 million from CAD4.7 million a year ago.

In LTL, revenue was CAD105 million, a 6% decrease. Two factors contributed to this result -- lower volume due to persisting, weak market conditions, and the appreciation of the Canadian dollar. Integration and employee termination costs also impacted our EBIT. As a result, EBIT in our LTL was a loss of CAD2.4 million, versus a profit of CAD1.9 million the year before.

The Truckload segment generated revenue before fuel surcharge of CAD144 million, up from CAD139 million in the first quarter of last year. This 4% increase came from small volume increase, partially offset by unfavorable currency movements. Our performance in Truckload was considerably enhanced by better fleet utilization, which more than offset the timing difference between the rise in fuel costs and our ability to pass on those increases to our customers. As a result, EBIT increased 92% to CAD6.2 million, up from CAD3.2 million last year.

In Specialized Services, first-quarter revenue before fuel surcharge reached CAD138.1 million, up from CAD107.2 million a year earlier. A contributor to this 29% increase was our acquisition of Speedy assets. Margins remain stable in the waste management and ancillary transportation service. EBIT in Specialized Service rose 24% to CAD14.6 million from CAD11.8 million a year ago.

Looking ahead, we believe that 2011 will allow for significant year-over-year improvement in the Company's financial results. We expect small volume increase and a better pricing environment in some of our sectors late in the year. With our strong cash flow generation, we will now focus this year on reducing our debt. Overall, TransForce is well positioned to benefit from an ongoing economic recovery. I feel confident in telling you that management of TransForce is optimistic that the steps we've taken, and those we've planned, will continue to grow shareholder value.

I will now be pleased to answer any questions you may have. Operator?

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions) Cameron Doerksen of National Bank Financial. Please go ahead.

Yes, good morning.

Good morning, Cameron.

I guess a couple of questions for you on the LTL segment, obviously that continues to be a pretty difficult market.

Yes.

I'm just sort of wondering if there's any particular geography in that segment that is weaker than the others and what are you seeing on the competition side? Are we seeing some capacity coming out of the market yet in that segment? The third question on it is, what else can you do to improve the profitability, or is it more just a function of volumes coming back?

Okay, Cameron, to answer your first question, really on the LTL side, it's across Canada. Although I think that the Western Canada will recover faster then the east. Okay now that being said, in terms of competition, there is still a lot of capacity in the system and all the moves that we've taken late in last year are starting to get results now. Okay fine, you look at our Q1 and we're losing money, so that doesn't look too good. But we need some stability and this is where we're going now. So we won't lose any money in my mind in Q2, and slowly, we'll get back to our feet and get back to profitability which is normal to us. But, this will be done through, again, increasing prices because, through this recession, price pressure has been tremendous and costs are still a big component of our operation and we're there to manage them. But it's been very challenged in merging 3 divisions, it's been difficult.

But when you look at our Q2 numbers, you'll see that we are on the right track and going through all this combination of business, you always lose a little bit of business. It's normal that you will lose 5% to 20%. So far, we've lost about 6% of our revenue A, because the guidance used to deal with company A and now is dealing with B, he may choose his option and go with the competition. So we made the decision because the LTL market is shrinking in Canada, so we had no other option than to go through this process and it's about the same thing as our Truckload. If you look at our Truckload, the LTL is lagging Truckload by about a year. Okay so we've been going down in Truckload for about the last 2 or 3 years although we never lost any money. And now, it's starting to get better in the Truckload environment. We see the same thing happening in the LTL, it's just a matter of time. You'll see Q2, major improvement, 3, 4, and by 2012, I think we should be back on track.

Okay. That's good. Just a second question quickly on fuel. I understand you can clearly recover much of the fuel increase through fuel surcharges but there's that lag effect and I'm just understanding if you have an idea of how much you might have I guess lost on the revenue side or cost side as a result of that lag?

It's very difficult to say because we don't really track that, but I would say it's a minimum of CAD3 million to CAD5 million.

Okay. And --

Because it spike big. If it goes from CAD75 to CAD85 it's no big deal but it went from CAD75 to CAD110, now it's down about CAD95, CAD100. But the percent of spike, and because we recover after a week up to a month, I mean-- and in the winter you use more fuel, because the quality of the fuel is different than the quality of the fuel come April, because they don't want the fuel to freeze, the number of Btu is different so it's a double whammy. So to say safely between CAD3 million and CAD5 million it's a good number.

Okay. And I know there's some parts of your business where there really are no fuel surcharges, are you having the ability to pass through some higher pricing either with contract renewals or new contracts that help offset the higher fuel?

No, we didn't do that. See, on the waste side, it's very difficult because it takes a long time because these are long-term contracts. On the energy side, we didn't do as good of a job as we should have done there, so this is why we have to make some changes in our Management in Alberta. With Marc Fox we made some changes over there so we could adjust ourselves faster and better on the pricing there. On the USA side, we did a better job. But don't forget, we're still building the Company over there in the US and in Alberta.

Okay.

But I'm much happier when I'm looking at the US side of our operations. In Canada we still have lots of work to do over there.

Okay. Great, that's all I had, thanks very much.

Thank you, Cameron.

David Newman of Cormark Securities.

Good morning, Alain.

Hello, good morning, David.

How are you doing?

Hanging in.

Hanging in there, yes. Just a question on the LTL side and then a flip through to the US. What does this mean to you in terms of the LTL business being so soft? I mean, is there a read through on the Canadian consumer that in the economic recovery and I guess the consumer recovery that we're seeing here, it's just not there yet? And the read through I think you mentioned to the media that you're looking at the US as being a real area of potential growth and what are your plans there?

Yes, well the US for us is a potential growth on the parcel side not on the LTL side, that's for sure.

Yes.

Okay, on the LTL side, the big problem we have here in Canada is that our revenue, because of the recession, went down between 15% to 20%. So this is a recipe for disaster. And also when you have such a huge drop in volume, a few things happen. Number one, is a lot of our peers or our competition, they panic because they are stuck with trucks and terminals.

Right.

And they lower the price in order to get more volume. And this is a spiral that keeps on going down and down and we haven't seen the end of that.

Okay.

So us, our approach to that is say guys, we're going to have to down size like we did in the Truckload. And we'll have to grow in other sectors like the energy and the parcel.

Right.

So that's the way we're doing it.

I mean is there anything systemic or secular with the Canadian consumer or that worries you that-- because it's always been kind of the consumer sector, right?

No-- yes, true, but it's not the consumer the problem, the problem is the fact that we lost so many manufacturing jobs and so many manufacturing plants in Canada, Ontario the number 1, those guys -- we used to have those guys as customer for LTL.

Right.

But they're gone, they're closed, they just disappeared. So take TST Overland, one of our best division in LTL, I mean these guys used to be strong with the manufacturing base of Ontario, but that's gone. So we have to switch Overland, more into the retail market because those guys will never reopen their plant in Ontario or in Quebec, smaller in Quebec, but still. So this is a change, not because the consumer but because of manufacturing and this is an effect of the Canadian dollar being so strong.

Right. Okay.

Okay so this is why my decision is, guys, we have to combine and when you do a combination, the effect is you're going to lose business, we know that. And we know that we're going to go through that, we're going to loose some business because of combination and you go through a period of instability because you're combining divisions so it takes -- it costs more money, et cetera, et cetera. But let's say come September, all this instability will be gone and we think that this was the best thing to do but we're suffering right now.

Absolutely. Yes. And on the Package side in the US, what are your-- are you just going to be sort of like slack markets identify, what's your plans kind of tuck-unders kind of thing?

Yes, exactly. Take Florida for instance, because Dynamex is strong in the healthcare market, 27% of our revenue is healthcare. Our presence in Florida is very limited. So definitely Florida is a market that we're targeting, not this year because this year, as I said, our priority is to reduce our debt, small acquisition maybe. And for us, really on the US side, Dynamex is we want to understand better the business before we do something. But as a first, I know that in 2012, there's lots of potential for us to grow in that market in the US.

Okay. And just a housekeeping one, what's your CapEx plans for this year? What are you thinking about a debt repayment? And I guess the last one is, you've been a one-man machine, at some point are you looking to sort of bolster and get some help to help you, obviously you're quite busy in the last 4 to 5 months?

Well, that's a very good question, David, and yesterday we didn't announce it publicly, but our Board approved a change in our structure, so we've nominated 5 executive VPs to support me. So that is a change and this is an improvement and that's going to help me big time. So that is number one.

Is the by segment sort of thing?

It's by segment to a certain degree, but we still have some changes. If I take our Truckload, for instance, about 80% of that, Truckload will be-- or 75% will be run or managed by 1 guy. But on the parcel side, we have 2 VPs in there, Executive VP of TransForce that will be responsible for that. Specialized Services, we have 1. So this is some kind of a reorganization that we just been approved yesterday by our Board.

Very good. That's good to hear, yes, obviously you've been working pretty hard.

So we'll make an announcement on that, but we haven't done it yet.

Okay.

And what was your other question?

And just on the CapEx spend for this year and --

The CapEx, yes, yes. CapEx, very good question. CapEx is going to be less, because we're downsizing our LTL, small. And this is, if you look at my MD&A, the information, my CapEx last year was huge with the LTL, so it's going to be much smaller this year.

Okay, very good.

So to give you a number, were talking about around CAD50 million net now. And on the debt side, our model tells us that we'll be floating between CAD750 million and CAD775 million with the acquisition of Loomis. And Loomis, don't forget that-- the other thing, too, over and above the asset, it's going to cost me about CAD25 million to CAD30 million on the working cap.

Right. Right. Okay, very good. Thanks, Alain and keep up the great work.

Thank you, David. Good day.

(Inaudible) of Desjardins Securities. Please go ahead.

Yes good morning, Alain, it's (inaudible) in for Benoit, how are you?

Yes, I'm very good, how about you?

Very good, very good, thank you. First question is on LTL here, do you think at this level, you have the right days to go forward or some further terminal consolidation is a possibility at this point?

Yes, most of the job has been done, but we still have a few issues that needs to be taken care of, which will be dealt in the next Q2, 3 and 4 of this year. So by the end of the year all of this consolidation, all of this adjustment of the offer to the demand will be done.

Okay. Okay. And you still expect around 10% EBITDA margin by the end of 2011, or has that probably been --

Is going to be difficult but we'll see some improvement all the way into the rest of the year. 2010 and maybe it's going to be a difficult target for us year, EBITDA. But for sure, I mean we'll be over the 5% by the end of the year.

Okay. Okay. Second question on Dynamex, sorry about that, so I was wondering if you could give us some more color maybe about what you've learned, Alain, from-- since you integrated the business, I mean what's different compared to what you thought the business would be like? And maybe also what impact you expected on the margin starting in 2Q because obviously the margin dropped in the first quarter, wasn't that pronounced?

What I could tell you right away is that I'm very happy with what I've seen so far with the company. They have a very strong management team in the US. So this gives me major comfort that we could grow the business over there. Their IP system is fantastic, their accounting system, I mean everything is fine. Now, on the overhead, Mr. Welch and his team, they know that we need to improve that. We have the tools and we have a program that has been put in place, as a matter of fact I had a meeting with him and the COO, Mr. Skarka yesterday, and we're on track, we have a plan, and we're executing it right now. So I'm very happy with what I've seen so far. We are having a little bit of difficulty in Canada on the east side of the country, not in Western Canada, mainly Ontario and Quebec. So, for us, to support them it's going to be very easy, this is our backyard.

Right.

And on the US side, we're growing double digit on the revenue side. Think about it, double digit so far. And about 5% in Canada.

Okay.

So, it's very good. I'm very happy with this acquisition. The only thing, is it a cost me a lot of money so we have to turn our wheels fast and make it more profitable.

And maybe a third one if I may, Alain, just on that TL side, I mean you maintained a good level of discipline and did not increase the investment in tractors I was just wondering, I what point does availability of third-party resources dry up and maybe puts you in a position where you have to invest in CapEx on the TL side?

On the TL side, again, it's not going to happen. It's not going to happen, if ever we need more to service our customer, we'll buy a company.

Okay, okay. (Inaudible).

And when you're buying a company, you get rid of the accounts that are not paying the fair price and then you can support the growth of your good customers.

Right. Okay. Thank you, Alain.

That's the way we do it.

(Operator Instructions) Jason Granger of BMO Capital Markets.

Thanks very much. Good morning, Alain, congrats on the quarter.

Thank you. Good morning, Jason. Thank you.

Just looking here again, circling back on your Package and Courier segment there, results came in better there than we were expecting, so happy to see that. The organic revenue growth that you saw about 9% in your remarks, mentioned volume and price increases there, Canpar and ATS. I mean could you give us a sense of how much was price and how much was volume on that organic growth?

Most of the growth, Jason, was volume. Pricing, it's still very difficult pricing in all our sectors. I mean the US is probably different in Canada. Here in Canada, we still have issues on the pricing and so this is why in my comment I say that hopefully by late in the year we could see some improvement on the pricing side. But we don't see it really yet. A little bit maybe in the Truckload, not really in the parcels, so it was mostly volume. And the reason that we're better is because of our-- know our operating model is we've been very productive.

Okay. Okay. And I mean on the volumes, what sectors or regions are you seeing the volume growth there? And do you see this, I mean this sort of 9% organic revenue growth, do you think -- that's a good growth on a volume play, do you see that carrying on as we progress through the year?

Well Dynamex in the US, double digit, 10% in the US according to the Management, our Management team there, it's a plan, we'll do that. 4% or 5% in Canada. In terms of Canpar, ATS and ICS, in the parcel business we see more like a 4%, 5% or 6% growth there. On the LTL side, we don't see any growth in revenue at all. We see a drop of maybe 5% to 10%. On the Truckloads side, we see a little bit more activity. A little bit better pricing. But we're not sure if it's going to be durable or if it's just a matter that it's seasonal. And on the waste side, no, it's flat. But on the energy side, we see improvement in margin there because of better pricing and more volume.

Okay. Okay, that's very helpful. Just, switching gears here to your EBIT margins or EBITDA margins, which every-- sort of speak to, how should we be looking at, if you could just give us more color, those as the year progresses and in terms of normalized levels, I would say looking into 2012 and 2013, what sort of targets would you look at by segment across those?

Oh, boy, that's a tough question. In terms of -- I could answer you globally, Jason, in terms of sector I would have to go back to my notes because I don't have all the numbers in mind. But what I could tell you is, Loomis is not in the equation so far because we're not sure of the dollars and all that, so ex Loomis, including Dynamex, we know that our revenue is going to be floating around CAD2.5 million this year, probably CAD2.6 million next year with an EBITDA floating in the neighborhood of between CAD315 million and CAD325 million, CAD320 million. And a cash flow of CAD200 million and a little bit more. And a debt, by the end of the year, that's going to be around CAD750 million to CAD775 million. Now come 2012, there again, ex Loomis, because we take Loomis out of the equation because we don't know enough as of now, I think that we could improve that by at least, bottom line, by at least 5% again there.

Don't forget that we are moving from CAD268 million in 2010 EBITDA, into let's say a CAD320 million this year. Exclude the Dynamex for 10 months, this is still a major improvement. Come 2012, to get another CAD15 million, CAD20 million in improvement in margin, I think it's highly doable because our Truckload will do better, our energy sector will do better, our LTL will do better in 2012, our parcel in dollar will do better, in percentage will probably not as good because of the integration of Loomis at the time and Dynamex. But, all in all, in dollars we'll do probably in the neighborhood of CAD340 million, CAD345 million, CAD350 million EBITDA. But more important, if you look at my depreciation, with 20% more revenue, my depreciation stays flat, right?

Yes.

So, that shows you where we're going.

Yes, no absolutely. Okay. And then with DHL, provided that it sounds like that's on track to close toward the end of May, so I mean, if we look at the contribution from DHL for the balance of 2011, net neutral in terms of EBITDA contribution for 2011 and then ramping up in 2012, is that a reasonable way to look at it?

Yes, I think that is reasonable. And yes, I think that is reasonable, it's going to be 0 for 2011 because don't forget, that it's going to take us 2 months, maybe 3 months to segregate the international from the domestic. So we're going to be very busy doing that. So let's say we take over the company in June, so it's not before September that the company, Loomis, as a stand-alone from DHL international.

Okay.

And then we can start making some moves.

Okay. Okay. Last question here, just on the regulatory side, in Ontario, it sounds like there is some momentum building afoot to lead to wider adoption of long combination vehicles, which could be a big boost to productivity for the Truckload space. Any comments on your thoughts on whether or not we're going to see something along those lines the next couple of years?

Hopefully, because LCV, we have that in B.C., we have that in Alberta, we have that in Manitoba, in my mind it's only Ontario that doesn't have it.

What would that mean to your business?

The long vehicle, the 253s or 332, that's how they call it, LCVs.

Yes, yes.

But it's not allowed in Ontario. It's been tested right now, we're part of the test and we support that big time because for sure for the environment it's better, and in terms of safety, this has been proven in Quebec and in Alberta and in B.C. and in the US that's still safe. So I don't know what's the hook up but it's going to come.

Yes. Do you have a sense of how that would -- to what extent that would improve your productivity in your top line business?

No, I don't know exactly, Jason, but for sure it's going to be very interesting. Are you talking CAD1 million in savings or CAD2 million? We don't know, I don't know that.

Okay. Okay. Very good, that's it for me. Thanks, Alain

Okay, thank you, Jason.

And Mr. Bedard, there no further questions at this time. Please continue.

Well thank you, is if there's no other questions, Operator, I think that it's going to be over.

Okay.

So, ladies and gentlemen, thank you for your interest in TransForce and have a pleasant day.

Excellent. Ladies and gentlemen, this does conclude the conference call for today. Thank you are your participation and you may now disconnect your lines.