TFI International Inc (TFII) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to TransForce 2012 third 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. Instructions will be provided at that time for you to queue up for questions. (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'd like to remind everyone that this conference call is being recorded on Wednesday, October 24, 2012.

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

Well, thank you, operator, and good morning, ladies and gentlemen. Earlier this morning Canada NewsWire issued the news release detailing our results for the third quarter and nine months ended September 30, 2012. I will first provide you with the quarter's highlights followed by further details about the performance of our operating segments.

In the third quarter of 2012, TransForce once again performed strongly in a challenging market environment, whereas the North American economy is basically solid in many sectors. Total revenue was CAD761 million, up from CAD743 million in the same quarter last year. EBIT, a very important performance metric for us, rose 17% to CAD66.9 million compared to CAD57 million last year.

Approximately half of the year-over-year increase in EBIT reflects the success of our continuous drive to optimize operation and asset utilization across our network. The other half of EBIT growth was related to our acquisitions. As a percentage of total revenue, EBIT reached 8.8%, up from 7.7% last year. We registered increase in most of our business segment as you will hear shortly.

Net income for the third quarter rose 178% to CAD53.8 million or CAD0.53 per share fully diluted, versus CAD19.3 million or CAD0.20 per share fully diluted in 2011. I must point out that the net income includes the foreign exchange gain on US dollar-denominated long-term debt. Still excluding items that are not in our normal business, adjusted net income increased by 31% to CAD43.5 million or CAD0.43 a share fully diluted.

Net cash from operating activity reached CAD89.6 million in Q3, and free cash flow totaled CAD79.5 million or CAD0.84 a share. This robust free cash flow generation enabled TransForce to use CAD42 million to repurchase almost 0.3 million in common shares under our normal course issuer bid program. We also reduced our long-term debt by CAD22.8 million during the quarter. It is our intention to continue to use the cash we generate to reimburse our debt, repurchase our shares and partially finance any further future acquisition.

I will now discuss the third-quarter results for each of our business segments. In Package and Courier, revenue, excluding fuel surcharge, was CAD258 million compared to CAD265 million the prior year. This 2% decrease [lacks] lower shipping activity in our existing customer base. EBIT in this segment increased 17% to CAD17.4 million or 6% of total revenue, versus CAD14.8 million or 5% of total revenue in Q3 of last year. This significant improvement has been made possible by continuing improvements in productivity, strict cost control and by the implementation of technology and facility-related initiatives.

In the LTL segment, industry overcapacity and pricing continue to represent issues, but we are pleased with further progress being made following our rationalization efforts. LTL revenue before fuel surcharge for the third quarter of 2012 reached CAD133 million, up 14% from CAD116 million in Q3 of last year. This increase is attributable to the Quik X LTL division which we acquired last January.

More importantly, our rationalization effort is allowing us to significantly decrease operating expense and to be more efficient. EBIT in our LTL segment was CAD10.8 million or 6.7% of total revenue in the third quarter. Even more revealing, if we exclude Quik X from this year's results and exclude gain on sale of property and equipment from last year, the year-over-year improvement in EBIT would be about [43%].

Moving to our Truckload segment, revenue excluding fuel surcharge was CAD126 million, a 5% decrease compared to CAD133 million for Q3 of 2011. Prices remain relatively stable, but volume decreased in the current quarter. Here also, we kept our eyes on optimizing asset utilization and maximizing return on assets. This focus led to a solid 19% increase in EBIT to CAD14.9 million. As a percentage of total revenue, this quarter's EBIT margin reached 10.1%, up from 8% last year.

In the Energy sector, revenue reached CAD98.4 million, a 24% increase over the last year. This increase is attributable to the acquisition of Miller, as revenue decreased in our Alberta operation due to lower drilling activity from certain customers. EBIT increased 17% to CAD12.6 million compared to CAD10.8 million last year. Our strategy in this sector involves creating more synergies within the group. You will recall that we harmonized the branding of our Company earlier this year. We're now moving forward with the consolidation of IT platform in certain divisions, which will lead to administrative and operational synergies.

Contrary to more conventional trucking and maintaining capacity in this sector, (inaudible) a higher profitability. Finally, revenue from other Specialized Services was CAD82.3 million versus CAD85.6 million last year. This 3% decrease came as a result of slightly lower revenue from the waste management group.

Looking at uncertain economic conditions for the rest of 2012 and the first part of 2013 indicate that the North American economy will barely grow. In this context, we anticipate no organic growth, but we will continue to direct our energies to maximize our return on assets and improving operating efficiency. The gains realized from executing all of these priorities will allow us to generate strong cash flows from which we can reimburse our debt, buy back the shares and finance acquisitions.

Our highly selective acquisition strategy will remain a key driver for growth, revenue and EBIT. The scope of our operation in North America gives us the ability and the know-how to bring innovative value-added transportation and logistics solution to our customer base. In turn, this helps us generate superior return on assets and continue to create further shareholder value. Should the pace of economic growth increase, we are in a strong position to realize significant benefits.

At this point, I would like to -- I'm pleased to answer any questions you may have. Operator?

Thank you. (Operator Instructions) Walter Spracklin, RBC Capital Markets.

Thank you very much. Good morning, Alain.

Hey, good morning, Walter.

So I'd like to start, I've just got three questions here. First on your integration, I guess. Your margins in the quarter, even though revenue was down quite a bit, margins were very strong particularly in your P&C division, but also -- sorry your LTL division, but P&C was holding up very well as well. Can you update us on the integration? Is it going according to plan? And specifically, the IT system you're sort of guiding us Q1, Q2 of next year to have that done and then when you'd start the terminal rationalization as well?

Absolutely, Walter, right on target, right on plan. And you see all of these benefits in our Package and Courier, most of them comes from Dynamex where I'm very happy with the management team we have there. We have six EVPs that are fully committed. They understand our philosophy and there I'm very happy with what's going on with Dynamex.

At the Loomis, Canpar thing, I mean as I said earlier, we have to move the IT of Loomis onto the same platform as Canpar. This, I mean, will allow us to improve our operation and it's not complete, but we're on the right track. I mean it's going according to plan, okay. And as I said, probably sometimes early in 2013, okay, everything will be on the same system and then we can start getting the full benefit of all this operation that needs to be improved, but we can't do anything until like we speak the same language.

Sure.

Absolutely, we're right on track and on the IT platform the energy is next to be completed. Our LTL program, okay, because we have the same LTL program as the P&C, we're moving along -- by the end -- I'm going to be in Calgary in a few hours and meeting the management team there. And I'm sure that we'll track there according to all the reports I'm getting, so that we're going to have CF and Overland -- TST Overland on the same platform very, very soon.

So I mean I'm very happy with the direction we're going and as you point out, our revenue is down, okay. Well, globally if you exclude the acquisition, our revenue is down. It's up only slightly 2%, 3% if you include the acquisition. But we really worked hard on the cost, on the efficiency, okay, to generate close to 9% EBIT in the quarter.

Yes, that was quite evident, that's fantastic. The next question I have is on specifics around, if we were to dissect pricing and volume in each of your major divisions, it looks like in the notes to your statement, P&C, you said it was mostly due to volume. Was there any pricing pressure?

No.

No, not at all.

No.

Okay.

No, our P&C price is quite stable, okay. It's the volume. The month of August was a disaster for us. I mean, we don't know what happened. [It seems] like everybody left for vacation in August. I mean our volume at Canpar dropped 8%, 9% in August.

So you saw a bounce-back in September?

It's back on track in September and October, but just to say that I don't know what really happened in that month, okay, but the pricing is not a big issue. It's still some kind of an issue in LTL. So this is why a few customers we had to say guys, we can do it. I mean if you guys want us to invest in equipment and you're going to get me a return of 2%, well, I'm going to invest elsewhere.

Yes.

Right.

Yes.

Right?

Right. Okay. So it sounded like August was your problem month and now it's back on track you said for September and October as well?

Yes.

Okay.

Well, it seems that October, it's okay, but there again I feel that Q3 and Q4 will be like some kind of a slow quarters compared to the nice Q1 and Q2 of the year. I'm still convinced that -- two months ago, I was convinced that we're going to beat our plan. Now I'm convinced that we're going to make the plan just because of a little slowdown on the revenue.

Okay. LTL, it sounded like it was both a mix of volume and price. Is that right?

It's a combination, yes. We had to walk away from some customers, okay, and so that's volume, but the market is not growing in LTL. So this is why there's more consolidation that needs to be done, okay, and that's the story there.

Okay. And you alluded to being on plan, just to get an update there, your 2012, I guess you are giving us CAD375 million to CAD400 million. I agree you are probably coming in above that before the third quarter, but now you're saying probably within that range for 2012.

Yes.

Yes. 2013, you had mentioned that under a no growth scenario, you see CAD25 million in additional EBITDA.

Right, yes.

Any changes there?

No, no.

Okay.

I'm still confident that same revenue as 2012, we're going to beat -- no, same -- in 2013, same revenue as 2012, we're going to beat 2012 by about CAD25 million.

Right. Okay. That's all my questions. Thanks very much, Alain.

Thank you, Walter.

Kevin Chiang, CIBC World Markets.

Hi. Good morning, Alain.

Good morning, Kevin.

Just looking to dig a little bit deeper on the lower courier revenues year-over-year. Just looking to see if you can provide some granularity in terms of where you're seeing the slowdown either by operating company or end markets?

The market -- the slow market we have, Kevin, is really in the east. Ontario and Quebec, those two provinces are going through some very difficult time. You look at Ontario with a huge deficit, okay. Even the Prime Minister just quit. Ontario, it's a problem for us. Quebec is the same, okay. Those are the engines. Ontario has been the engine of Canada for the last 50 years and it's [speaking] like it's a little -- running low on gas.

Okay.

So that's why there is not a lot of growth in Ontario. And it's the same, not as bad maybe in Quebec, but it's not -- it's never been too great in Quebec anyhow. But that's the difficulty we're seeing, but all in all, our revenue on the P&C is down just a bit and mostly it was in August.

Okay. That's very helpful. And then I think yesterday or the day before, Stats Canada was reporting some softening in retail sales. Can you provide some read there in terms of how that's impacting ATS Retail and are you seeing some softening there reflecting those Stats Canada statistics or is that being offset by some of these US retailers coming north of the border?

Well, you're absolutely right. I mean, our guys at ATS are doing a fantastic job because we just signed a new account, okay, that comes from the US. And the problem we have with ATS is that we have a nice niche, which is in the entertainment that's melting like a snow under the sun. When we bought ATS, the entertainment business represented about CAD40 million of revenue and now we're down probably to CAD25 million.

But all in all, the revenue of ATS is quite stable because we lose a little bit here, but we gain some there. What you just mentioned about Canada, the statistic, I mean the retail down a bit. We see that with the Canpar, a little bit with the Loomis. And I was talking to a guy in the US just two days ago and he was telling me that they are very confident. They saw the same as us, okay, in July and August, where we see some -- these consumers coming back. Inventories are very low. So if the consumer is back, I mean the business should do okay.

Perfect. That's it from me. Thank you very much.

Pleasure, Kevin.

Cameron Doerksen, National Bank Financial.

Good morning.

Good morning, Cameron.

I guess a question on the Energy segment, I mean you cited some pretty significant weakness in Canada, I guess especially Alberta. Can you maybe talk about what the activity is like in the US and what the outlook is there?

Yes, okay. So the activity in the US, I mean down south in Q3, we have a storm -- one thing that we didn't predict is that this is hurricane season in the south, okay. So our month of August in the south was slow, okay, because every time we have a hurricane, I mean the business, [the reeling] activity comes to a stop, okay. They stop a few days before and they stop for the time of that week that the storm is in and then it takes a few days to get back to work. And us we had to move our team north to Kansas so that -- but that cost a lot of money, but at least we keep our guys busy, okay. So that's where we had the little softening in Q3 and the revenue on the US side.

North in the back end, it's still okay although we see a little bit more competition there because the margin is so great that some of the guys want to move in there, but it's not easy to move in there because it's fine -- it's tough to find workers and it's tough to find a place to have your workers stay because there is no -- it's very tough to have a man camp over there. Around the Denver area, on our Greeley terminal we're doing great. Our Rock Spring terminal, which we're basically the only guy in town over there. So this was a terminal that was a problem for us until about a year ago. Steve, our Manager there did a fantastic job of turning that thing around.

We look at Louisiana. Louisiana, we've always done very, very good over there. We have a Manager there Jude, that's the guy, he's unbelievable. And although Louisiana is more gas, so this is why we've slowed down a bit there. Pennsylvania, we're doing okay because basically everybody left down there because it's gas and it's lower activity.

So all in all, I had a meeting last week with our energy team in the US and I'm very confident with these guys. They are fully committed. Those guys, they know the business, the drilling activity, whether it's Obama or Romney that's get re-elected. It's only going to increase. Yes, there is more pad drilling, okay, that affects the number of moves that we do, but there's more drill activity. So all in all, we're very confident that we're going to have a very good year, strong year in 2012 and it's going to continue in 2013.

Okay. And you would --

Except Canada, right?

Right.

Cameron, except Canada. Canada, I mean the number of rigs there, it's a disaster. It keeps on going down and down and down. My revenue in Canada is down to about CAD50 million on the rig moving side. The only beauty about Canada is that my oil sand related business is growing 15% right now, okay, because oil sands is busy.

The Canadian operation is something you would consider divesting, just to -- so you could just focus on the US?

No, because you see the reason of our rebranding, okay, is that we need one name for North America because we have Shell, which is a huge customer of ours, okay, in the US. And it's also now a good customer of ours, but prior to that, to us being in the US, it was using somebody else in Alberta. All right. We have a BP, we have Husky. So this is like a North American business. I agree with you, Cameron, we don't make any money in Canada right now, basically flat.

So every time I look at that and -- but we have a new management team. We have a guy there [Kilani]. He's a Canadian, worked for us in the US. He's back into Canada. He's changed a lot of things that we were not doing correctly there. We're improving our density. So I'm confident that we have a team there, although with smaller revenue that we could make a profit.

Now is this -- the return on asset in Canada, is it going to be as good as the one in the US? It remains to be seen. But the problem is that if you're in the US, but you're not in Canada, it's doable, but if you are in both countries, I think that for the major customers, the customer of the future, we deal more and more with the energy player than the drillers now, all right. So for them it's really important that you have a North American solution.

Right. That makes sense. Maybe talk a bit about acquisitions, that's been pretty quiet here for the last couple of quarters. I mean, what's your expectation as we look for the remainder of 2012 and into the early part of 2013 for acquisitions? And where -- have the focused areas changed at all?

Well, see, Cameron, 2012 I said it, it's a year that we're going to be focusing on the digestion of the acquisition that we made in 2011. So this is why I was like semi-retired on the acquisition trail, but I'm back in 2013, okay. I'm working on the few things right now, okay. That's going to probably take effect sometime in the summer of 2013. And that's going to keep our Company growing for the next few years. But until, let's say, the summer of 2013, I'm very much involved in delivering what we said that we would deliver for 2012, cost, efficiency, Loomis, Canpar, Dynamex, this is very important to me, okay, that we are in the right track before we add to these guys, okay. Same thing with Fox, the energy sector, Marc is doing a fantastic job, but there we still have some issues that needs to be fixed before we add on top of our energy business in the US.

But I'm very confident that by -- let's say, within the next six to eight months, okay, we could buy something at the right price, that's going to be a fit for us. In the meantime, I'm buying my own Company. That one I know, I know what I'm buying and I know at CAD17 or whatever the price is right now, it's a hell of a deal. Because at CAD17, my cash flow yield per share is 14%. Hey, what is this? I mean, I'm going to buy my stock until and I said, I'm going to buy CAD7 million, we bought a little bit more than CAD2 million so far and we're still buying. We were buying yesterday, we'll probably be buying today, okay, until we get to that CAD5 million to CAD7 million. So that's the one I'm buying right now, Cameron.

Okay. And that was --

[I know that one].

Okay, absolutely. I guess sort of my next question. I assume just based on that statement that your priority here for free cash that is buying back shares as opposed to paying down debt?

Yes. We're going to keep the debt at this 2 times -- the 2 times EBITDA leverage, okay, around the 2 times, 2.2 times. We're going to close the year at about 2.15 times, something like that. So the leverage will stay around the 2 times, 2.15 times, 2.20 times and the excess cash flow that that being said will go towards the debt for the next six to -- not towards the debt, but towards the share repurchase for the next six to eight months until we have more of the M&A acquisition -- M&A activity.

Right. Great, that's it from me. Thanks very much.

Thank you, Cameron.

David Newman, Cormark Securities.

Good morning, Alain.

Hey, good morning, David.

So here we go again, let's say, the economy softening up once again, it seems like five years of this BS, but --

Yes.

As you look at just sort of overall, I mean, you mentioned it's not specifically in the Package and Courier, but just the general freight markets overall, are you just sort of seeing a bit of a deceleration. I know the railroads sort of mention that every month within the quarter, they saw a weakness and what are you looking at like sort of Q4, does it look like it could be a little softer and what do you think the organic growth could be kind of as you head into the back end of the year?

Organic growth, David, is zero.

Right. [So we've got three] minus 8% for the quarter?

Yes, absolutely. [You saw] minus 8% for the quarter and where we had the worse, so the worse was really our LTL.

Yes.

A little bit our Package, our Energy, okay, Energy mostly because of Alberta, not the US. And I don't think that Q4 is going to be minus 8%.

Okay.

Okay. The thing is, we're going to do a little bit better, but there is some weakness, okay. We talk to our customers and they say, well, we don't have any [worse], so we can't ship anything. It's not that we lost a customer except on the LTL, okay. But the rest of our business, energy, parcel, truckload, I mean, it's just that the freight is not there.

Yes. And do you see a peak season -- was the peak season, was it hampered this year? And would Package be the, I guess the biggest one that would be impacted on that in the lead up to Christmas?

Well, so far we're doing fine on that.

Okay.

Okay. We're doing fine, but use the word fragile. To me when I looked at the freight volume, it's like it's fragile. It's not solid. It's not -- I was talking with my truckload guys yesterday morning, okay, so the week and this and that and they say, well, in a strong environment, okay, at 7 o'clock in the morning, I mean we're booked.

Right.

But now we're booked at 10 o'clock in the morning. So it shows you that it's not humming on eight cylinders.

Right.

On the other side of the coin, David, that tells me in a sense, okay, to focus my guys, okay, and all our attention to be more efficient. All of this IT implementation, it's not easy, but it's easier to do when you're not too busy. When you're very busy, okay, then it can get more complex, because you have to be focused on growing the business because the business is growing. When the business is flat or down a bit, well, then you don't have any excuse, you have more time really to put your energy towards this implementation so that we could do it as fast as possible.

Right.

Okay. And then when the business comes back, because it's going to come back one day, I mean like you said, it's five year of that bullshit of soft revenue. But this is a fact, but it's going to come back. I don't know when. Maybe if Romney gets re-elected, the US will be on fire, okay. He says he's going to create 12 million jobs.

Yes.

Hey, we'll see. But one thing is for sure, it's going to come back at one point.

Yes.

Okay. And us, we got to be ready. So this is why us in a sense it's not bad for us if it's slow, because we work on our cause. If you look at our EBIT of 8.8%, I mean go back five years, okay, and even five years ago when the economy was great, we never delivered 8.8% EBIT.

Right.

Never happened.

And when the economy comes back, obviously, you've done a lot in terms of cutting cost and [hitting] down that path. So that's --

Exactly.

On the energy side -- please go ahead.

Excuse me, David, but also we have price pressure. Our line haul provider, okay, those guys, I mean they have cost, okay, that they're trying to pass on to us.

Right.

Like a air line haul provider, I mean those guys, they try 727. So that is a huge cost that's been transferred to me. So what am I going to say to the provider? Change the plane, okay, buy more efficient plane and I've got this same situation with the truck line haul. Well, these guys are --

Maybe you should buy them.

Eh?

Maybe you should buy them.

No, because it's too much money for what it's worth.

Right. And just on the energy side, obviously, Canada is difficult. I mean can you reposition assets, close branches and kind of realign assets on the Eagle Ford and Permian and things like that?

Yes. You're absolutely right. This is something that we're looking at right now. There is some kind of difficulty. We've done that in the past, okay. It can be done, okay, but the management team I've got now in Alberta are fully committed. So before we -- and consolidation of our operation in Alberta, this is definitely something that we're looking at, okay. But before we -- we got to be North Americans. So we need Canada.

Right.

We need Canada, but we have now the team with the leader there, Kilani that's going to turn that thing around. I'm convinced.

So you don't want to cut off your nose to spite your face?

Right.

But you do -- you want to tweak it.

Yes.

Sort of thing.

Yes, because now we have the team. We have the people. We have the -- I met those guys last week. All of them, we had a nice time. We were about 35 -- 32 to 35 of our management team there, both Canada and the US and then -- those guys, I mean, it would be hard for me to [say to Marc, Marc], we're going to sell the Canadian operation. We're going to close it down and move the asset into the US. Because those guys told me, Alain, we will turn that thing around. And I'm convinced that they will do it.

Right. And then, clearly the market is getting a little bit more -- a little more crowded, I mean (inaudible), just thinking about coming back in America and things like that.

Right.

You've kind of did that peak energy, I think you guys -- you put two guys in a pickup truck, which was a pretty good margin. I mean, obviously, pad drilling less movement and things like that, would you think about moving up the value chain towards things like more rentals, like pad drilling requires, I think, 30% more support equipment. Those are other things that you can do to kind of -- to build the business?

Yes. Yes. You're absolutely right. This is the -- we have the network, we have the people and like I said to our management team, okay, we still have a few things that needs to be fixed with our rig moving business. Well, let's start to get our eyes open, okay, to add, like you said, more services to our customers because right now the only other service that we provide is pipe storage and moving the pipe. So, yes, it's important, but we could do more, we could do better.

Right. And then you capture more of your customers' wallet and all that?

Right.

Right. Okay, very good. Thanks, Alain.

Okay, David.

Ben Vendittelli, Laurentian Bank Securities.

Good morning, Alain.

Hey, good morning, Ben.

Just a couple of questions with regards to movements, to get a bit more detail. You were in the process of renegotiating some unprofitable accounts or contracts. How is that progressing and was that part of the revenue weakness in the quarter?

Good questions, Ben. And, yes, we did -- that needs to be done as a first step and we lost one account that was about CAD4 million that is based in Western Canada. But that's it, that's it. And we adjusted our price to be closer to market pricing and the effect of that according to my team over there is going to be about CAD2 million to CAD3 million more to the bottom line, okay, for let's say a 12-month period. It's small, okay. It's not a lot. But as a first step I mean that was the right thing to do. And so the revenue of Loomis after this account that went away, okay, we've gained some new business. As a matter of fact, we gained an account in Quebec, (inaudible).

Okay.

Just a few months ago. So all in all, the revenue of Loomis -- since the time that we bought the company, I mean revenue-wise we're flat. And so we haven't lost anything. We lost a few, we gained a few.

Okay. And in terms of LTL, you mentioned the same thing, there was a decrease related to non-profitable contracts or accounts that you let go. How much of the decrease in LTL was related to that?

On a yearly basis, I mean the marketing action, I don't like this word, but this is what really happened and it's about CAD50 million on a yearly basis and mostly these accounts are in Ontario, Quebec.

Okay. Okay. And lastly just on your Energy segment, you do discuss CapEx on the IT front and consolidating the IT in that segment. First of all, how much CapEx that you plan to spend there and how much of an impact do you expect that to have on margins?

Okay. On the Energy sector, the combination of the IT platform, the cost is less than CAD0.5 million.

Okay.

And the saving is not going to be that huge. If you look at LTL, that's a different story, okay. The investments are not that huge because we have an AS/400 in Toronto, we have an AS/400 in Calgary. And so what needs to be done and we're working on that and it's going to be done before the end of the year is to upgrade, okay, that AS/400 that we have in Toronto at TST. And you're talking maybe CAD0.5 million there. So no big deal. It's the software that we own, the TST software that's going to be implemented, first, at CF and then CF Calgary becomes the backup of Toronto, okay. And then we're going to move with Kingsway and then we're going to move with Quik X.

So the total cost is not that important because we own the software that Toronto will be upgraded, so that we [could revise] all these companies. Now the savings there, it could be huge, okay. You're talking between CAD2 million to CAD5 million, you see. Well, that's a lot of money and CAD2 million to CAD5 million, I mean why the CAD2 million to CAD5 million? It's always difficult to predict, okay, using the same platform. It's the back office people, the operational people are to say and the cost saving on the equipment, but we believe it's going to be between CAD2 million to CAD5 million coming in line sometimes in 2013 and 2014, right.

On the Loomis or package system, we're moving ATS as we speak, okay, to the TFI platform, okay. So that's going to be a saving because right now we're still using Mike Andlauer's ATS software. By the end of the year, we're going to be completely off Mike's software. So there is a saving there of about CAD75,000. And we're moving the Loomis platform off the AS/400 that's been housed by IBM, cost us a fortune and that's going to be done, like I said, sometimes in 2013. There the saving is going to be just a Loomis thing. It's going to be between CAD2 million and CAD4 million, okay, and that is because we're going to be combining the back office of that Loomis, Canpar at that time, okay.

And the investment, it's huge, okay, with Loomis, Canpar because we have to replace all the handheld computers that Loomis were using. So we've already --expense, I think, is CAD1.5 million in Q3, okay, and it's going to cost us another CAD1.5 million. We have to upgrade the system that we have in Toronto. So the cost is going to be about CAD3 million to CAD5 million, okay, for the Package and Courier. And the saving, (inaudible) be about a year on that.

Okay.

But it's going to be huge. As a matter of fact, I just approved yesterday an CAD1.5 million investment in Toronto for ICS sorting facility. And according to our VP of Ops there the payback is less than three years, okay. So we are really investing a lot of our time and effort. And as I said earlier, in slower times like we're going through right now, no revenue growth, okay. That leaves us time to really work on the operation and get ready for when this economy is going to be back on track, hopefully, sometimes in the next -- well, in the next five years because, gee, we've been five years in a very difficult revenue environment, right.

And from that perspective what's your -- if you were to gauge what the potential upside is to margins in a good operating environment from these levels, where would you say the upside is?

Well, what I could tell you, Ben, is this. If we run the Company TFI today to the optimum and we will do that, okay. Just the Package and Courier, the LTL and the Truckload, we're very close to the optimum there, the waste, the energy. If we could do that, okay, that means our EBITDA instead of closing the year, this year like a CAD385 million, same revenue, okay. We would be flying CAD450 million, CAD460 million. No revenue, no market condition, no price improvement, this is what needs to be done from us, the management team, okay. And this is going to take some time. It's going to take us two to three years because we got a big job to do at Loomis. We're working on Dynamex.

So no market environment improvement, okay. We can deliver with this machine, the machine we have today between CAD450 million to CAD460 million. I said earlier to Walter, next year we'll deliver CAD25 million more, same revenue, okay. But there is more to do, okay, but it takes time. See, we got rid of 22 locations over the last 12 months. In this quarter, Q4, we'll get rid of another two or three locations. I said, a year ago, we'll get rid of at least 50 and it's probably going to be more than 50. But those 22 locations is going to start showing and this is all the improvement that needs to be done.

And to answer a question on the M&A side, I'm looking at one company right now in the US, which I met those guys three, four times, they had an offer and I said, you guys, if you can sell your company at this price, good for you. Then I talked to the guy last week and the deal didn't go through. Well, I'm used to that. Somebody wants to sell me a Rolls-Royce for CAD50,000 I'm going to say, yes. Then I call the guy, he says, well, I'm out of stock, right. Does that mean that the Rolls is worth CAD50,000? No. So if you tell me your company is worth CAD40 million and then the deal didn't go through, I had the same discussion with Canpar when I bought Canpar from RBC. They said, well, Puro is paying this price. Well, you didn't close the deal with Puro. So that doesn't mean that this is the right price, right.

Agreed.

I'm going to have lots of fun there, Ben. We're going to have lots of fun, lots to do.

Okay, good. Glad to hear that. Thanks a lot.

Okay, Ben, take care.

Benoit Poirier, Desjardins Securities.

Good morning, Alain.

Good morning.

Yes. Just to come back on the Energy business, we know that you focus on the rig moving, but is there any opportunity for you with respect to the crude by trucks, is there a sector that you would like to grow over time?

Right now, Benoit, it's too early. One thing that I could tell you is that we have the pipe storage and pipe moving in Alberta and I've looked at a company that's doing exactly the same thing in Texas. And finally, I said, excuse me -- finally, I said you know what, no. We have still too many things to do. So I walked away from that deal. So this is really for us a first step, okay, because we know that business. We're doing the same business in Canada and we're doing great with that business. We have a nice software. That's really a big plus for us. So that is really the first one.

The second one that I really like is the one that David alluded to is the [rust about]. Servicing well with a pickup and a small trailer. I mean this is a great business because unbelievable to me the gross margin is better than what we get us with moving rigs and we have big trucks, big cranes, big investment compared to these guys that have small investment and better margin. I mean does that make sense? No. That's a fact. So those are the first two or three things that we got to be looking at, but nothing before the mid-2013.

Perfect. And now when we look at the net CapEx for 2012 and 2013, do you still expect to be at roughly CAD60 million?

I think that the CAD60 million is the right number for 2012. So far I think that 2013 is going to be down to CAD50 million. And I was surprised when I had this meeting with our energy boys in the US, CapEx for us in 2013 in the US is zero, none. And about the same in Canada. So efficiency, the more we combine, the more synergies that we create, I mean it's the strength of TransForce. So this is why I think that -- I haven't seen the final numbers, but it's going to be maybe CAD50 million, but no more than CAD60 million in 2013.

Okay, great. And when you talk about the terminal consolidation, could you refresh your memory about the amount of real estate for sale right now, Alain?

Well, we have about CAD75 million to CAD100 million of real estate, okay, that could be sold tomorrow that would not affect my business. I'll give you a perfect example. I've got a terminal in Toronto. Single tenant, I'm out of there. My tenant is FedEx, okay, with a long-term lease. So I said to my real estate guys, hey, guys, wake up and smell the coffee. This got to go. We have a perfect tenant. I don't need that terminal, a REIT will buy that. So we're in discussion right now. So that terminal is part of that CAD75 million to CAD100 million of real estate that needs to be gone.

I've got another one. Edmonton. My anchor tenant there is Puro. And true, I've got one of my operations there, but small. But that, it can be sold. And it's going to go because I've got a nice tenant, which is Puro and us. And another of our UTL division, our Energy division that's there. So, yes, there is more to be done, but over and above that, this is just a cash flow issue, but -- and also an operating cost issue. But over and above that, we closed 22 locations. I'll give you an example. Dynamex Montreal, we said no. You move into our [Chemin St. Francois] facility. There's a saving of CAD350,000 a year.

In Saskatoon, CF, okay, and Overland we'll be operating under the same roof. As we speak now, in a month they will be under the same roof. And the old TST terminal is going to be their soul to one of my competition or leased to them. So this is all these actions that we take, okay. Loomis is the same thing. Loomis [there is BC] moving into our CF terminal there. And this is ongoing. As I said, over the last 12 months, we've eliminated 22 locations and over the course of the next three years, because we have long-term leases, right, about three years, so it takes two to three years.

I've got a huge an office at Dynamex at Dallas. I mean, I need about 30% of that huge elephant there. So our guys are working on that. Our head office at Dynamex has to stay in Dallas. We have a great team there, but we don't need all that space, right. So all new projects that we're working on. And as I said, true, if the revenue would be growing 8% to 10% right now, okay, then you're involved into working hard to support your customer growing. Right now, we don't have that problem. We have the opposite problem is that we're flat, we're down a bit, so this is why -- we're lucky because we got tons of things to improve in our operation because of the Dynamex purchase, because of the Loomis purchase, because of the energy investment that we made over the last year or two. So that's where we're busy.

Thanks, Alain, for the call.

Thanks, Benoit.

Jason Granger, BMO Capital Markets.

Yes, thanks. Good morning, Alain.

Hey, good morning, Jason.

Just carrying on with the theme of productivity improvement. So looking out to 2013 in a flat revenue environment, you've noted potential CAD20 million to CAD25 million in budget improvement. So now if -- and there was a comment earlier on the call, organic revenues down about 8% this quarter. I came up with a similar number. If we assume that moderates maybe 3% or 4% in Q4 and flat in 2013, just trying to understand if organic revenues, say, are down 5% in 2013 --

Right. Yes.

Which would be about CAD150 million or on the flip side, if they're up 5% in 2013, what is due to that CAD20 million to CAD25 million in EBIT improvement of a flat revenue environment?

Okay, so in 2013, if our revenue -- excuse me, Jason -- would be down 5% versus 12%, okay, which I think is too much.

Yes.

Because we're down 8% in this quarter, okay. But that's not the trend. I mean we had really a bad month of August everywhere. But if we use that 5% number, which I think it's a little too high, I think more reasonable it could be 2% to 3%, but let's say 5%.

Okay.

Okay. That to me, the CAD20 million to CAD25 million is based on approximately the same revenue. So if we lose CAD100 million of revenue next year compared to this year, so that could put pressure on my CAD25 million and bring that down maybe to CAD15 million. Now if it goes up CAD150 million or CAD100 million, okay, that CAD25 million now becomes more CAD45 million than CAD25 million, because the last dollar and this is why there's so much uptick to TransForce is when the revenue will start to improve, the last dollar coming in, your EBIT is not 8% or 9%.

Yes.

It's 15% to 20%, okay.

Yes.

So this is why -- when the machine will be well tuned, all right, because TransForce today is well tuned, but not to the maximum, okay. As I said, same revenue -- when the machine is well tuned, when Loomis is on top of the situation, Canpar and Dynamex and all these guys, we're going to be flying at CAD460 million, CAD450 million, CAD460 million, if the machine is well tuned, we're not there. And if the revenue starts to grow and the quality of revenues starts to improve, when the dollar stays the same because the other thing also in the quarter, dollar affected me a bit, okay. So that from CAD450 million to CAD460 million then you are way above CAD500 million.

Yes.

But we're not there yet. I don't know where this is going to happen. What I could tell you, Jason, is that us we're working hard to get to the CAD450 million within the next two or three years, CAD450 million to CAD460 million, same revenue.

Yes, okay. So that CAD450 million to CAD460 million, so say, you do CAD385 million this year --

Yes.

We're in flat revenue for 2013, 2014 and 2015, so for the next three years. So next year, you're up CAD25 million. Now you're at CAD410 million. Say, the next year you're up CAD20 million, you're at CAD430 million. The next year you're up CAD20 million to CAD30 million, you're at CAD450 million, CAD460 million. That's looking beyond -- I think we've got a pretty good sense of where the earnings improvement opportunity comes next year.

But if we look out into 2014 and 2015 that incremental CAD20 million to CAD30 million a year in EBIT, is it -- is more of that -- a lot more of their earnings improvement opportunity there coming at the operational execution level as you start to see the benefits from your productivity improvement, labor productivity, reduced rolling stock as opposed to SG&A?

It's a combination on everything. SG&A, we still have lots of work to do, okay. On parcel, Dynamex, still have lots to do there. Loomis, Canpar with the combination of the platform SG&A will drop. Our LTL, our SG&A is too high, too much. So still lots to do there. And the very important thing is, if we remove Quik X --

Yes.

Our EBIT improves big time. So that shows you that Quik X doesn't lose money. Quik X is not as profitable as the rest of our LTL business. So within Quik X, we have a big job to do there, okay, on the LTL. On the Truckload side not as much. On the Energy sector, not as much on the waste side. But the SG&A is really LTL and parcel.

Okay.

On efficiency of operation, big saving will come from LTL and parcel. Not as much Truckload, not as much the Energy. Energy a little bit, on the waste side not really, okay. So this is why if we close the year at CAD385 million and going to that CAD460 million that I said or CAD410 million next year. A lot of that comes from Package because at 6% EBIT, Jason, it doesn't make any sense. It's not acceptable.

The reason is Loomis, a little bit of Dynamex. Dynamex is better than 6% now. We're flying about 7%, 7.5%. But 7%, it's not good. When we bought the company, it was 3% to 4% and those guys were happy with 3% to 4%. Me, no, we got to be double digit at Dynamex and we will. So lots to do there. Loomis, we're at zero. I mean, okay, fine, we bought the company. Those guys were losing a pile of money. Now we're happy we're at zero. No, we're not happy. We cut the bleeding, but we have a big job to do there and we will do it.

So to answer your question, it will mostly come from Loomis, Canpar, Dynamex and our LTL operation because 6.6% EBIT in our LTL, this is not acceptable. Prior to 2008, we were flying 10% to 12%. So we got to get back to 10% to 12%. Our Package got to get back to 10% to 12%. Our Truckload at 10% in the quarter, it's great. With the market condition that we live in right now, I mean, my guys are doing a fantastic job there.

So just quickly back to the SG&A, so if we look out, say, over the next three years, potential call it, CAD60 million to CAD70 million in earnings improvements. I'm trying to understand how much of that would come from SG&A. Is this sort of roughly half of that in the SG&A account?

The SG&A, we've got to reduce our SG&A globally in our Package by about 2%. 2% is out of CAD1 billion, CAD1.2 billion. Do the math, it's CAD20 million to CAD25 million.

Yes, okay.

Okay. So this has got to be done and the big issue, for example -- I'll give an example. Dynamex US, my own rate is way too high. But the guys have done a fantastic job. They were at 26%, 27% of revenue, now they're about 20% to 21%.

Sure.

But let's say, 20% to 21% guys for same day company, no hub, no sorting facility, it doesn't work. So we still have lots to do there. Loomis, those guys are not doing too bad, okay. But if I can buy Loomis with Canpar, okay, we're still at 21%, 22%, it's too much.

Yes.

We've got to be under 20%.

Yes.

The same thing with my LTL. I'm flying 20%, 21% -- no, not 20%. 21%, 22%, 23%. It's too much. In today's world, you've got to be under 20%, okay. 15 years ago, 22% was great, but we didn't have the same technology. This is like Obama, when he was talking about the ships there, technology is different, okay, today and it helps us bring the world down under the 20% mark.

Sure, okay. So it sounds like that CAD60 million over the next three years in earnings improvement, flat revenue environment, over half seems like that's coming from SG&A with a good chunk of that still to come in 2014 and 2015?

Right, right, because don't forget that until we have the combination of the IT platform in our Package, in our LTL, Package should be completed sometimes in 2013 and LTL completely is going to be sometimes in 2014, this is an ongoing job.

Yes, Yes, okay. And I mean, in terms of excess capacity in your system at this point, how would you characterize that?

Within the LTL, we still have way too much of capacity.

Okay.

Way too much capacity.

Okay.

It's unbelievable, but this market is shrinking and we've got to adjust, we've got to adapt. We are just -- we're going to shut down a terminal in Northern Ontario November 1. And in that terminal, we had one Manager and three drivers. I mean this is not acceptable. If I have one Manager for every three drivers I have got, I'm going to be bankrupt tomorrow.

Yes, okay.

It doesn't make any sense. But those guys, that was the kind of an environment that they were operating in. So I said, no, it's not acceptable. So we're shutting down and we're going to give our freight to an agent there. So these are all things that we do continuously, okay, but the capacity is still too much. So us by buying Quik X, okay, now we have a better control, okay. And then we're going to be working hard with the management team there to improve Quik X. Now our Jeff, good guy. We posted Rob O'Reilly. So Rob has got the full, now, control of our LTL operation in Canada.

And very important to me is that we got to reduce the -- [often] consolidate, consolidate, consolidate. We bought a small company Brooks, okay, which we merged with Pedersen. Pedersen is a nice -- one of the nice acquisitions we did last year. We just bought another one, Total in Lloydminster. Okay, that's going to be a nice combination. We're looking at buying another one in Alberta. Alberta is a growing market, whereas Quebec and Ontario, it's not a growing market.

Yes, yes. Okay. And just the last one here. Looking back to the M&A into 2013, wondering if there is a number you can put to potential M&A for 2013. Like would you be comfortable looking for CAD100 million next year or is it just really too tough to say?

It's still difficult to say, Jason, but I think that between CAD50 million investment -- CAD50 million investment to CAD100 million of investments in growing our Company through acquisition, today it's a right number for 2013. So if you look at our cash flow next year of about, let's say, CAD275 million, okay, we're going to do about CAD240 million this year and we'll do a little bit better next year. And then if you factor in that we're going to be buying back our shares, let's say, 4 million shares at -- we're going to buy these shares at CAD17 approximately.

If the price is CAD19, I mean we're not going to buy any. But if the price stays under the CAD19 mark, we're going to buy that. So let's say, put 4 million shares at CAD17, then you put the dividend at CAD15 million. And then you put our CapEx, that's going to be probably be closer to CAD50 million than CAD60 million, net CapEx, okay. So that leaves us with some rooms, okay, to really invest CAD100 million, CAD50 million to CAD100 million without budging the 2 to 2.2 to debt-to-EBITDA ratio.

Sure. Okay. Okay. And within that free cash flow deployment there, I mean, the dividends under a flat revenue environment scenario, how do you look at that?

Jason, it depends on the share buyback.

Sure.

So I would be stupid to increase the dividend if my price is -- my stock price is CAD16.

Yes.

Already I've got a huge cash yield and I would increase the dividend. I'm not going to do that. I'm just going to buy more shares.

Sure. Okay. Yes, yes, that makes sense. Okay. Well, very good. Thanks for the color, Alain. Appreciate it.

Thank you, Jason. Have a good day.

Thanks.

Turan Quettawala, Scotiabank.

Yes, hi. Good morning, Alain.

Hey, good morning, Turan.

How are you doing?

Pretty good. And you?

Pretty good. Thank you very much. I guess most of my questions have been answered, but just I'll ask one on the Specialized Services segment. I know you talked about their new weakness across most of your other businesses. Just wondering do you think you can see some growth there on an organic basis next year. And then maybe even comment a little bit on those margins.

Yes. On the growth side, Turan, in Canada, I don't see any growth there. We're down to CAD50 million. Our plan next year is we're going to do CAD50 million, but with the CAD50 million we're going to make money. On the US side, that is more of a question mark. We're deploying our asset more in Texas as we speak, okay. So as David alluded to, Eagle Ford and all of that area in Texas, lots to do. We've moved some of our team into Kansas, okay, when we have these storms in Louisiana in August. So there is some potential for us there. So organic growth in the US could be possible, okay. But in our plan, we have none.

I see. Okay. So I guess -- your, I guess, 410-ish kind of number for next year, that you're all basing that pretty much all in the margin improvement and I see most of that if I assume sort of 100 basis point improvement in LTL and P&C, as well as sort of around 10% in Truckload, that can almost get you to 410 next year, right?

Yes. Yes.

Okay. And then just last question on -- you've bought quite a few businesses. I know you alluded to a little bit more seasonality maybe than you thought in the hurricane side. Just wondering, does this seasonality change at all in terms of the business based on all the acquisitions you've had over the last couple of years or so?

I would say that the Q1 has always been our weakest, okay. It's always improving to a certain degree versus the other three. I see more issues with Q3 now with the J month, the July and August, which normally you see better than what they are today.

Okay.

It seems like July and August, everybody leaves for vacation and -- I mean it's -- the activity goes down big time like January. We've known that for a long time, January is not a great month, okay, for volume, but now it seems like we have July and August that's creeping up. Seasonality, in terms of the quarter, if you look at my Q2, my revenue was CAD805 million I think and now I'm down to CAD760 million something.

So that's a huge drop, okay, versus what we used to do in Q2, but we had all the situation there. I think that will be a little bit better in Q4. Seasonality, it's hard to say, but Q1 is a little bit better than what it was, let's say, four or five years ago because of the rig activity in the US is really strong into Q1 and into Q2. A little bit weaker into Q3, back in Q4. So, yes, there could be some changes there, but not that significant.

Okay, great. I wonder where all these people are getting money for vacations with the economy [being so] weak.

I don't know. I think that -- you know what I was thinking, Turan, is that a lot of people are buying new houses, a, over the last few years because of the interest rate so low in Canada. I'm talking in Canada. And you look at the housing market in Ontario. When we look at the housing market in Quebec, those markets are doing good in terms of people buying new houses, this and that. And I was thinking, maybe that's where they're spending their money right now because they want to buy a house or a condo and they stop buying on the rest, okay, which is the day-to-day thing that helps us.

Yes, maybe. Maybe, that's a good point, yes.

Maybe that's there, I don't know.

Yes. And just last question, Alain, on the revenue side -- sorry on the restructuring side. Obviously, talked a lot about the restructuring. I understand the need for that with what's happening on the revenue line and also understand, obviously, there is going to be operating leverage when the revenue comes back. I'm just concerned that, is there -- in terms of maybe cutting too much, what happens if the revenue does come back strongly next year? How does -- how is your business able to then maintain that revenue leverage, if it comes back faster?

Oh, yes, absolutely, Turan, because what we're doing really is that we're replacing -- I'll give you a story. When I first got involved with Kingsway in Montreal, those guys were letting go people, but they didn't change the tools. So they were stuck after six months and they had to re-hire all these people.

Okay.

The way we do it, Turan, is very different. When we let go people, okay, is because we replace the tools. We have different tools. We have better tools, okay. So that's -- we're not letting people go away and because we're just stupid. We're replacing the tool. So we have better tools. We could do a better job with less people and it's the same thing in terms of our delivery network, et cetera, et cetera. That's the way we do it, okay.

Okay. Fair enough. Okay, that's great. Thank you very much.

Okay, Turan. Good day.

Maxim Sytchev, AltaCorp Capital.

Hi. Good morning, Alain. How are you doing?

I'm doing very good. How about you, Max?

Good, good, good. Listen, just maybe a broader question in terms of energy. And there is obviously a takeaway capacity bottleneck right now in North America and it looks like the rails are benefiting from that dynamic. I was wondering, is there any type of business that you think would be interesting right now for you, in addition to kind of the auxiliary stuff that you're looking at right now at the drill sites? I mean, something on the fluid hauling side. Is there something that interests you at this point of time?

Not really, not really, Max, because I think that -- see, what's happening in the Bakken right now is that, they are replacing all in coal, okay, by all [in queue], oil, okay. So that's great for them, okay, but for us to start a business or to get involved in that business -- to me, I'm not too sure if it's going to be long-term because these pipelines has to be built and then I mean you don't need the rail or you don't need the truck as much and it's very capital-intensive, that business and also there is lots of environmental risks.

When you're hauling petroleum products, okay, and you get involved into an accident, the environmental costs are huge. So this is why I don't like that business. We do a little bit of business in Quebec, very, very small and this segment of our business is insured with a third party, not our captive because of the huge environmental cleaning cost that's involved if you get into an accident. You look at North Dakota, the road system there is pretty poor. So the traffic is high. The population is growing in that sector and because of the activity in the energy. So too many risks for me. I don't like that. And it's capital intensive, big environmental risks, I say no. We're going to put our energy and money elsewhere.

Okay. Fair enough. And maybe, I think you mentioned in your prepared remarks about the oil sands market growing at 15% year-on-year. Can you maybe qualify exactly what types of services that are growing for you right now and if this is the market where you think maybe you can expand your presence over the next couple of years?

Yes. What I said then is that what we're doing now is, we're the largest rig mover in North America, that's great. Okay, we still have lots of fine-tuning to be done within that, but on the side, okay, we've got to grow, okay, what else we could do to our customers. So I took the example of what we do -- with Winalta, in Alberta is that we have the pipe source and the pipe moving for our customer. That's something that we're looking at right now in the US. I've looked at a company that does that.

We walked away from the deal okay, because the timing was not right. That's one activity that we're really interested in. The rest about things, the servicing of the well, which is very light capital investment. It's just a pickup in the trailer. Okay, that's something that we have the knowledge that we could start getting involved in. So these are the kind of activity that we see today. Maybe more down the road, but that is what I could tell you today.

Okay. Excellent. That's it. That's it from me. Thank you very much.

Okay, Max. Have a good day.

You too.

Thanks.

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

Well, thank you, operator, and thank you all for joining us on your call today. And I look forward to speaking with you again following our fourth quarter and year-end results. So have a good day. Thank you all.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.