TFI International Inc (TFII) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the TransForce 2013 fourth-quarter results conference call.

(Operator Instructions)

Before turning the meeting over to our 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 Thursday, February 27, 2014.

I'll 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. Yesterday after the market closed, we issued the press release detailing our results for the fourth quarter and fiscal year end December 31, 2013, via Canada News Wire. I will begin by giving you an overview of the financial highlights of both the fiscal year and the quarter, and then provide more details about the Q4 performance in our operating segments.

For 2013, TransForce total revenue reached CAD3.1 billion, similar to last year. EBIT stood at CAD209 million or 6.7% of total revenue, compared to CAD247 million or 7.9% of total revenue in 2012. Adjusted net income, which exclude the after-tax effect of changes in the fair value of derivative, net foreign exchange gain or loss, and the asset impairment charge, was CAD120 million or CAD1.26 per share fully diluted versus CAD143.9 million or CAD1.45 per share fully diluted last year.

Despite lower adjusted net income in 2013, free cash flow remained strong at CAD225 million or CAD2.43 per share. This includes proceeds of CAD64 million from the sales of property and equipment, which was carried out as part of our ongoing plan to optimize our asset base and maximize return. With this free cash flow, we reimbursed CAD100 million in debt, used CAD57 million to finance our acquisition, repurchased CAD19 million worth of common shares, and paid out dividend totaling CAD48 million.

Now turning to our Q4 results, our total revenue reached CAD793 million, up 2% from last year, driven by the package and courier segment, as a result of our enhanced same-day delivery network in the US. The EBIT margin before asset impairment was 5.5% of total revenue compared to 8.2% in the same period of last year. Harsh Winter weather impacted margin by increasing operating expenses.

Also, a planned measure to close certain facility and reduce headcount in our package and courier, and LTL segments, as well as decisive moves to rationalize energy service operation resulted in additional CAD7 million in expense. Adjusted net income was CAD21.5 million or CAD0.23 per share fully diluted in the fourth quarter of 2013, compared to CAD37.8 million or CAD0.39 per share fully diluted in the fourth quarter of 2012. Our free cash flow was CAD60 million or CAD0.65 a share -- allowed us to reimburse more than CAD48 million of debt during the quarter.

I will now provide detail regarding the fourth-quarter performance of each business segment. In the package and courier, revenue, excluding fuel surcharge, was CAD297 million, a 9% increase over last year. The acquisition of Velocity early in 2013, which expanded our US same-day network, accounts for most of the increase. Excluding Velocity, we'll still produce a loss; EBIT for the quarter fell 21% to CAD20.7 million, and the EBIT margin decreased by 1.7 percentage points to 7%.

Rationalization expense and the severe weather we experienced in December impacted this quarter's EBIT. Despite the Q4 setback, our ongoing commitment to optimize operational efficiency, eliminate redundancies, and reduce costs across all divisions [raise] our EBIT margins for the year, before acquisition, to 7.3%, up 0.6% over 2012.

The LTL segment continues to be affected by industry overcapacity and pricing issue. Revenue before fuel surcharge in the fourth quarter was CAD134 million comparable to the CAD136 million realized a year earlier. Again, harsh Winter condition in December had a negative impact on the LTL segment as well. We also continued with our plan to deploy resources where returns are higher, which resulted in some business loss.

For the quarter, the total operating expense before depreciation increased by CAD7.4 million or 6% compared to Q4 2012, which was mainly due to high severance costs, and accidents and claim expense. As a result, EBIT declined to CAD1.9 million from CAD10.7 million in Q4 of last year. On the plus side, our consolidation and the moves to align supply with demand have reduced the need for equipment terminals and employees. This has reduced our fixed-cost base, and given us a more efficient structure to work from going forward.

In the truckload segment, Q4 revenue, excluding fuel surcharge, was CAD124 million compared to CAD129 million last year. Lower customer demand led a drop in volume, though prices were relatively stable. EBIT in the truckload segment was CAD9.9 million in Q4 2013, compared to CAD12.5 million in Q4 of 2012. The EBIT margin was 6.9%, a decrease of 1.4 percentage points from last year. Continued cost reduction and asset rationalization have helped to mitigate the effect of weak economic fundamental in this traditional trucking market.

The energy services sector continued to be a challenge. Commodity prices for natural gas are weak, slowing industry activity level, and structural operating change have resulted in lower rig-moving activity. We closed the Canadian rig-moving operation at the end of December, and are selling the equipment. We have also further scaled down the corresponding US operation. Given these measures, we recorded a non-cash charge of CAD63 million for the impairment of intangible assets in the energy sector in the fourth quarter.

In the fourth quarter of 2013, revenue, net of fuel surcharge, was CAD85 million, down 11% over the previous year. The loss from operating activity was CAD0.8 million, compared to net income of CAD7.1 million in Q4 of 2012. This deterioration reflects lower activity and closure costs.

Finally, the other specialized services sector performed solidly. Revenue before fuel surcharge was CAD84 million, essentially the same as in Q4 of 2012. Revenue is down slightly on the logistic side, but waste management saw revenue increase, largely due to our Lafleche Environmental Complex, where revenue were up in the landfill operation and the composting facility.

Going forward, we will continue to focus on adjusting operation to the demand we see in our various business sectors, and to further eliminate our asset base and cost structure. Deploying our assets where the return is highest remains a top priority.

Quite frankly, I don't see economic or market condition changing significantly in early 2014. So, organic growth will be limited, but we will benefit from the greater density from the acquisition of Clarke, and Clarke Road Transport, and from the pending acquisition of Vitran.

We will continue to generate strong free cash flow, which we will use either to reimburse debt or fund our acquisition strategy. The operating principle we have established have served us well, and we have a very solid team that is able to execute our business strategy. We are confident that TransForce is positioned to benefit significantly when the economic recovery gains momentum in all business sectors.

So, at this point, I would be pleased to open up the call for questions.

Thank you.

(Operator Instructions)

Your first question comes from Mona Nazir from Laurentian Bank Securities. Your line is open.

Good morning, gentlemen. Firstly, it seems as if your lower year over year quarterly results are a wide degree of such is more of an anomaly given bad weather and one time charges. Is this correct, or is there more bad weather in Q1 or other items that we can expect in 2014?

Well, you're absolutely right. What we saw in Q4 really was a disastrous month for us in December and in January of 2014 is similar. Because you look at what's happening in the US, besides the West coast, on the East coast, New York and all the way down to up to Florida, it's been really tough for us. In Canada, January was really bad, cold all over the place, Ontario, Quebec, and even in Western Canada. The price of fuel really spiked because of the depreciation of the Canadian dollar. So that will be affecting the month of January. It had a little affect though in December.

But basically you're absolutely right. The ice storm of Toronto, because don't forget, we operate networks in both LTL and parcel in Canada. And that affects us big time when we have an ice storm like it happened in December in Toronto where we had lots of issues for four or five days, employees that didn't show up for work because they had no electricity at home.

All kinds of stories that -- and when it hits Toronto, it's the worst for us because everything comes out of Toronto, about 75% to feed the network. So issues with Linehaul, issues with accidents. We had three people that died over that period, three of our employees in accidents. So, it's been a very difficult quarter for us, mostly from November 15 until, I would say nearly until now.

Just moving into the Package and Courier segment, can you speak about the restructuring and integration of Velocity? Can we expect that to be completed on schedule in Q1, and what kind of margin range are you targeting post completion? Is it much of an improvement over Q4?

Well let's talk about Velocity in the US. This is an acquisition that was done early in Q1 of last year. And we firmly believe that all of the Velocity thing will be things of the past after Q1. There again, our team there is working pretty hard because the margin at Velocity were slim, we're working with customers to try to improve that, we're integrating.

In Q4, we took about a CAD1 million charge just to buy back some leases that we didn't need on properties of Velocity. And we're going to be spending about the same amount in Q1 of 2014. So, I would say that the Velocity thing is going to take us, again, a few months in 2014. I would say probably until either April or May to digest and integrate all of that.

On the IT, customer side, the integration is done with. In Canada, we're following our plan of integration for Canpar Loomis. Mostly in the back office, that is done. We are combining the operation in Vancouver in the month of March, and we're working on some issues also at some terminals in Ontario. So that's an ongoing process.

So just in the month of December, we spent CAD1 million dollars in severance, but that will have an effect of about CAD2.5 million reduction in our payroll for the years to come every year. And we've said it, the next day business for us in Canada, we have to eliminate about 400 to 500 jobs. So far, we've done about not even half of that.

On the LTL side, it's the same story. We're combining our admin platform. That's going to be done in Toronto, so the same thing happened there in Q4. So we let go more than 35 people in our LTL operation, because that's the direction we're going. We've said that many times. We need more consolidation, and the acquisition of Clarke and the pending acquisition of Vitran is going to help us to consolidate this LTL market I'm talking now that has always been weak that needs to be consolidated.

And just going back to the Vitran and Clarke, I know the margins of those businesses are below your specific LTL range. Just looking to the time frame that you think could expand those, and -- soon?

Well, it's going to be a real challenge for us. Our guys are going to be working with the Vitran team. The President there, Mr. Tony Trichilo, has done a great job. So he's going to be working with us and working with Dean Cull at Clarke.

And definitely, we have to eliminate a lot of back office positions to be more efficient, to work closely with our linehaul provider CN to see how we can do things more efficiently. And right now, we're flying with a 6% or 6.5% or close to 7% EBIT margin in LTL. This is not acceptable. Prior to the crisis of 2008, 2009 we were over 10%.

So we got to get back slowly to where we were. But you have to understand that this market has been suffering big time over the last five years with the loss of all manufacturing capability in Canada that affects our LTL, that affected our truckload. So we've been going through a transition for I would say the last five years in Canada with the LTL market, and to a certain degree the truckload as well.

But we believe that the way to get to our double digit EBIT in that sector is by reducing costs. Prices with customers and volume, this is now really something that we have in our schedule. If the market improves, definitely we'll work with our customers to get better yields. But for now, volume and pricing are not really part of the equation to be more successful, it's all about cost.

Just lastly here, are you putting on hold acquisitions for now to continue focus on what you have on your plate, or are you still looking?

Well with that very difficult fourth quarter for us, yes, we have the Clarke and the Vitran acquisition. We're looking at some small things in the waste sector. But at least for the next three or four months, we have lots to do to get back on track with that really difficult fourth quarter.

Yes, a lot had to do with the weather, but still, we have to execute our plan. Vancouver, for our next day thing is going to be important. And we have lots of stuff to do in Ontario as well. So, yes. I would say that nothing important will get out of TransForce on the M&A side until the last Q3 or Q4 of this coming year.

Now, there was just an announcement yesterday in Quebec that we're buying more airspace at a landfill close to Three River that's 1.1 million ton. I think that we'll come out with some other news in our waste sector that's doing great over the next few months or weeks. But that -- on the M&A side is going to be light until Q3 and Q4, except on probably the waste side.

Thank you.

You're welcome.

Your next question comes from the line of Cameron Doerksen from National Bank Financial. Your line is open.

Yes, good morning.

Good morning, Cameron.

I have a few questions on the energy segment, obviously specifically focusing on the rig hauling business. Obviously, there were a number of I think unusual things that happened in Q4 with the wind down of the Canadian operations that perhaps affected the expense line item.

So I just wonder if you can maybe talk about whether you think that we've maybe seen the bottom for the margins in the energy segment, and what you think the prospects are in 2014 for improving the profitability there?

Well you see, what we did, Cameron, is we shut down Canada removing business completely. So by doing so, as a matter of fact, we're selling all of our assets today at [Richie] and Edmonton with a price that has been secured by Richie. And we'll probably make a small profit on the disposal of assets.

But at the same time, we took a loss in Q4 for that closure in Canada of CAD1.7 million, which is mostly severance and leases that by closing it down we don't need those facilities. So, we have expensed those leases. So that affected CAD1.7 million to CAD2 million in Q4, the closing of Canada.

In the US, we've scaled down the market that we serve, because the future there -- our plan for 2014 show us at a small profit right now. The month of January has been a big [deception] for us in the US. We've lost more money than the previous year, and this is all relates to, again, this weather.

I was with my guys in Dallas earlier this week. They've never experienced a lot of ice in Texas. We had three days of ice that cost us a fortune. In the north, the snow and this and that.

So, I think that for 2014, on the energy side, we'll probably come out there on the rig moving with lower revenue, but at least a small profit. That is our best forecast that we could see right now.

Can you maybe give us what the loss was for the Canadian rig hauling operations in 2013?

Yes, the Canadian business in 2013 had a loss of just a little over CAD5 million on CAD20 million some of revenue. So it's a huge loss as a percentage of revenue.

Thinking longer term, I think when you go out into the Canadian rig hauling business, you wouldn't have expected to eventually shut it down. And I'm just wondering what your thought process is on the US rig hauling operations.

Is this a secular declining business, where three years from now we could see a similar situation occurring in the US as what you've experienced in Canada? I'm just wondering if this is really a core business for TransForce longer term.

No, for sure it's not, because it's too cyclical. And we look at 2012, we had great result, we were heroes. And now you look at 2013, we're zero. We're just a bunch of stupid guys. And some guys would say oh maybe, TransForce is a broken story now. It's -- we had a bad quarter in Q4, right.

The energy is really dragging us down, because the energy profit for 2013 versus 2012, we're down CAD42 million. So it's too cyclical for me. So what we've done is we shut down the rig moving business we had in Canada. We, over the course of the year 2013 and early 2014, we recuperate CAD30 million that we have invested there without losing any money, except the operational loss of the year.

And in the US, today, I've got CAD90 million invested in the rig moving business. By the end of this year, 2014, I'm going to be down to about CAD50 million to support a lower revenue. And if things doesn't improve, then we'll probably have to relook at the situation again, because us, we're in the business of making money, not losing any. And if we cannot support a profitable operation, we're just going to walk away, sell the asset and do something else.

Okay. No, that's a good answer. Just thinking about the free cash flow expectations for 2014, you had a fair number of asset sales in 2013. It sounds like there's going to be a fair amount in 2014 as well. What do you think you can do in free cash flow this year?

We're going to be a little over CAD250 million this year, because, like you said, Cameron, we sold a lot of assets last year. We're selling again this year. We just sold a terminal in Calgary in Q1 of this year, a terminal that was a single tenant that we own, Puro was the tenant there. And we sold that for CAD12.5 million. And we're looking at selling more of that, because we're not really in the real estate business.

The fact also that we walked away from the rig moving business in Canada, this will have an effect on our cash flow because we're going to recuperate about CAD14 million like I was saying earlier with this auction that is taking place today. And we will probably generate another CAD15 million to CAD20 million in the reduction of assets that we have in the US.

This is why, if you look at our balance sheet, now we have a asset held for resale or something like that that amounts to $30 million, which is CAD15 -- CAD14 million of the Canadian, and $16 million of the US This is what we know so far.

Okay. That's good. That's all for me. Thanks very much.

Thank you, Cameron, and have a great day.

Your next question comes from the line of Walter Spracklin from RBC. Please go ahead.

Thank you very much. Good morning, Alain.

Good morning, Walter.

So my first question I guess -- there was an announcement that Purolator will be moving its heavy lift air cargo services from an incumbent to a new operator that is changing the way in which they will be charging Purolator. Prior to that, it was fixed cost based, now it's going to variable costs, and there was some -- as a result, there was some, let's call it, irrational pricing from what would be your Package and Courier businesses biggest competitor.

And the view is now, that as they move from a fixed cost heavy lift environment to a variable cost, there will be less price discounting with your biggest competitor. Is that accurate? Is that view accurate, and are you seeing any early signs of pattern or behavior from Purolator that would suggest that pricing is getting a little bit more firm on that side?

That's a very good question, Walter. And I think that what we started to see -- there's a new team there that is running this company right now, which is the number one leader in the Package and Courier business in Canada. And already, over the last six months, we see a different tune. Instead of just chasing volume, just for the sake of chasing volume and not making any money. So I think that now and the new leadership has a different view of being more efficient, and delivering better results for the shareholder.

So, that changes that will take place in the future with the air linehaul provider, effectively that's going to help, because if you are based on put or pay, well then, you have to put because you have to pay.

Exactly.

And this is always bad for a market when you have a situation like that. So, I think that now with the new provider, they will be based as us on a per pound basis with some commitment. You have to have some commitment. But at least you are on the per pound basis.

And then that puts a little bit more sense into the market. So I tend to agree with you that long-term, medium term, that is definitely a good thing for the Package and Courier next day business in Canada.

That's great color. Staying on the Package and Courier, I notice one comment in your MD&A that customers are choosing less expensive shipping options. Do you think that -- is that a comment you made because you're signaling that that might be a pattern change or a behavior change going forward, or was it something that you think is specific to the fourth quarter? And if so, why would it be just to the fourth quarter?

No, I don't think it's specific to the fourth quarter, Walter. I think that the industry in Canada has been suffering for the -- our customers have been suffering for a long time. And they're trying to find ways to reduce their costs.

So we, like in the US, when you're going through some difficult times with customers, they try to move from a more expedited way to a less expedited way and spend less money. So we've started to see a little bit of a trend like that in Canada with our service. And that's just a fact.

Now, is that something that will stay and remain? If things start to improve, that may change. But as of now, that's a little bit of a trend that we see in the market with some of our customers.

And it's the same thing, when you look at the truckload. When the times are tough, we have a customer that called us, for instance, a huge customer that used to move its product with a truckload over the road, and now because this company has been bought by a US truckload operation company, now they have to pay more money, and they say whoa. Now we're going to have to switch from road to rail.

So we have the same thing to a certain degree right now with either next day, or guaranteed, or before a.m, or in the a.m., or afternoon. So, we're starting to see a little bit of that, but it's not a major concern of ours because we could always adjust ourselves.

Great. You gave us an update on your free cash flow guidance for 2014. Do you have an update on your EBITDA as well? I believe we were at CAD385 million to CAD400 million I believe was the last run rate.

Yes, I think that with -- if we close the Vitran deal, which is supposed to close early in March, so by closing this Vitran transaction and also losing the rig moving business that was a money losing, we believe that CAD375 million today is the target that's attainable. Now, what we're starting to see with a bad January of 2014, but we see improvement though year-over-year in February of this year.

We believe that the depreciation of the Canadian dollar could have some effect in the manufacturing sector of Canada. Maybe it's going to be short term, but we're starting to see a little bit more activity in our truckload sector right now. So, a little bit more. And so that's why the CAD375 million, maybe CAD385 million is something that makes sense. Our plan is in that neighborhood, anyway.

And then, your free cash flow, does that incorporate any changes in your CapEx spending plan? I think you were guiding us at CAD56 million, did you change that at all?

No. We're always around the CAD50 million mark.

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

Thank you, Walter. Have a great day.

Your next question comes from the line of Benoit Poirier from Desjardins Capital Markets. Please go ahead.

Good morning, Alain.

Good morning, Benoit.

Just to come back on the Package and Courier on Walter's question, is it fair to assume, because I realize that you also provide a breakdown between same day services and next day services, is it fair to assume that we might see a shift as a result of customers looking for a cheaper way?

Well, this is a good question, because not really in Canada, Benoit, we're not there yet, but definitely in the US we see more and more customers that are trying to switch from next day provider to same day provider. So, we are in a test procedure right now with guys like Target stores.

And definitely in the US, you're starting to see -- because the same day operation is always cheaper to operate than the next day guys. You don't need the network. You don't need the conveyers. So most of our customers, what they do, is they just line all the product to their DC, and from their DC with delivery. So yes, we see that more and more though in the US. But Canada I think will be next.

Okay, perfect. And also, just in terms of financial position, you ended with almost 2.4, so obviously very healthy compared to the max level of 3.5. Could you maybe provide some color on where you should be after the acquisition, and also the redeem of your convertible debentures, Alain, in terms of debt and in terms of debt to EBITDA ratio?

What you'll see is that our debt at the end of December was, if I remember correctly, CAD775 million. And we've reduced that with the convertible debenture by about CAD120 million, but we added the purchase price of Clarke and the probability of Vitran.

So, Clarke cost us about -- it costs us CAD88 million plus working capital, let's say so CAD100 million. And Vitran is going to cost us probably around CAD120 Canadian. So, that's CAD220 million minus the CAD120 million of the debt, so we're going to be up CAD100 million. So CAD775 million plus CAD100 million, so we're going to probably be ending Q1 at CAD875 million or something like that, and then reducing that over the course of the year.

Okay. Excellent. And also what should we expect in terms of growth for the waste management this year? And maybe wondering if we should see some margin expansion given that you reduced your logistic business, Alain?

Well, definitely you'll see some improvement there. Our plans for this year in our waste, is we're going to show up a minimum of CAD5 million to CAD8 million improvement. It seems like there was a major contract that was up for bid this week or last week in the South Shore Montreal, and we were the lowest bidder on that contract. And this is a major contract, that it represents about 140,000 tons of waste per year. It seems like we were the lowest bidder. So lf it's confirmed, so that's going to add a lot of dollars.

We bought some airspace at the Champlain landfill in Three River. So you'll definitely see some major improvements. We're looking at a compost project. We are part of the finalists for Calgary. We're looking at one on the South Shore of Montreal, we have a fantastic recipe for that. Our pilot plant, our number one plant is really in Moose Creek, Ontario. It's doing great. It's at capacity right now.

We just started new volume with the city of Toronto on the waste side. We are the backup of Toronto, so we are just starting with a 50,000-tonne per year, it's small. It's just 1,000 a week, but it's just an early to get us moving there with Toronto.

So, definitely the waste, you saw us improving in Q4. As a matter of fact, when you look at that, that was the only sector where we did better than last year. But definitely in 2014, our plan is we will improve the waste side between CAD5 million and CAD8 million based on what we know today.

Perfect. And just for the US dollar, you provide some sensitivity on your EBIT for Q4.

Yes.

Just wondering if you assume that the affects will remain at almost CAD110 million, CAD111 million, what is the potential impact on the EBIT line we might see for 2014? Is it fair to assume that it could be close to CAD20 million impact on the EBIT line?

Not as much. Every cent, because we have in excess of US funds of let's say, between $150 million to $175 million a year. So every penny is let's say between $1.5 million to $1.750 million. So if it degrades by $0.10, which is what it is now, so it's $0.10 times $1.5 million, so it's $15 million.

Okay, got it.

$15 million, to $16 million, $17 million, yes.

Okay. And just wondering for depreciation and amortization given the impairment charge and also some amortization probably was -- or some assets were depreciated or ended with the amortization, what should we expect in terms of D&A this year for 2014, Alain?

That's a good question. I didn't really look into that. But I would say that it's going to have about a CAD5 million reduction in depreciation of intangible, CAD5 million to CAD6 million.

Now, I don't know what the effect of Clarke is going to be and the effect of Vitran. So with Clarke and Vitran, is going to annihilate the reduction of that CAD5 million or CAD6 million, I don't know that yet.

Perfect. And just to clarify on the contribution from rig moving last year, you mentioned the number on the loss was CAD5 million. But what was the revenue contribution from Canadian rig moving, Alain?

It was just a little over CAD20 million.

CAD20 million, okay. So for the total energy including also the oil sands, what should we be looking for for the total business for 2014? Because there's a lot of moving parts.

Yes. So we believe on the rig moving side, just on the US, we're going to show up about, let's say, CAD100 million. And then on the other business that we do, which is mostly truckload and LTL for the energy sector, so we have about $75 million of that business in the US which is coming out of the farmer acquisition, and we have about CAD125 million in Canada. So, let's say a total of CAD200 million.

Okay, plus the CAD100 million? So a total of CAD300 million.

Right.

Okay. Perfect. Thank you for the time, Alain.

Okay. Very good. Thank you, Benoit.

Your next question comes from the line of David Newman, Cormark Securities. Please go ahead.

Alain? Are you there?

Yes, David. Good morning.

Sorry, you've given pretty good guidance on the free cash flow from the CapEx. Sorry for my cold, I sound like Joe Pesci here. But if you look out just in terms of the timing and some of the work that you're doing, if you had to give margin guidance, and I think you gave it for the LTL and the energy side.

But if you look at the other segments as well, it sounds like you have a modest positive in the energy overall, LTL looking for a recovery as well as up to 10% in time. So, if you're looking at the margins by segment, what should we anticipate, and is it going to take longer than I think you initially envisioned, or -- (multiple speakers)

No, you see if I start -- excuse me. But if I start with the Package and Courier, we're on track. We had a bad quarter in Q4, but I'm convinced that definitely we will improve. We did some small improvement in 2013 versus 2012. If we exclude the Velocity effect, small 0.6% improvement, which is not enough. But definitely I see some major improvement in 2014.

So to me, we have to improve our profitability there by at least 1 point versus 2013. With the consolidation of everything that we're doing in Canada and the drag of Velocity in the US should be out by the end of Q1 or at max the end of Q2.

In the LTL, the fact that we're adding Clarke and adding Vitran, and see we just announced that we're moving the admin in Toronto. So we're really scaling down big time what we had in Calgary. Because it's going to be way more efficient. And we're doing the same thing with our IT platform.

So, there again, we had a disappointing year in our LTL, mostly because of our Western Canadian operation with CF. We shut down more terminals there late in 2013 in the small towns, and we'll probably do more in 2014. But, there's no way in my mind we have to improve that sector by at least 100 basis point, 1% EBIT to get us closer to the 10% which to me is just normal. When you're at 6% or 6.5%, it's not normal.

The other thing that we're doing more and more in our LTL, which is going to help us, is we're reducing our asset base. No question about it. The fact that we're now not really operating in those small towns, we use an agent, well it means that we have less assets, we have less trucks, we have less real estate, and we're more flexible for the future when you see a downturn in volume like we've seen for the last few years.

Right.

So, this is all part of a transition. And if you look at Clarke and Vitran, those guys don't operate in the small towns of BC, or the small towns of Quebec, or Ontario. So they are mostly -- their network is mostly in the major cities. And this is the kind of alignment that we're going to doing with CF and Kingsway and TST.

And what about TL, do you think it will be kind of in the same ballpark? Plus -- (multiple speakers)

No, I think TL is going to improve this year. When I look at my month of January, I was very disappointed, but January we had the weather, we had the fuel spike, and this and that. But I look at February, whoops, different story. We're starting to see volume improving. Finally, because fuel was so high in January, we're recuperate in February with a fuel surcharge. So February of this year in the truckload operation, we're ahead of last year.

Okay.

In terms of revenue, in terms of volume, and in terms of profitability. So I think that truckload, if you look at what we've done, is 2012 was a great year for us. We dipped CAD10 million profit we've lost in 2013. And I think that the way I see it, is I don't know if we're going to be as good, same volume in 2014 that we did in 2012. But I think that we're going to do better than 2013.

And if you look at the year, it sounds like it's going to be tilted towards more of the back end. I think you have easier --

I think so.

Easier comparables with the Quebec construction, et cetera. That should help you through the Spring period.

Yes.

So is that safe to say that we can expect a higher back end load?

I think so. With all of the things that we're doing and the fact also that we had a slow start a difficult start for the month of January, So I think Q1 is going to be maybe not the best of the best, but I think that the prospect of all the improvements. The combination of Vancouver, for instance, that we're doing in March, just on that, I'm going to be saving CAD1 million in rent on a yearly basis.

So all of these actions that are taking place, to me I'm very confident. And the other thing that we have really talked about is that one question was about M&A. Well one thing I didn't mention is that, maybe M&A will be buying my own stock.

Okay. So you will likely renew your buyback when the time comes.

Yes, we're very active with that right now.

Very good. And just overall looking at the whole -- and you're not the only one by the way that's being impacted by weather, even the railroads, everybody is being impacted by this. It's been a horrific winter. If you look at the US trucking side, they posted a record tonnage level last year.

Right. Yes.

And Canada is still lagging here. You're talking about being helped out with the currency on trans border et cetera.

Could be.

What the heck is going on in Canada? Is the economy that much worse than the US, or what is your view?

Absolutely. I think what happened is that the last five years, every year we're going down the hill in Canada because we're losing manufacturing jobs, good jobs that -- look at the Ontario situation where we lost good jobs in the automotive business, guys were earning CAD75,000 to CAD125,000 a year. Now, those guys work for CAD50,000 a year. They can't spend the same amount of money.

They're raising taxes in Quebec. They're raising taxes in Ontario. So, for sure, us, we see it. The Canadian economy, it's slow. And yes, maybe you see a 1% GDP growth, but maybe it's more in the commodity sector like wheat, and all that that's coming out of Western Canada.

But for us, we look at what we do for the LTL industrial service of our customers, five years ago in Ontario we had lots of industrial customers in LTL. Today, we're down 50%, 60% of what we were serving. Those guys are all shut down closed. Gone.

They are all in Mexico.

Yes, probably because the weather is nicer there and it's cheaper to operate.

Yes. And then just last question, you've sort of given a great run down on what you've got for sale, et cetera. But in terms of assets, what else do you think might -- are you there yet? It sounds like Velocity, you're almost there. You're dealing with LTL overall. Energy you're dealing with. Do you think there's anything else that you could identify here?

Well, on the real estate side, definitely. We're working on some terminals that -- we've got a little over CAD100 million of assets in our real estate portfolio that will have to be sold over the next three, four years. So, that one is very important.

The other thing also is more and more we're going -- with this Clarke acquisition, we didn't buy a lot of real estate. But with the Vitran one, we're adding also to our portfolio of real estate. So definitely, you should see more after the acquisition of Vitran, we'll probably adding to our real estate portfolio for disposal. Because we're becoming more and more efficient.

Not keeping terminals everywhere.

Yes, exactly.

Okay. Very good. Thanks a lot.

A lot of good stuff that will come out after a very disappointing Q4, true, but there was also a lot of action that was taken to support cost reduction in the future. The problem is, we did that at the same time as we also had a major issue that we can't control, which was the weather, and the low volume, too. Volume were not that great.

So you're clearing the decks, and you've got the weather.

Yes.

Basically. Very good. Thanks, Alain.

Bad timing.

Yes. Exactly.

Your next question comes from the line of Milan Posarac from Scotiabank. Your line is open.

Great. Hello, Alain, how are you?

I'm great. How about you, Milan?

Good. I'm just on the line for Turan here. A lot of good questions have been asked, but I just wanted to touch one in the MD&A in the LTL section there on page 11. You mentioned that in the Western Canadian region recent terminal closures didn't generate the expected cost reductions you were hoping for. So, I was just wondering if you could provide some color on this, and any takeaways for future terminal consolidation and closures, lessons learned, things like that? And any more color on that would be great.

Yes. Well you see what happened is that we shut down some terminals at CF. And we're not very happy with what happened over there, because we should have brought our costs more in line with these moves. So this is why we had the President there, Mr. Wettstein, that took an early retirement.

Mr. O'Reilly, our Executive VP that's responsible for the LTL is way more active out West. As a matter of fact, he's in Calgary today working with the guys, and putting all the measures in place to make sure that we get back on the right track.

At the same time also, we're moving the management team, the back office to Toronto to be more efficient, and to be more cost effective. Because the cost of a worker in Alberta is prohibitive in our sector. So you can't really have clerks there that are paid salaries that we can't afford.

So all of that being said, we have to adjust ourselves and this is why we're putting more of our assets, more of our people there out West to really solve the issue. Because, I said that in the last conference call, I was not happy with what was going on out West, and I'm still not happy today. So, guys are working harder, and we got to put the right people at the right place that's going to really adjust ourselves to the volume.

Okay. Great. Thanks, Alain, for the color. Appreciate it.

Pleasure, Milan. Have a great day.

You too.

Thanks.

Your next question comes from the line of Kevin Chiang from CIBC. Please go ahead.

Hello, thanks, Alain. A lot of questions have been asked here. Just a couple of housekeeping questions. In terms of severance costs in 2014, is there a number we should be thinking about given you're halfway through some of its restructuring?

2014, Kevin, yes, you have to think about CAD7 million.

CAD7 million, okay. And just on the previous question, it sounds like some of those unrealized savings were asset specific. But in general, are you seeing the pay back on some of your asset dispositions taking a bit longer, or was what happened out in the LTL side just a one-off situation, or are the low hanging fruits no so low any more from that perspective?

No, it's just that we didn't do the job properly, Kevin, out West. And we didn't do what we were supposed to do. So the crazies were in charge of the asylum, I would say, and we were not on top of the situation.

So this is why we had to make some changes. And this is really an issue that we have which is limited to our operation out West with CF, and I'm not happy. So we made the changes. The leader is retired now, and we have the second in command is really taking the bull by the horn, and we've got to correct this situation.

And for sure, we're having a reaction as of today of we're not going to work with you guys from our union representative. But we say, guys, it's either you work with us, or you're not going to work any more.

Sounds good. That's great color, and a lot of information on the call. Thank you.

Thank you.

(Operator Instructions)

Your next question is from Maxim Sytchev from Dundee Capital Markets. Your line is open.

Hello, good morning.

Good morning, Maxim.

Alain, very quickly, so when you talk about Vitran and obviously this asset having more real estate, and obviously you're going to be looking to dispose of some of those assets, can you quantify that dynamic to an extent?

Yes. When I say we're going to dispose, I'm not really talking about the Vitran asset, I'm just talking assets in general. Because take for example, they have a great Toronto terminal. As an example, so we may be looking at moving other operation in that terminal.

What I'm saying is that, with the Vitran acquisition, we'll have too many terminals. And we will be disposing, so it could be one of our terminal that we have in Edmonton, or it could be one of our terminal we have in Vancouver today. And because Vitran's got a nice real estate portfolio, we will be moving some of our operation in their own terminal. So it's not really a Vitran terminal that's going to be sold, it could be one of ours.

I see. And then in relation to the normal course issuer bid, when exactly are you out of the blackout?

We are out of the blackout today, because we gave notice to our broker to -- he's got specific. And we're allowed to give him specific before the blackout. So, we gave him specific of what to do in December. So he could act on these actions today, and he did yesterday.

Okay. And then going back to the energy services division, obviously the rig moving assets, quite difficult performance and so forth. Hypothetically speaking, if you see a flat line similar performance over the next nine months, you will sell at the bottom, or what's your thought process?

Well if we don't improve in the US, Maxim, definitely they already know. The team that runs the Company there they already know that if we don't improve, we don't have a future. So we can't come up with 1%, 2% return on asset. It's not acceptable for us. Because I told them, listen, if we don't have returns I'm going to take my money and invest it elsewhere. ¶ So they have a plan, they're working on it. I think that the market should improve to a certain degree, but we're not sitting still.

I told them, I've got CAD90 million of assets here in the US, and I'm reducing that to CAD50 million to CAD60 million. Because this is what you need to support your CAD100 million-and-some of revenue, and that's what we're going to do.

Now, let's say within six months if we are not satisfied with the returns, then we'll take maybe another course. But definitely, within TFI, a business unit that does not perform has got no future.

All right. And so, it's all about just asset utilization right now. That's the bottom line here?

Yes. And also the fact also that the pricing has been really depressed, and the competition is fierce. And I'm saying to my guys, we shut down Canada, because we couldn't compete. We're in the business of making money, not just moving rigs for the fun of it.

Yes. And then -- appreciate the color. Very lastly on LTL, we talk about the 10% EBIT target. Is there a time frame that maybe you can think off? Is this a two year or a three year proposition, or is it conditional on the economic environment?

If we don't get help from the market, which has not happened for the last five years, in terms of pricing improvement and volume, let's say we don't get any support from the market. And it's a fact, it's been like that the last five years, I anticipate that we will improve our bottom line in 2014 by 1% based on costs.

If in 2015 we don't get again another improvement in the market condition, I think that we'll be able to slowly improve by 1% every year. That's our target.

Okay. That's very helpful. Thank you very much.

Okay. Pleasure.

Bye.

Your next question comes from Benoit Poirier, again from Desjardins Capital Markets. Your line is open.

On the LTL [revenue] targets, you provided some very good color about the 1% a year improvement to the bottom line. What about the margin improvement in Package and Courier? I think we were previously looking to achieve about 9% in 2014, and 10% the following year. Just wondering, given what you've reported this year, given the tough Q1 also, should we expect a longer time to achieve those numbers, Alain?

Yes, I think so, Benoit, because you see we've improved 2013 versus 2012 by 0.6% only, with the bad Q4 that we had. So this is why what we're saying today is our target is to really improve 1% in 2014, with no support from the market whatsoever in terms of pricing, power, or volume. If ever we get a little better than that, fine. But what we're saying is that let's say we end up the year on the 7% mark, we have to target closer to 8% for us in 2014.

Again, like you said, we had a slow start for January. January was very difficult for us in Ontario and in Quebec with the weather, and all those different conditions out West, and even in the US. I was with our Dynamex guys in Dallas the other day and New York cost ourself $1 million in January, because the city had about six storms, which is unusual.

Okay. And just for 2015, given assuming that the Winter will be more comparable to normalized level and given Velocity will -- the issues around that will be resolved, could we expect let's say a little bit higher than 1% improvement 2015 over 2014?

If weather to me over the course of December and January so far, what I could say it killed me for about CAD10 million to CAD12 million. So if this is -- if we go back to a normal weather pattern over the course of a year, that's a lot of money that would come back to the bottom line.

The Velocity thing, we're buying back leases. These are one timers we bought back for CAD1 million of leases in Q4, and we'll probably do something similar in Q1 of this year. But that is going to phase out over the course of this year. We're next to the end of that.

And just for E-commerce, we all read some very positive stuff about the E-commerce, the exposure and everything. So do you see your growth similar to what is the industry experiencing right now, Alain, when you look at your exposure and your growth rate in your P&C segment and LTL?

In Canada, we're not there yet. In the US, what we're starting to see is that, the next day service provider, like UPS, they were overwhelmed in Q4 in December. And they see, the next day guys see a lot of growth, and a lot of activity now. And so that does not affect us at all, because we're not in the next day business in the US.

Now, on the plus side, though, is we're starting to see more and more guys are trying to look at how can we move more business from next day to same day. So I'll give you an example. We just started a project with Google. We started that project in San Francisco. And we just opened up New York for them, and we're looking at 17 different markets.

And Google thinks that they're going to have 1,700 guys on the road through us, and somebody else serving for the E-commerce to compete with Amazon. So I think it's Google Express Service, of something like that. They have a new name for that. And that could help us big time in the US.

Canada we lag. We're still way, way behind what's happening in UK or what's happening in the US. Listen, we're sitting on the fence right now. It's not affecting us, it may affect us in the future positively.

How big could be the opportunity with Google, assuming they put the 1,700 guys on the road over the long term?

Yes, 20 drivers for us at Google is CAD1 million of revenue.

Okay. And should we still assume decent margins on that business or --

Absolutely. Google has a different attitude versus let's say and Amazon, that says I'm not in the business of making money. I'm there to service customers. Google, they have a different thinking. So this is why we prefer to piggyback, to be riding the tail of Google versus the other guy.

Okay. Thanks for the time again, Alain.

Pleasure, Benoit. Have a great day.

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

Well, thank you for joining us today. So I look forward to speaking with you again following our 2014 first quarter results, so everybody have a great day. Thanks a lot.

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