TFI International Inc (TFII) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the TransForce 2014 first-quarter results conference call.

(Operator Instructions)

Before turning the meeting over to Management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Friday, April 25, 2014.

I will 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 afternoon [chairman his wire] issued a press release detailing our results for the first quarter ended March 31, 2014. First I will review the key financial data of the quarter, and I will give you more details about the performance and activities of each of our operating segments.

Total revenue was CAD770 million compared with CAD750 million in the first quarter of 2013. The acquisition of Clarke Transport and Clarke Road Transport were the main contributors to this 2.8% increase. Without the acquisition, we should have seen the revenue decline.

Unusually severe winter weather had an impact on most of our operations, lowering volumes and increasing costs. As a result, EBIT was CAD33.2 million or 4.2% of total revenue compared to CAD44.6 million or 5.9% of revenue in the first quarter of 2013. Adjusted net income, which excludes the [advertise] effect of changes in the share value of derivative and [most] foreign exchange loss was CAD19.9 million or CAD0.20 per fully diluted shares compared to CAD24.4 million or CAD0.26 per fully diluted share a year ago.

Free cash flow increased to CAD35.1 million, up from CAD20.5 million last year. Increase is largely due to the sale of assets. Most of the free cash flow was used to repurchase our shares.

I will now review the results for each business segment. Package and courier revenue, excluding fuel surcharge was CAD277 million, a 1% increase over last year. This revenue increase is mainly due to the positive impact of foreign exchange, where we convert the revenue of our US operating division. Without the impact of foreign exchange, revenue was down 2%, mostly due to lower volume in our US operations versus the year before.

We continued our effort to mitigate pricing pressure by implementing pricing action on low-margin customers to protect profitability, also continuing to expand to new markets that have considerable potential for growth, such as our e-commerce. EBIT for the packaging and courier segment declined to CAD12.9 million, and the margin was down to 4.2%.

In addition to our costs associated with the weather, the Velocity operation had a negative impact on the EBIT margins. Still, our plan to optimize US same-delivery operations remains on track, and we are confident that it will allow us to generate adequate returns.

In the LTL segment, volumes cost and efficiencies were also negatively impacted by winter weather. Revenue before fuel surcharge was CAD147 million, up 20% versus last year. This increase was mainly attributable to the acquisition of Clarke Transport, and to a lesser extent, Vitran, which was completed less than a week before the quarter ended. We expect Clarke to generate approximately CAD115 million of annual revenue, and about CAD200 million for Vitran.

Excluding the acquisition, revenue volumes were slightly lower. However, [there were signs of] encouraging upward trends. Even so, consolidations have reduced our fixed costs and given us a basis of a more efficient cost structure. And our reduction of over-capacity has generated margin improvements, though they still aren't where we want them to be. In the first quarter of 2014, we sold the property in Calgary, which generated CAD3.8 million gain. Whereas last year, we completed the sale and lease-back in Dorval, Quebec, which generated a CAD9 million gain. Before these gains, year-over-year EBIT decreased by CAD2.9 million or 2% as a percentage of revenue.

In the truckload segment, Q1 revenue, excluding fuel surcharge, increased by 7% to CAD120 million. This increase was mainly due to the Clarke Road Transport acquisition, which will generate CAD65 million in annual revenue. Without the acquisition, we would have seen a 3% revenue decline, again mostly because of severe weather. However, our prices in this segment are finally beginning to trend higher. EBIT was CAD6 million or 4% total revenue in Q1 versus CAD6.5 million or 4.6% of revenue last year. The acquisition generated lower EBIT margin of 1.6%. Or excluding the acquisition, EBIT was relatively stable year over year.

With our ongoing efficiency and asset [preservation] efforts, we are confident in our ability to protect margins in this market and improve them. In the energy sector, Q1 revenue net of fuel surcharge was down by 18% to CAD75 million, compared to CAD92 million in the same period of 2013. The decline reflects our decision to close down the Canadian moving operation (inaudible) last year, and to reduce our activities in the US. During Q1, we closed four more terminals in the US to strictly focus on more stable market, and we'll continue to do whatever it takes to improve our profitability.

We sold for CAD15.5 million of equipment in Q1, resulting in a gain of CAD1.7 million. And we also had CAD14.5 million worth of equipment up for sale as results of the more recent closures. EBIT in the first quarter of 2014 was CAD4.3 million compared to CAD3.3 million in the previous year, mainly due to the gain on the sale of assets.

In the other specialized service sector, revenue before fuel surcharge was CAD68 million compared to CAD76 million in 2013. Much of this decline comes from the disposal of Unique Personnel Services at the beginning of the year. Since these operations generate a very small margin, the EBIT margin increased from 13.5% to 15.7%. Waste management margins remain healthy, and we are optimistic about the prospect of growth in this sector.

Our outlook regarding the economy hasn't changed. We'll see activity levels still relatively flat in the sectors we serve in Canada, while in the US, we should see some improvement. Still, our organic growth will be modest. However, I am pleased to see that some early signs of more realistic pricing in the LTL and truckload segments. I'm also encouraged by the progress that we're making in improving the efficiency in all of our operations, especially in the package and courier and LTL.

The Clarke and Vitran acquisitions also boost our top line considerably. And in the months ahead, we will be focusing our effort on integrating these operations and achieving all potential synergies. The energy sector has dragged down our results, which is why we acted quickly as possible to close our Canadian moving operations and align US supply with demand.

Our people accomplished a great deal over the past few months, but there is still more work to be done. Otherwise, we will continue to execute on the business strategy but deliver results for TransForce, even in a challenging economy climate -- improving the operating efficiency, eliminating redundancy, maximizing return on assets in all business segments relating to our priority. The cash flow that we generate from our operation will allow us to continue to pursue our selective acquisition strategy and build shareholder value.

So at this time, I will be pleased to answer any questions. So, Operator?

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session.

(Operator Instructions)

Cameron Doerksen from National Bank Financial.

Good morning.

Good morning, Cameron.

Just a couple questions for me. First thing, on the rig hauling segment. Obviously, it's a shrinking business for you. But you did provide some idea of the revenue out of that business in your commentary in the MD&A. Can you talk about what the EBIT was? I'm assuming it was negative. I'm just wondering to what degree.

You mean the Canadian rig moving business?

No, the overall rig moving business in Q1.

The overall rig moving business in Q1?

Yes, what was the EBIT loss on that business?

In the US, okay, in Q1, we lost CAD5 million on our rig moving business in the US. With about a CAD30 million-some revenue.

Yes. And with the actions that you've taken here to close some more terminals and sell some assets, when do you think you can get that to breakeven, or better?

Well, what we're thinking there right now is, the plan that we look for the rest of the year, we should operate at a breakeven point if our plans materialize. I mean, the major issue that we faced in Q1 was really very harsh weather in southern part of the US.

When I start looking at our numbers, if we look at the operation we have in the South: in April, finally, we are starting to make money over there. We still have a major challenge in the North. Our operations, like for instance, in the Bakken area for us, we're still not where we should be. Our drilling operation close to Denver -- I was talking to Jay, the guy that runs the show over there for us in the US, president. And he's very confident with the operation we've got there.

So this is why -- to go back to your initial question, Cameron -- we believe that we should operate the rest of the year over there at the breakeven.

Okay. And just on the asset base, you sold some assets in Canada. And then you have recorded a gain on them. I'm just wondering if you can quantify what remains within the rig hauling, specifically? What is the hard asset base there if you were to sell additional assets? What -- or, theoretically, if you were to sell the entire asset base, what would it be worth?

Okay, so we will be selling about CAD30 million to CAD40 million of assets over the course of the next nine months. So CAD30 million would be, in my mind, the minimal. With the foreclosure that we have done, the excess, also, equipment that we have -- because, don't forget: in 2012, these assets generated revenue of like CAD265 million, if I remember correctly. And right now, we are trending at about an average of about CAD8 million to CAD9 million to CAD10 million revenues a month.

So this is a disaster versus the drop in revenue and the drop in [baliff] profitability. So this is why we had to shut those assets. And I think we were fairly lucky, because at least we can recuperate the investment that we made on these assets. So far, every time we are selling assets, we have a small gain. We had a small gain in Canada. So far, whatever we sold in the US, we were also able to generate a small gain.

Okay. And what is the total asset base today?

The total asset base today, prior to those disposals, is about CAD75 million. Again, let's say, at the end of March.

Okay.

Just switching ears to the waste segment -- I think maybe it was in the last conference call, you had suggested that maybe you would start to break out a little more information on waste specifically.

Yes, absolutely.

I didn't see anything in the MD&A that talks about revenue or margins. Is there anything you that you can tell us about the size of that business?

No. We are coming with that, Cameron, on Q2, okay? The guys are still working with KPMG to make sure everything is going to be fine. So the discussion we had with KPMG and our Board is that we will definitely be ready for Q2.

Okay. And there's nothing you want to talk about it yet, or approximate the size of that business?

No, because I want to give it the right information at the time. I wanted to tell you that if you just look at the sector? By selling Unique, which generated a small gain for us -- I mean, our revenue is down, but if you look at the margin and the profitability, in there, the only thing you have left in there is our logistics segment.

And you see in Q1 our EBIT went up to about 15 point-something, 15.7, I think. And logistics -- everybody knows that if you have an EBIT of 8, 9 points, you're doing good. So at the end of Q2, everybody will have the proper information to properly evaluate what we are doing in that waste sector.

Okay, that's fair enough.

Just timely for me, just on package and courier, you've talked about some savings still to come on lease expense, and Velocity is still a drag. I'm just wondering what you think the margins will do for the remainder of the year in that segment? And how the integration of the various businesses and the IT and all that is going.

Yes. You see, if you look at Q1, both the LTL and package and courier, it's a deception for us, okay? What we have said is, if you take our 2013, we have to improve by 100 basis points. So we have still lots of work to do in the rest of the year to meet that goal of improving 100 basis points versus the year before.

Now, on the US side? I'm very encouraged with what we're doing with some of our customer base there on the e-commerce. I mean, we are actively working in New York right now. We have a special team that is working with our customer there to grow that business on the e-commerce side.

The Velocity effect that has been dragging for a year: I was looking at our numbers in April. Finally we are getting out of that drag. We still have lots of real estate that's dragging us. But at least if I compare the bottom line of Dynamex's operations in April versus April of last year, finally we are doing better than the year before. On the Canadian side, on the Dynamex same-day business, we've got lots of potential. I think that we should see on the same-day thing in 2014, and even more in 2015, organic growth like we've never seen before. So I'm very encouraged with that.

Now, if you look at our next-day service in Canada with Canpar-Loomis, there again, we had to make some changes with the use in regard to (inaudible) last year. We have a new team there working on that. Because the consolidation was taking place, but not at the pace that was acceptable to me. So now with this new team, we are really working very hard. So we shut down in Alberta, for instance, three small terminals. We shut down Lethbridge, we shut down Medicine Hat, we shut down Lloydminster. And business is going to Loomis. We are working also -- Sault Ste. Marie, for instance. There was a Canpar operation. It's been shut down, and now we are going to be using [Anafin] there, which is a partner of ours in [DS]. And you'll see more in Ontario.

We are working on the Saskatchewan side. We are working on the Quebec side. So the big issue is that you'll see a lot of severance. But this is an investment for the future, future profitability. So there again, in the package and courier, in my mind, although we are behind in Q1, I see an improvement of 100 basis points. In terms of growth: organic growth, we have none. But we had some very good news this week with a few of our accounts. So I'm more encouraged today than I was three months ago. Three months ago, January, February and March -- it was a nightmare for us.

Now I think that with this spring, we are starting to see a little bit better -- that this year -- I mean, that's why I'm confident that the signal that we sent for the market that we could deliver an EBITDA in the neighborhood of CAD385 million is doable, even with being back CAD12 million -- CAD10 million to CAD12 million in Q1.

Okay, very good. That's all for me, thanks very much.

Okay. Thank you, Cameron.

Turan Quettawala, Scotiabank.

Yes, good morning, Alain.

Good morning, Turan.

My first question, just on the weather impact. Could you -- I think you mentioned the MD&A about CAD2.8 million. And I think [the first one] also in the fuel and surcharge [lack] because you've used more fuel in the quarter. But if there's one number you can give us in terms of what the total impact might have been for you?

It's pretty hard to see a trend, but what we can say directly is that the spike in fuel cost us about CAD3 million. And this is an unusual spike. Because the Canadian dollar dropped so fast. So the catch-up and the fact that this is Q1, it's a slow quarter. Everybody is slow.

And then normally, it's a 30-day impact. This year it was more because, you know, you call the customer. He says I've got to raise the fuel surcharge. The guy says: hey, could you wait? Because there's four guys here that not busy that they will do it for the same price, right? So fuel, to me, was at least a CAD3 million impact, just eating. That one, I'm sure, cost me CAD1 million more in TFI's network year over year, okay?

Accidents. I mean, we had major issues on 401, two or three times. And with the number of trucks we have on the road, it's unbelievable. We had some major issues on 401 that at one point, we had three trucks stuck in the same nightmare of accidents there. So accidents in Q1, which is unusual -- my accident normally average about CAD1 million a month -- my loss. In Q1, it was over CAD5.6 million.

Okay.

And then the other thing also that's important is the fact that this weather affected the consumer as well. Affected -- like, for instance, in March, normally in Ontario, we start to see spring. But spring was not there in March in Ontario. So that delayed the consumer, delayed our customers, et cetera.

So it's also the effect of low volume. And us, if we have volume also that goes over the rail, and if the rail has an issue because of weather -- well, it affects us and it affects my customer. So then what you do is, then you have to truck it. And truck it is more expensive than rail. But you don't have any other options to service the customer. Because it's our customer, right?

So it's a lot of small things like that, that affected us big time in Q1.

Okay, thank you for that color.

Also when I look at your LTM P&C margin, it's about 6%, 6.1%. And I think it's down from about 7% if I look at it a year ago. You're talking about long-term, 10%. And I think obviously, based on your commentary to Cameron earlier, about 8% by 2015. Is that achievable if revenues keep declining? Like, can you do a number on the cost side [like] that?

Yes, I think it's achievable, Turan. Because I think that the revenue is not going to keep on declining on the parcel side. The parcel side, the big revenue decline we face is that when we bought Velocity, the revenue there was about CAD140 million on the US side. And today, that CAD140 million [per yearly] is down to CAD70 million. The reason being is that we bought the company, and already some customer already flying out the door, okay?

So that's why the Velocity acquisition -- you know, if you scale that acquisition on a scale of 1 to 10, is has not been a 10 for me. At best it's been a 6 or 7. Because without our knowledge, some of the customers were already flying. Already from CAD140 million, I was down to about CAD100 after a month and a half, right?

So this is -- when you compare my revenue of last year, I had Velocity for February and March last year, with the high revenue. And today, I've got [vast] with the low revenue. So we are very confident that this erosion of revenue on the same-day in the US and in Canada, and also on the [magazine] service, this erosion is going to stop.

Okay, that's helpful, thank you.

One more just for me on, it was an announcement or news article today on Amazon and testing its own delivery network. Is there some risk there for you guys? Just trying to understand the -- it's still [leading] for the long haul, but they're looking at the [last mile] themselves?

Yes, so that is something that they said that, in their mind, okay, they will try to service the market directly themselves for about 30% of the market. Through their AmazonFresh or through whatever system that they plan on implementing. And then the other 70% in the US, about 40% will go towards guys like us, and 30% will go towards USPS.

Okay.

Now, that's in the US. In Canada, right now, we are in discussion with them, okay, for the Toronto market. So maybe they will use us to start with them. In two years they will have their own operations -- that I don't know. But one thing is for sure, their plan in the US is pretty clear; they stated that. But Amazon for us is a small customer today, okay?

Okay.

The big customer for us today in that e-commerce in the US is Google Express services. We are very busy in New York with these guys, and we are overwhelmed with demand over there.

Okay. And Amazon is not that big in Canada, as well, for you?

No. Amazon for us in Canada is nothing.

Okay

But we believe that we are in a very good position to serve Amazon in Canada. So we will know probably within the next few months.

Okay, that's helpful. Thank you very much, Alain.

Very good, Turan.

Benoit Poirier, Desjardins Capital.

Good morning, Alain.

Good morning, Benoit.

Just to come back on Turan's question -- what explained the recent new erosion of Velocity? It seems to be higher than usual, Alain.

It is. Absolutely. What happened is that Velocity was a bankrupt company. And Velocity was purchased by a private equity, [come-back], okay? And those guys tried to turn the thing around for two years. They lost money every year. And then we had discussion with those guys. We bought the company for cheap. But you know, when I bought that company in the US, the revenue at the time was about CAD140 million.

Now, we are going to [a new deal], and we are finalizing all documents, and we get a call that one of their large accounts, which is represent about CAD14 million, has decided to switch and go somewhere else. And if you lose that account, then you get a few accounts that will piggyback on that guy. So that CAD14 million loss, after a month, became more than CAD20 million.

And then -- because that was not a good company. That was a company that was not making any money. So what we did [arf] is, we bought the revenue. And normally you use about 20% to 25% of revenue on an acquisition like that, when we buy a not well-run company like that. So my experience -- this is what we normally lose. Velocity was more than that. We lost about 40%, 45% of revenue.

Okay. And then, Alain, you made some comment about the harsh winter. But I was just wondering whether it could create some pent-up demand for Q2 and Q3 in your view?

So far, we don't see that yet. If we look at Canada, still it's like we are just waiting for Spring. I was talking to our waste guy in Ontario, Brian King, that runs our landfill in Moose Creek. And we are just starting now to see increased volume in our landfill. Normally we see increased volume at the end of March because people, they do their Spring cleanup at the end of March, sometimes early April. But we are just starting to see that now.

So I would say we are about 30 days behind normal in Canada. Even in the US. You look at New York -- I mean, it's still not that warm for the end of April.

Okay. And you mentioned, just in terms of guidance for the year, you are still comfortable with CAD385 million of EBITDA. What about the free cash flow outlook? Are you still okay with CAD250 million?

And how much would you expect to come from the asset sales? It seems that the number could be closer to CAD60 million, CAD65 million for the full year.

Yes, so we are still comfortable, even though that we are behind CAD10 million in Q1. And we did CAD330-something million last year. So this is like starting at CAD320 million, going up to CAD385 million. Say: wow, that's a hell of a job. But we're still looking at our numbers. And I was discussing with our EVPs and the rest of our team. We are still confident that we could deliver that.

In terms of free cash flow, I think we should do probably a little bit better than that. Because we still have, like I said earlier, a lot of assets that are not making any money in the US. We are looking also to sell another CAD10 million to CAD12 million of excess real estate. We did CAD12 million in Q1. We are going to do probably CAD3 million to CAD4 million in Q2, depending on if we can close those transactions in Q2.

So we still have lots of excess assets that will be sold. We still have a big job to do in our LTL. We are closing down small terminals. We are looking at combining more operations. It's a big job, but we know what to do.

And I understand the integration of Vitran -- it's still very early days. But (multiple speakers) and [Neo Fortune piece to] for on the real estate side?

Not yet. We are having a meeting this afternoon with our team over there. We've got lots of good stuff on the go. On the real estate side, we are very busy. If you look at our MD&A and the number of sites that we've closed out over the last 12 months is unbelievable. We still have more to come.

On the same-day business that we have in the US, I'm still 2% of revenue. My real estate cost is still 2% of revenue -- too much to where it should be. So that's CAD8 million on the real estate in my US operation that's costing me. So we've got a lot of work to do over there. But it takes time. Real estate -- it takes two, three, four years sometimes to adjust with the market condition.

Okay. And just in terms of M&A activities, Alain, you mentioned last quarter that you would likely take a pause in the first half this year. However, you publicly said that you were looking in California to add a company on the package and courier side. And it seems that you are also looking for a truckload company in the US with a foothold in Mexico. Could you give us an update a little bit on that front?

Yes, that's a good question. We've got lots on the go right now on LTL, and in our package. But I've got a great team there, with Brian Kohut running our Canadian package division, working with the team there. And the same thing with Rob and the team there on the LTL side.

What I've said is: yes, on the US side, on the same-day market, if we see a small opportunity, definitely we will look at it. So yes, we are looking at a company right now in California. That's small, and it would not be a tuck-in with Dynamex. It would be a standalone. The company is profitable, it's not another Velocity. It's not a turn-around thing. It's a good company combining with us. It would make a lot of sense and it's affordable for us.

On the truckload side, there was a Canadian truckload company that was up for sale. The price didn't make any sense. The combination was okay, but at the end of the day, it didn't make any sense. So when I saw that, I said: no, I think what we need first for shareholders at TFI is a US truckload base. You have to understand that a driver in the US earns about 30% less money than a driver in Canada. And a driver in Mexico, well, it's about 60%. So there's going to be a lot of trade between Mexico, Canada, and in the US. With our Canadian truckload operation, combined with a good solid US truckload company, makes a lot of sense.

Now, if I buy another Velocity-type of company in the truckload, then I will have a nightmare. This is not what I'm -- I'm not looking at a company I've got. I'm looking at a strong management team in the US that's a proven management team, with a good size, that could be some kind of a beachhead for us in the US at a reasonable price.

Okay, very good color.

And the last question before I get back in the queue. Just in terms of CFO, Alain -- how does your searching go?

It goes well. We have four good candidates so far. As a matter of fact, I'm having lunch with one of them today. And I believe that sometime in the summer or early in the fall we will have a new guy on board that's going to help us with things like taxes. The tax files at TFI are very complex because we have the Canadian tax, we have the US taxation. It's a big job to oversee all of that. So I think that this person would join us the end of Q2; sometime in Q3 at the latest.

Okay. Thanks again, Alain, for the time.

Okay, very good. Take care, Ben.

David Newman, Cormark Securities.

Good morning, Alain.

Good morning, David.

On the Velocity -- with the CAD70 million delta on the revenue side. On the same-day, could you give us a sense of how much Google and Amazon might be? And how fast that might grow? In other words, could this potentially backfill the shortfall that you saw on the revenue compression on the package and courier side, especially on the same-day?

Yes, when I'm talking to Scott, the best number that we could say right now is that the New York market is really booming for us right now. We are overwhelmed. We have a special team that has been sent there to New York just to support the growth of our customers.

So what we know so far is CAD1 million revenue for us equates about 20 drivers. The last discussion I had with Scott is that Google, in our mind, will be at least an CAD8 million to CAD12 million customer for 2014. Maybe more. But don't forget, they operate only two markets to date, which is San Francisco and New York. So their plan, as we know, is DC is next, with Austin in Texas, and then Chicago and Boston.

So they have 17 markets. And now they understand they're dealing with us, because we are national. It makes a lot of sense. I'm not saying that they will give 100% of their business to us, but we could have a fairly good share. And like you said, that's going to help us fill the gap of that CAD70 million that were lost. Now, one thing, David, that's important. That CAD70 million of business that we lost, the gross margin on that was fairly bad.

Yes, you wanted to lose it.

Yes, it was fairly bad. The only problem that I faced is that I was stuck with the people. Well, people -- okay, that was done. I was stuck with the real estate. That is my problem.

Okay. And so some facilities coming off this year. When are you completely cleaned up on the Velocity real estate?

It's going to take me another 18 to 24 months, David. If you looked at my MD&A, and you see the closures that we did, the combination that we did; it's unbelievable what we do. I mean, we buy Vitran and Clarke, and we have no more [terminals] than we had than before buying those guys.

Okay. And what sort of an EBIT drag is that? Just for the real estate alone, assuming the same level of --

The real estate just in the US is an CAD8 million drag --

Okay, got you.

-- a year, right now. In Canada, if you -- real estate for Dynamex in Canada, it's not too big of a drag. It's small because we bought TDS out West. But Canada is not too big of a drag. Canada, really, the big drag there is the LTL combination with the rest of our LTL. But I will say -- I would put the number on that, maybe CAD5 million. So really, the big drag on real estate for us is, really, the same-day business that we have in the US.

Okay, very good.

And on the TL markets and LTL -- clearly encouraging conditions starting to evolve here. And Clarke was -- it was a bit tougher of an acquisition overall. With the Vitran, as well. Has it become a seller's market for you yet, in terms of the TL side and the LTL side? And how much could that add to margins, coupled with what you might do with Clarke and Vitran?

Well, it's still early, I think, David, in the game, to really understand. We had a blip in the volume late in March and early in April. And we believe this is because the rail was so -- it had so many service issues, that the shipper had no other option than to go with the [road].

Now, in terms of the general Canadian economy, what we are starting to see [the lines] of April -- I'm looking at my numbers. And the market is starting to get tight. Not that tight, but tighter than it was. This is why, when I say that our truckload, which we operated last year at about a 6.9% EBIT margin. In 2012, we did about 8%. I believe that this year will be closer to 8% than to 7%. Or maybe a little bit better than 8%. So we are a little bit behind in Q1 in our truckload, but not that much.

Okay. And how long do you think this Clarke-Vitran integration might take? And do you think you've got the bench strength and resources to get it done?

Oh, absolutely. Clarke is a great company and Vitran Canada was a great company. We have good two good leaders there that knows what to do. And working with our team at Quik X, Jeff King; and our team at Kingsway and Overland and CIA -- we've got all the tools to do the job.

What we've done so far in our LTL, for instance, back office. Calgary was shut down, so all the CF now is supported by terminal. We are going to be doing Montreal over the next step. Montreal should be done for the summer. I mean, we've got a lot of good stuff on the go. But we had a very disappointing Q1.

Yes. And, Alain, last question.

Over the years, you've garnered a ton of respect in the industry, and you've done a great job executing on the strategy. And certainly it's a big Company now, with a lot of irons in the fire. I was really encouraged that you've got a CFO coming on board. Do you feel comfortable that the bench strength you've got overall -- do you have the right resources and horses in play so that you can (multiple speakers) -- ?

Absolutely. The CFO is one guy that's going to join the team. After that, we are already looking for another position that's going to be -- that new person will report to that new CFO.

If we buy -- let's say the discussion I have with Benway -- if we buy a truckload company in the US, it's not going to be Velocity. We're not going to buy a (expletive) company that we have to turn around. I don't have the team to do that in the US. So what were looking at is a good company that -- working with us will make these guys better, and at a reasonable price. We are not -- we can't buy something with a stupid price, like some of the guys are asking. It's not going to happen.

Okay. Last one.

Obviously, with the market getting tight -- driver issues and all that sort of thing; service rules and all of that -- how is the recruiting going? Has the market tightened up here? Is that going to get a little more difficult, do you think?

You see, David, right now, stupid the system is, is that you've got good companies like -- I'll take an example, Contrans. They pay their drivers very well. You look at us, we pay our drivers very well. But there's a lot of small companies that don't pay their drivers well

Yes.

So one thing is that, the good company will have less of an issue with the shortage than the guys that pay at a discount. I was looking at the salary in the US -- a US driver of a truckload company like Heartland, and the good companies like Heartland, will be in the neighborhood of CAD0.40 a mile. But you've got companies at CAD0.32 a mile, at CAD0.34 a mile. So to me, the guy that's going to have more pressure is the guy that pays CAD0.32 a mile.

Exactly, for sure. It's all (multiple speakers) --

We have the same situation in Canada. Good companies that are efficient, like Contrans and us and Mullen, we pay our people fair. But there's a lot of small guys that are trying to cheat the system or gain volume by paying those drivers at a discount.

Sounds like it could be another big round of consolidation could happen here, as well.

I think so. I think that in the US, you saw the Heartland-Gordon Trucking acquisition, which is a fantastic transaction. You have Knight that is trying to buy USA Truck. I mean, in the US, you look at the pricing, you look at the future, you look at the potential of the US economy starting to move again.

Just look at what we are doing with some of our customers in the US. I'm very encouraged with -- so this is why when I say, I look at CAD385 and I look at my Q1, and I say: wow, we need a miracle to achieve that. But I think that we've got all the tools to do it.

Okay, very good. Thanks, Alain.

Okay. Have a good day, David.

Mona Nazir, Laurentian Bank Securities.

Good morning.

Good morning.

You stated in the outlook section that your fuel pricing improvements in the truckload and LTL segments -- I'm just wondering if you could pinpoint exactly what's driving this? Is it overall economic growth? Or is it because their consolidation strategy is coming together, and you have more control over the supply? Or is it just consumer trends?

Well, if you look at the truckload, I think that what's helping to us, which started really very early in April, is that our industry in Canada -- maybe it's because of the CAD0.90 dollar right now, they have more orders, so there's more activity. The other thing, too, is that you have -- the transportation companies for the last four or five years in Canada have suffered big time, with low volume. So a lot of guys were not able to replace equipment. And a lot of drivers have retired, and not a lot of new guys come in. So the market is getting tighter because of all these reasons. And the shippers need more trucks. So this is why you will see -- we believe that this truckload environment in Canada will start to improve. You see the same thing in the US.

Now in terms of the LTL, we had a lot of tailwind. We went through some tremendously bad years for us. Because the Canadian economy tanked in 2009, there was a new player that joined the LTL market -- which was TL Freight -- at the same time that the market was shrinking. So we went through years and years of low-volume price pressure. And the only way, us, we were able to generate a low EBIT, like a 5% or a 6% EBIT -- which, to us, is way too low; we should be in the 10% to 12% like we used to be -- is by reducing our costs, by buying companies and combining and consolidating. That's how we've been able to do what we were able to do.

Now, we believe that down the road, if the Canadian economy starts to improve, LTL, through their pricing power -- there is none today. Trucking -- we see a little bit of improvement. LTL, it's still not the case. We believe it will. When? Hard to say. I'll give you a small example. We are rail providers for our intermodal division. Every year we get the 3%, 2%, 3.5%, 2.5% increase by the rail provider. And we were unable to pass it on to our customer.

Now, in those past days, we didn't own Vitran. We didn't own Clarke. We didn't own Quik X. Now it's part of our family. We cannot absorb an increase by our rail provider on the intermodal and not pass it on to our customer. It doesn't make any sense. But this is what has been happening for the last six years. Right?

Yes. Okay, thank you, that helped.

And secondly, just going back to the Vitran. When you first stated that you were going after them, you said that they would be a standalone entity. But now we've seen some integration, and that you can obtain some synergies. I'm just wondering, what changed? And in regard to the synergies, is it more top line or cost synergies can we expect? And could we also see the same with Clarke?

Vitran is a standalone company, like Clarke is. What we're trying to do with the Clarke, Vitran, and the rest of our Company as a first step, is all the last-mile providers that we use -- that they use. And I'll give you an example. In the Maritimes, Vitran and Clarke were using the same provider as us. But they had different rates. So the first step, we say: well, okay, Clarke and Vitran as part of our family, they should be paying the same rate as our family. So this is the first step. We're looking at another provider in Manitoba, and we are doing the same thing. So this is the first step.

The next step is: okay, Company A operates in that city. And Vitran uses Company B. We don't own B. So, could A do the job for Vitran, versus B? Well, that's the next step. And this is where we talk about synergies. Not combining the Companies. Let's say Clarke and Vitran in Toronto are one company. No, no. This is not going to happen.

Thank you. That's all my questions.

Okay.

Walter Spracklin, RBC.

Thanks very much. Good morning, Alain.

Good morning, Walter.

When we look at some of the commentary you made in your P&C division -- longer-term implication here -- you talked about customers starting to look for less expensive, perhaps less premium modes. And that was affecting some of your yield. Do you consider this at all a temporary trend due to the economy or due to some of the external factors? Or is this something that we need to worry about a little, longer term? That perhaps the -- let's call it, the mix within your P&C division might be resulting in lower yields on a go-forward --?

No, not at all, Walter. This is just short-term. When times are tough, customers always try to find cheaper ways to ship. So for instance, they will use sometimes more intermodal versus truckload, or whatever. So that is very small, what we see right now.

As a matter fact, what we are starting to see is that ICS, which is the premium of the premium service that we have over in TFI -- this business, this division is really starting to grow right now. Another of our premium division key force, Retail, which is the -- it used to be called ATS, TForce Integrated Solutions, based here in Toronto. We are starting to see some organic growth, and this is a premium provider. In the tough times like we've been facing, yes. But this is not significant at all.

Okay, that's encouraging.

Moving over to energy, I know there's a lot of moving parts now as you scale back on certain businesses; you're exiting at sites and you're declining. What do you see when you come out of 2014 as your general revenue run rate for the overall business?

And what would be the contribution -- you know, it's very tough from a modeling perspective to not only take into consideration some of your assets you're selling, but what the margins were on the assets being sold, and was being left. What's your best sense coming out of 2014 what that division will look like?

We'll see -- the most important thing, though, Walter, that's going to give more clarity, is that, as of Q2, the only thing that's going to be in energy for us will be our rig-moving business. The rest of the business that we do to support the growth or the operation of the oil sand is mostly LTL and truckload. What we'll do in Q2 is that all that LTL and truckload that support the energy in Alberta will be moved back into truckload or LTL. And the only energy business that's going to be left is the rig-moving that we have in the US. Even our farmer operation, where we're all in pipes and storing pipe, will be part of our truckload operation.

So if you look at the end of 2014, on the rig moving side, we will be looking at somewhere in the neighborhood of CAD80 million to CAD90 million of revenue, and a small loss for 2014. Going into 2015, that's probably going to drop again, unless market improves. Now what we're starting to see in the South -- Texas, Louisiana -- we are starting to see a little bit of light there. But we haven't seen any light up North though.

Okay. So it sounds like we are going to have some pretty significant accounting or reporting adjustments in Q2, with waste coming out, and then moving some of your --

Exactly. And that will give the investor a better picture of, first of all, our truckload. A little bit in our LTL. And also our waste, which is a great division of ours, but nobody has the right feel on it. So this is not fair, and this is why I look -- Q2, it's going to be out in the open. And then people could appreciate what we do over there.

And you're still looking for CAD5 million CAD8 million this year in the waste side? No change there?

No change there whatsoever. We had a slow Q1 on the waste side, as well. But I was with Brian King last night and I'm very confident. We just won a contract in Montreal where we have a great deal with our partner in waste management, with Lachute. And we signed a deal with a landfill similar to the Lachute deal in Champlain, Quebec, next to Three Rivers. They've got a lot of good stuff on the go now.

Great. Two more questions. One on CapEx.

I know there's a lot of acquisitions here that you've done. And when you look at their fleet and the fleets of the acquisitions that you've done, how is the fleet age there? And where I'm going is, what is a run rate, what you would expect long-term, net CapEx number that we should use for transference when we're modeling it out longer-term?

You see, if you look at Clarke, their truckload division assets -- no issue there whatsoever. The only issues at Clarke is some containers maybe, but they're small. If you look at Vitran, all [do it well], the company was going through some very difficult times. Their asset base is small, because the only assets really that they own is containers. And we looked at it. They're not that bad.

So with the consolidation and all the improvement -- and also the important thing, also, to remember, Walter, is that we are shutting down a lot of small terminals. And we are going to be dealing with agents, so that reduces our CapEx requirement.

So the CAD50 million run rate you're doing --

Still okay.

Still okay? Good.

Still okay.

Last question here.

I know when we spoke strategically about your acquisitions and you targeted your core markets -- P&C -- waste, you're talking a little bit more -- you've always said that you didn't have much interest in the US, outside of the same-day.

I don't know if I heard it correctly, but the acquisition you're looking at in the US right now on the truckload slide, is that a little bit of a departure from that original strategy? Can you give us a little bit more color on what your acquisition strategy is in the US -- if that's changed at all?

Yes, that's a very good question, Walter. It changed a bit, because at first, what I was trying to do is to build through an acquisition in Canada a great truckload company, a company that will have a CAD1 billion in revenue, and one day could be standalone, ROTFI. So that was plan No. 1.

But the problem is, there's not a lot of candidates in Canada. And if you are a stubborn vendor, well then you can do anything. So this is why I said to myself late last year, I said: okay, so what if we buy a good US truckload company? So I've been on the lookout since that time. And we are trying to find -- we have a few candidates that we are looking at right now. And we are trying to find the good fit. Like I said earlier, we are not buying another Velocity. Why? Because I don't have any management team in truckload US, so I look at good companies.

And another thing that's important to me is, I need a presence in Texas. We are a big truckload Company ourselves in Texas, we have 400 trucks there for the pipe hauling. So big presence in Texas, close to Mexico. And I see down the road, in the future, if we could buy a great US truckload-based company, combine that with our Canadian operation -- which is fairly strong in Alberta with the energy sector, strong in Ontario, strong in Quebec -- combine that with a solid US guy that's got operations in Texas, and maybe if he's got operations in Mexico, even better. But not a lot of men have that.

Okay.

And then what you do is that you look at the efficiency of a US truck driver versus the efficiency of a Canadian truck driver. I mean, there's a huge gap. And never forget one thing, is that when a US truckload guy comes into Canada, he's trying to get freight to go back. So for him, that's a back-haul rate. And he [rigs] the market.

Whereas us, as Canadians, we try to go into the US with a head-haul rate, we come out of the US with a back-haul rate. So if you act smart -- if you're working with that US guy, I see some improvement there.

Now, does this mean that perhaps truckload for you is no longer a non-core asset, to the extent I consider in the back of my mind, that perhaps this is for a for-sale asset? But does this indicate now, based on what I'm hearing, is that you're considering truckload more of your core going forward-type of -- in your long-term strategy?

It depends on what we can achieve over the next 12 months, Walter. If I could find the right company -- and I just explained. We are looking at a few right now, but we don't have anything done. But let's say we find that great company with a great management team, then we will have to get back to the investors to explain exactly what will be the next step.

Okay, all right. Well, thank you for that color; that's very helpful.

Okay, Walter, thank you.

David Tyerman, Canaccord Genuity.

Good morning, Alain.

Good morning, David.

So a question on Clarke and Vitran and the impact on LTL. In Q1, the margins were really low. Admittedly, you lost a couple days at Vitran. But Clarke you had for the whole quarter, and obviously it was impacted by weather. But they're really low and I'm wondering is this representative of the operations? And if so, how are you going to get a percent increase in the over-LTL, since that's 50% of the -- or, 50% sales increase?

Yes, David. What happened in Q1 in Clarke -- Clarke LTL didn't make any money. That's exceptional. I mean, if you go back -- it's not public, but we go back year after year, go back five years, and those guys are profitable in Q1. Now, they went through the same scenario as the rest of us in dealing with the intermodal division, dealing with delays, dealing with all kinds of issues. And we end up with Clarke, instead of making, let's say, normal 1.5% bottom line, they came up with zero.

But this is unusual. I'm very confident, working with Darrell that runs the Clarke business there, working with Tony at Vitran. Even Vitran had a very difficult Q1. So it's the industry, and things have to change. Like I was explaining earlier, we get price increase by our providers, but we don't pass it off to the customer. That's been going on for five, six years. So this is something that has to change. We can't go through that every year, get price increase from the intermodal provider and not pass it on to the customer. It's not acceptable. It's not fair.

Would you be able to achieve your LTL margin goals for 2014 if you don't get any pricing? If you can't -- if the market just doesn't give it to you?

Yes, if the market does not give it to us, David, I'm still confident that we could improve the 100 basis points, even with a very slow -- profit in Q1 for LTL was zero -- CAD2 million, so it's next to nothing. But I'm confident for the rest of the year, talking with my guys, looking at what's in the pipeline in terms of new business, all the actions that we've been taking and that we are taking right now, I'm confident that we can still improve.

Because look at the profitability: over 5%, 6% EBIT. This is -- as some guys will say, this is (expletive). This is nothing. We've got to go back to the 10% and 12%. So a lot of weight is on our shoulder to improve our costs. And down the road, for sure, our customer will have to share the burden of, for instance, the [Lionel] provider that increases our rate every year by 2%, 3%. Right?

Right. Okay, that's helpful, thank you.

And then just on the LTL, also. I noticed again in the current MD&A, you indicated that the Western Canada terminal closures didn't generate the expected cost reductions. So was there any improvement there? And why aren't you getting any improvement here?

Well, every time you have a situation like that, you've got some adjustment. It takes some time. I mean, you cannot take an action like that and expect that you're going to get the result the next day. So you have a transition and an adjustment period.

I'll give you another example. We moved Loomis in Vancouver into a newer facility, which is one of ours. And we invested CAD4 million in equipment, because Loomis Vancouver had no technology whatsoever. So we did that in March. And we're supposed to sort up to 6,000 -- the capacity of 6,000 parcels per hour. But the first three days of operation, four days of operation, we were sorting only 2,000 parcels per hour. So it's not acceptable, but it's a transition.

Talking our guys last night, now we are up to 3,500. But 3,500 is still not 6,000. So we have a transition period. An education period -- the same thing. Like I said, Loomis Vancouver, they had no technology. They were sorting by hand. Doesn't make any sense, but that's the way it was.

Okay. And so for the --

It's the same thing for CF. There's a transition period. You shut down terminal. That's cost. You've got to move all the equipment back. So you're moving empty equipment, no freight. So there's a cost.

So you can't see the result right away. It's like, all the things that we've done so far -- we had lots of severance in Q4. We had severance in Q1. We had CAD1.2 million of severance in Q1, if I remember correctly. And we're going to have over CAD2 million in Q2. Now, that takes a little bit of time to take effect. But that's for the future of the Company, future benefit of the Company.

Okay. So on the CF transition, that happened back in Q3, right?

No, you had some in Q3, you had some in Q4, you had some also in Q1.

Okay, so it's happening over time?

That's right.

How long would you think it would normally take to see the operations as they go to -- get up to normal performance? Does it take two or three quarters, or a year?

Normally, David, it takes two quarters. Now, don't forget that also we had the effect out West of that situation, same as in the East, weather-related, all that. So it's all ongoing at the same time.

I think that CF -- I was looking in the number of April. We are still not back on track in April. But talking to our guys, everybody's working hard. We will be announcing another special thing that's going to be happening early May that's going to benefit CF. But these action takes time.

Right. So when I think about Vitran and Clarke, you're doing the same kind of integrations, it sounds like. It sounds like it will take a few quarters to really have --

Oh, absolutely.

-- impact. So presumably, the near term is weaker. But by the time you get toward the end of the year, you're going to see quite a bit better? Is that the idea?

Yes. That's why I'm confident we can improve our LTL and our package by 100 basis points. And the same thing for our truckload, too, by the end of this year.

Okay, that's great. That's very helpful. Thank you very much.

Okay. Thank you, David

Benoit Poirier, Desjardins Capital.

Yes, Alain, just to come back on Walter's question about the less-premium modes. You mentioned very good color about the ICS, and also ATS. I was just wondering if you could provide any color whether your same-day delivery business is impacted. I understand it's about CAD500 million of revenues in the US. I just wondering if it's impacted a little bit or --

No, not at all. Nothing. No impact whatsoever there.

Okay, perfect.

And on the waste side, you mentioned that you're targeting to generate about CAD50 million of free cash from waste down the road. What is the current performance of waste? And when do you think you can reach the CAD50million target?

Okay, so the current performance of waste, you'll see that, Benoit, at the end of Q2. Because this is going to be publicly devolved there. Now, what I could tell you is that the target of having an [inter-guy] in the neighborhood of CAD100 million and a free cash flow of CAD50 million and more, that is our target before we start thinking about doing something else.

In order to get that, we need some organic growth, which we have. But we also need some small M&A activity, which we are working on. So you will see a little bit more color when you look at our Q2, with what's going to be happening over the next nine months.

Okay, very good.

And could you talk a little bit about the dynamics with the railroad? We all know that this has been a tough winter. They were very vocal on the call that they gained some market share over the trucking in the domestic intermodal. On the other side, it seems that you been benefited from the tough winter. So could you provide more color about the trend we see, or the dynamics with the railroads, Alain?

The only thing I can tell you, Benoit, is that us, we have lots of issues right now with the weather in Q1 -- we are working out. If customers are moving away from trucks in Q1 to get on the rail, that -- I cannot answer that.

One thing I could tell you is that there was lots of complaints of service that we see publicly. And so whatever the rail guys are saying is what they're saying. What I could tell you though is that, us, we are in a tough spot in the LTL world. Because the market is still very difficult, and we are getting -- well, we didn't own the companies before. But looking back, these companies were getting price increase every year, and they were not able to pass it on to the customer, which is not fair.

Okay.

Which has to change.

Okay. And for the intangible assets, it was close to CAD1 billion at the end of Q1. Given some acquisition or tougher-than-expected, just in terms of integrating or the contribution -- just wondering if there's any risk from potential impairment charge?

No. The only impairment is where we were facing -- and we took it head-on in Q4 last year -- which is about CAD50 million-some that we rolled out that was the intangible that relates to the energy sector. We shut down a Canadian operation, although the major part of that CAD50 million was related to the US. So we took it on, head-on, it's gone. The rest of our goodwill and intangibles, we do the test every quarter, and there's no issue there at all.

Okay, perfect.

And just in terms of severance costs, Alain, what we should expect in the coming quarter, given the comments you made earlier?

The severance costs we had last year was running about CAD7 million to CAD8 million. 2014 will be closer to CAD10 million.

Okay, very good.

And if I understand it, it was a positive contributor. Are you able to quantify a little bit the impact, Alain?

What we know is that every penny on a yearly basis should normally help us by about CAD1 million. So CAD0.10 is CAD10 million. But really, the effect in Q1 was really minimal.

Okay. So CAD1 million on the bottom line, right?

Yes. About.

Okay, perfect. Okay, thank you very much again.

Thank you, Benoit.

Kevin Chiang, CIBC.

Hello, Alain. Thanks for all the color on the call, and thanks for taking my question here.

Just a follow-up on some of the comments on the ATS solutions, or ATS Retail. Sounds like you're seeing some good momentum here on the e-commerce side. Just wondering if you're able to use this platform to drive e-commerce opportunities through some of the existing retail relationships you have? Or have you not been able to cross-sell those opportunities at this point in time?

No, not yet. Because you see, Kevin, Canada really lies behind the US. So what we're learning with the Dynamex US, with the Amazon and the Google, and all these guys, will help us in Canada. That's for sure. But so far, the e-commerce for us in Canada has been really small. I mean, the biggest winner of the e-commerce in Canada is Canada Post, because of their coverage. We do the eBay through Pitney Bowes for Canada, but eBay is really small still. We are well-positioned, Kevin, well-positioned in the US. And we're well-positioned in Canada, to be a significant player in that business down the road.

It seems like Retail, at least over the past few quarters, has been talking about investing in their online and in their e-commerce. Are you having those discussions with them as well, in terms of providing some of those logistics solutions?

Sure. But Canada lags big time, versus the US. So we see more action in the US right now than we see here in Canada.

Perfect. That's great color. Thanks a lot, Alain.

Okay. Have a great day, Kevin. Thank you.

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

Okay, well, thank you for joining us today. And I look forward to speaking with you again following the second quarter. So everybody have a great day. Thanks again for your interest in TransForce.

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