TFI International Inc (TFII) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the TransForce 2014 second-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, July 25, 2014. I'll now the conference over to Alain Bedard, Chairman, President and CEO. Please go ahead.

Thank you, operator and good morning, ladies and gentlemen. Yesterday after the market closed, Canada news wires issued the news release concerning our results for the second quarter ended June 30, 2014. We also issued a news release detailing an agreement to acquire Contrans.

I will begin by going over the main highlights of the quarter as well as provide you with more detail about the performance of each operating segment. Then I will discuss the proposed acquisition of Contrans.

I also want to take this opportunity to publicly welcome Alain Raquepas to the TransForce team as our new CFO. Alain brings us a broad and deep range of experience in financial management, including being CFO of a publicly listed company earlier in his career. We are very pleased to have him onboard.

Turning to our results, total revenue for the second quarter were CAD889 million compared to CAD792 million in the second quarter of 2013. Vitran and Clarke contributed CAD102 million to this total.

Excluding these acquisitions, revenue were down slightly due to the phase-out of removing activity, the non-renewal of unprofitable accounts at Velocity in the US, and the disposition of certain ancillary activities. On the other hand, waste management revenue were up and the high US dollar boosted our US dollar-denominated sales.

We've done a good job with our proactive measure to match supply with demand and EBIT before impairment reached CAD79.5 million, which is 8.9% of total revenue. A 27.6% increase over the CAD62.3 million, or 7.9% of total revenue achieved in the same period last year. I'm pleased to report that our year-over-year EBIT margin were higher in all of our business segments.

Adjusted net income, which excludes the after-tax effect of change in the fair value of derivatives and net of foreign exchange gain or loss and asset impairment charge was up 25% to CAD49.1 million or CAD0.48 per fully-diluted shares compared to CAD39.2 million or CAD0.40 per share last year.

Free cash flow reached CAD97.4 million. Out of that, CAD44.8 million was used for acquisition, CAD35.7 million for debt reimbursement and CAD4 million for share buyback.

I will now review the results of each business segment. And before I begin, I want to remind you that we've changed the makeup of our reporting segments. Waste management is now a distinct segment, while our activities in the energy sector have been allocated either to truckload or LTL and rig moving now is part of our other services.

In the package and courier revenue, excluding fuel surcharge, was CAD280 million, down 2%. The non-renewal of unprofitable business from the loss of these customers in the US amounted to CAD20 million in the quarter.

EBIT in the P&C segment rose 17% to CAD27.3 million. And EBIT margin increased to 8.4% up 1.3 percentage points.

LTL segment revenue before fuel surcharge was CAD203 million, an increase of 44% compared to last year. A sharp increase is attributable to the Clarke and Vitran acquisitions. Excluding these acquisitions, volumes were slightly lower but yield was trending a bit higher.

Margin improved for the second consecutive second quarter, and EBIT increased CAD7.8 million to CAD20.1 million with acquisition contributing CAD6.1 million. Before acquisition and gains on the sale of property and equipment, the LTL EBIT margin increased by 0.8%.

In the truckload segment revenue, excluding fuel surcharge, increase by 20% to CAD180 million. The increase comes from Clarke and E.L. Farmer. EBIT was CAD20.2 million, a 31% increase compared to last year. EBIT margin was also up, reaching 9.7%, an increase of 0.7 percentage points.

Our darling waste management segment had a solid quarter. Revenue increased 22% to CAD49 million. Lafleche environmental complex had high revenue in the landfill and composting operation in our Quebec operation at substantial organic growth.

In June we bought the Quebec operation of Veolia solid waste. EBIT in this segment reached CAD12.1 million compared to CAD9.7 in the same period last year. The EBIT margin was 24.6%, up 0.3 percentage points over the prior period.

In terms of outlook, the economy is slowly improving in the US but remains flat in Canada. Our efforts to improve efficiency and productivity, as well as adjust our asset base to supply and demand, are paying off. We will continue to work tirelessly to generate additional savings and increase profitability.

Strategic acquisition will continue to drive our revenue growth in a flat environment. In this regard, I'm pleased to announce that TransForce has signed an agreement to acquire all the issued and outstanding class A subordinate voting shares and class B multiple voting shares of Contrans through an all-cash offer at CAD14.60 per share. The total purchase price will be approximately CAD495 million. The transaction will be financed through a credit facility of CAD550 million.

Contrans is one of the largest freight transportation Companies in Canada. They have national presence in Canada and provide a wide array of specialized truckload services.

For the 12-month period ended March 31, 2014, Contrans generated total revenue from continuing operations of CAD580 million, and an EBITDA of CAD80 million. Contrans has a very good management team and generated solid results over the years.

In addition, their culture is similar to ours, as they've been methodically acquiring companies and focusing on growing shareholder value. We believe that this acquisition provides an exciting potential for TransForce by adding dedicated resources and excellent customer base and a very strong management team.

It is our intention to propose the nomination of Mr. Stan Dunford, actual Chairman and CEO of Contrans to join the TransForce Board of Directors at our next annual meeting in April of 2015. Our offer has been unanimously approved by Contrans' Board of Directors and Contrans has received a fairness opinion from their advisors indicating that our offer is fair, okay from a financial point of view. So at this time I'm pleased to answer questions. Operator?

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

(Operator Instructions)

Your first question comes from the line of Walter Spracklin with RBC. Your line is open

Thanks very much. Good morning, Alain.

Good morning, Walter.

Do we have Stan on the line as well?

No.

No, okay. First of all, congratulations. Obviously this is a huge transaction for you. So well done on getting this across the finish line, and obviously extending the same to Stan.

I have a few questions. First of all, you alluded to in your presentation, synergies. Typically, Alain, we've talked that when you do acquisitions in truckload, there's less opportunity for synergies compared to parcel or LTL.

But nevertheless, in the wording in the presentation, it seemed to allude to a meaningful synergy. I wonder if you could outline where they're coming from and what the magnitude would be?

Right. You're absolutely right, Walter. If you buy a truckload company versus an LTL or a parcel company, the big difference is that the LTL and parcel, they operate a huge network. Whereas the truckload don't really operate into a huge network.

So this is why the savings or the synergies normally is always much smaller in a truckload environment versus LTL and package. So you are absolutely right.

You got to look at when Heartland bought Gordon trucking in the US, they alluded to a CAD30 million synergies. Us, okay, when we looked at Contrans, Contrans is a very well machine. It operates lean and mean. It's been well run by Mr. Dunford and Mr. Rumble, and all the executive team there.

Where the synergy will come from, first of all, Contrans was a public company. We're buying Contrans so we saved all the cost of a public company. So that's really number one, which probably is in the neighborhood of maybe CAD4 million or CAD5 million. Okay?

Number two, is Contrans is a great specialty truckload with a strong, very strong, market position in Ontario. And they have a small position in Quebec.

TFI is completely the opposite. TFI has got a strong specialty truckload in Quebec, but is not really present in Ontario. Very small.

So the combination of the two is really a good complement on the market. Could it be on back haul, could it be on head haul? This is all things that we are going to be, the TFI trucking executives, will be working with Greg and his team to work together to be more efficient. This is hard to quantify.

So this is why in my mind, I think that besides the synergies coming out of a public company, I think it's fair to say that this will probably generate in the neighborhood of CAD10 million. Okay?

So it's not established on scientific numbers, because we have to live together and work together to accomplish that. But I think that CAD10 million is highly conservative.

I'll give you another example where Contrans has built very solid quality, is they are hauling waste from a transfer station for my competition into a landfill, both in Quebec and in Alberta. They do a great job doing that. They are a great recipe.

Within TFI today, we use either inside Matrec operation or some outside carrier. I'm convinced that using Contrans' efficiency, it's going to be beneficial for Matrec and Contrans. So that's -- (multiple speakers)

Helps you get that internalization ratio up on the waste side.

Exactly. With a great team that has done that before for progressive waste and waste management. So this is at least a few of the items that I see where we're going to be able to improve both Companies.

Okay. You mentioned the management team. Certainly Greg has done a great job, or Stan, it obviously goes without saying. How long do have them for? In either a firm or -- it said you would run it as a stand-alone operation.

What role do you see for Greg and the team that of done so well over a Contrans? What certainty or what visibility do you have into how long you can hold onto those guys?

I can't tie up Greg or anybody else, to a chair and work for the Company. The only way Greg and his team will stay with Contrans is if they are happy. And in my mind, they will be happy if they keep on doing what they've been doing all their life, is work for the Company into a great environment.

My philosophy has always been, we don't fix something that's not broken. We bought America, as an example, under the leadership of Scott Arves in the US. They do a great job, so we have no intention of doing anything there but working with them to improve. Same thing with Contrans.

This is why to me, it's very important that the message is very clear with, which I had a discussion with Greg personally, that Greg, we're not buying a Company for CAD600 million and huge ticket, huge price for me. It's the most expensive deal and the largest deal in my life. Just to see those guys fly away in six months because we're trying to change the Company. This is not the way we've built TFI.

Yes, if we buy a company that under-performs, well sure, we have to make some changes. But I don't think Contrans fits in that mold. Contrans is a great Company.

I'm buying the Company at, in my mind, at a huge price. Fair, agreed, but it's a lot of dollars, lots of investment. So I'm not going to change the recipe.

You talked in the last call about a spinoff as a publicly-listed US entity when you were looking at Transport America. And looking at that as a platform for future acquisitions, ultimately as an end game, doing a public listing spinoff.

Does this advance that timetable? Are you now have the scale to be able to move a little quicker on that? What are your thoughts on that end game scenario for your truckload division?

You'll see, Walter, with this acquisition we are running a CAD1.8 billion truckload Company with an EBITDA of CAD250 [million] pro forma Contrans. So for sure it's got the size to be a stand alone. No question about that.

I'm working with some financial advisors and we are definitely, Walter, working for the best of our shareholders. And trying to crystallize the value to our shareholders of our business unit.

That's one of the reasons why we are showing up now our waste management business. It's a diamond, which is undervalued within TFI.

So the waste is the same story. Waste is very small. By itself, probably not a stand alone, so we're going to have to do something about that.

But the truckload is really our priority. Once we close that transaction, we'll look at different possibilities.

For sure when I talk to Scott in the US at America, we're going to be meeting in August. Definitely we got lots of potential to grow, either organically over there, or to grow through some acquisitions.

But I think that a North American truckload Company with a solid, solid management team in Canada, the combination of Contrans and ours. And also a good beachhead with Scott and his team in the US, this is really a fantastic Company.

Yes, it's compelling, absolutely. Two administrative questions here before I queue up again. The breakup fee?

Yes, we have one. I don't remember what it is, but there's one. To me, it's not really important because we don't do a deal to have a breakup fee. It's there because the lawyers.

Standard, would you say? Standard?

It's standard, it's standard. But to me, it's not really important.

What's important to me is that we have something that is fair. Stan is happy with the deal. Greg is happy with the deal. And I am happy with the deal.

So that's why is going to get done, in my mind. The breakup fee is not very important to me

Understood. The terms in the debt facility, any indication as to the cost of debt on that?

It's very competitive. To answer, also another question, as soon as we'll be out with this. It's been back stopped by the two banks, RBC and National. We'll get all the news out.

The covenant will have to be modified, because with this deal we're going to be just shy of, just under 3.5. Our covenant today is you got to be less that 3.5.

We would be too close to the covenant, debt to EBITDA covenant. So this will be modified in the new deal. For sure with the cash flow that were going to be generating with this, no question that within 12 months we're back under 3. Okay?

That's your objective. Hold off on acquisitions, use free cash to bring that debt level back down below 3 times.

Yes. Unless there's an opening. There's the market understands how good this Company is and with the acquisition of Contrans.

If the price gets to the level where it's acceptable, we may do a small equity deal. But this is not in the cards today. I don't want anybody to think that were going to issue equity at CAD24. No way.

Okay. Loud and clear. Okay, that's all my questions. Thanks very much, Alain. Congratulations again

Thank you

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

Yes, good morning.

Good morning, Cameron

I just wonder if you could talk a bit about the process here with Contrans. Obviously you've had, I'm sure, talks off and on with them for a while. If you could describe how this came together, what the sale process was. Any information on that would be useful.

Well, what really happened is, I think that Contrans was using a financial advisor at one point. They went through a process and that didn't materialize. So I think that they were using a different advisor, which they probably had discussions with them to come up with a price.

This financial advisor gave me a call and says, hey, Alain, this is what Stan and the team there thinks is fair. So would you accept a deal like that?

And I think that this was based on the valuation that they did themselves. I looked at it. It's a lot of money. But it's a good Company, and it's a good team and it's a good fit for us.

It was way more than what I was, in my mind, but I said, you know what? Okay, I'll do the deal at this price.

Really, the price that we're going to be buying the Company for, really is the price that came from the vendor. I have lots of respect for the team there, lots of respect for what Mr. Dunford has accomplished over many years that he's built this Company, very, very solid, slowly, surely, conservative, high returns.

Because we've been working together. The market in Canada is very small. There's only three significant players: Murray Mullen, Stan Dunford and myself. We are always in the same kind of investors meeting, et cetera, et cetera. So I said, okay, I'll do the deal at this price.

Okay. You talked about some of the synergies in the, especially I guess, in the specialty truckload side of the business. Is there any overlap here that might cause any competition, Bureau issues? I noticed there's still lots of other competitors, but is there any concentration issues there?

No, no, none at all. You see, Contrans is really the top specialty truckload operator in Ontario, and TFI, as we speak, in Ontario. We have a van operation in Ontario, but in terms of specialty truckload, we are not in Ontario. We're very negligible.

And in the case of Quebec, I mean Contrans is present in Quebec. Small, but they are. And the combination of the two in Quebec, it's no big deal. So I don't see any issue whatsoever.

They have a small LTL division, which is very, very small. It's mostly a trans-border business between Ontario, Quebec and the New York, New Jersey area. It's so small, it's nothing.

Okay, that's good. A couple questions on the actual Q2 results. First of all, on the pricing front, you've mentioned in the MD&A here that you're seeing some pricing improvement on the truckload side. And maybe even a little bit on the LTL.

What are the trends you've seen so far in Q3? Has that continued? What's your expectation for pricing as we look through the balance of the year?

We believe that the truckload pricing environment will improve slowly, slowly in Canada. Very slowly. Not because the demand is growing like there's no tomorrow. The demand is probably growing a little bit, but it's more like the offer is less than it was.

There's less drivers, there's less guys that are financially sound to buy equipment. The market is slowly improving and the balance between the offer and the demand in the truckload is getting closer to be fair. So this is why we are seeing a little bit of improvement.

The other thing, also, is the rail. Because they have so much business, the crude by rail and their intermodal business is growing, et cetera, et cetera. So there's also some activity now that we are starting to see. A little bit more in the spring may be less now. But some customers had issues shipping their product on rail, because those rail guys are very busy and the service, it's public service, they went from tough times.

And if you look at the service of a trucking company like Contrans and ours where we are at 99% on-time, we're starting to see a little bit of switching back to the road. Because they save money using the rail, but if the service is not there, they don't save any money, they lose the business, they lose the customer. We share a little bit of that. So that's helping us a little bit.

On the LTL side, it's really the market is shrinking, because it's a fact. But at the same time, people, I think, in the LTL world, are starting to understand that it doesn't make any sense to chase volume and lose money.

So they understand that this impairment of volume in Canada started about five years ago, it's not coming back. We lost so many plants in Ontario and in Quebec, those plants are not going to reopen. So we have to adjust then.

We are adjusting ourselves. I think that some of my competition now understand that don't try to chase the other guy's volume, adjust yourself. Adjust your cost base and you'll make more money. And stop chasing the other guy's business.

So this is what we're seeing now, slowly. But it's not easy when you have an economy like we have now in Canada, where there's no growth. The consumer is highly in debt. This is why I see flat in Canada.

I see some growth in the US, probably mostly, depending on what happened on the e-commerce. If the e-commerce in the US grows, which I think it will, if the e-commerce moves a little bit more toward the last mile guy like us, that should benefit us on the growth side in the US. I think the fall, the next six months will be really when we're going to start understanding what's going to happen with that e-commerce in the US.

Okay. My last question. In your results now, the way you're segmenting, you de-emphasized the rig hauling business. There's really no commentary in the MD& A on how that business did. It looks like maybe it was improved.

But maybe you can talk about how that business profitability was in the quarter. The fact that you're de-emphasizing here, is that an indication this is a business that you're closer to exiting?

No, you see what we did, Cameron, is we shut down Alberta, which is a huge benefit for us. Alberta is very, very cyclical and so we walked away from Alberta.

Now in the US, we shut down probably 40% of our terminals, to adjust ourselves. Jay and his team over there are doing a fantastic job now. We've reduced our asset base. We sold a lot of equipment without losing any money.

We are really happy. I think that the first quarter in the US was a disaster. Weather-wise it was a complete disaster.

Q2, much improved, but we still operate the US after six months, at a loss. We believe that the Q3 and Q4 will start to see some positive results from this operation.

Now, this operation is much smaller than it was. So we're going to be running an operation that's going to be, on a yearly basis, between CAD75 million to CAD100 million. It's very small. But like I said to Jay, if we make money, if our return on assets is acceptable, we will stay in the business. But small.

Okay, that's good. That was all my questions. Thanks very much.

Okay, Cameron, have a good day.

Your next question comes the line of Jason Seidl with Cowen and Company Please go ahead.

Hi, good morning Alain, and congratulations on the Contrans deal, it looks to be a pretty good one. Real quickly in terms of the quarter, before I have some contract questions.

Could you update us on the integration that you have going on between some of the facilities with the Vitran and with Clarke? And with what sort of cost savings you're seeing now? And what we should expect going forward?

Right, right. On the Clarke and Vitran deal, Jason, so far we haven't done anything. The consolidation that we're doing so far is mostly on all the small terminals that we had in Northern BC, Northern Alberta. Now we're going to be working in Northern Quebec.

So Vitran and Clarke, we haven't touched that yet. That's why we're saying that where we're at today, we still have lots to do. So we haven't really touched the big thing yet.

So in terms of combining them in some of the same terminals and sharing, that's something down the road that we should expect maybe as a 2015 event?

For sure. We're looking at one locality right now in Canada where we're having discussions between those two Companies, where one would be the agent of the other. So this is all the things that's going on right now. But we haven't done anything really right now. Because don't forget, we bought Vitran just two months ago.

No, understood. In relations to Contrans, when you guys complete the deal, what how are you going to report some of their results? Are you going to segment them and push some into waste and some into LTL, some into truckload? How is it going to work for us in terms of the modeling?

Probably on the waste side, it's really -- they don't operate any landfill. They don't operate any collection. What they do over there, and they do it very well, is from the transfer station to the landfill site. Okay?

In my mind, that is specialty truckload. That's the way that it's been reported by Contrans. In my mind, it will stay in the specialty truckload or truckload, the way we report it.

In terms of their LTL, it's really very small. That is probably going to be reported, in my mind, into our LTL operation. The Contrans result will be mostly in the specialty or the truckload sector, and a little bit is going to go to the LTL, in my mind.

Is it so small that you might want to think about rebranding it into one of the other LTLs that you own? Or do you think it's going to be still stand-alone after the deal?

No, it's got a good name. It's a Company that Contrans bought a few years ago. They operate under a special name, which is Tripar. They do a great job; it's a good Company. It's been a stand-alone within Contrans, and in my mind, it would be a stand-alone within TFI as well.

Okay, that's fair enough. That's all the questions I have. Thanks for the time as always, Alain.

Okay, very good. Thank you, Jason

Your next question comes from the line of Turan Quettwala with Deutsche Bank. Please go ahead.

Yes, good morning, Alain.

Morning, Turan.

One question on the transaction. Then I have one on the quarter as well. On the transaction, can you give us a sense of what the soft lock-up details might be?

Oh boy, that's a technical question for me. I don't really know all the details. What I could tell you, in my mind, is that this deal has been supported by Stan and all the executives and all the Board at Contrans.

In terms of legal stuff, I don't really, I'm not a lawyer, so I can't really tell you that. But it's a deal that's been supported by everybody at Contrans and everybody on our side as well.

It's a deal, for lifetime deal for Mr. Dunford. It's very emotional for him because this is the Company that he's built for so many years. It's not been easy for him.

We respect the quality of the team, the quality of the Company. This is why, like Cameron asked me, how it was being done. It's very easy, is that they probably had a meeting with their financial advisor. They come up with a proposal. I looked at it. I said fine, I'll do the deal at this price.

Okay. And timing-wise? Is there any timeline that you have in your mind?

Yes, time-wise we are shooting for the end of Q2, latest the first week of October. Everything, based on what our lawyers and everybody is saying, we are mailing the circular, I think it's August 18.

We think that with the competition Bureau, we're filing as we speak now over there. We couldn't file before because of certain issues of confidentiality. And we're filing now, within the next few days.

So there's no issues. That's why, in our mind, it's going be either the last week of September or the first week of October.

Okay, perfect. On the quarter, it's obviously a great quarter here with margins going up in most of the segments. From a full-year perspective, can you give us a sense of where you think EBITDA is going to end up?

I think, especially now with Transport America, and then even -- I don't know if you've done the Contrans math yet, but I'm sure we can do that. With Transport America, where do you think it adds up to?

Well, what we said is that TFI, without America, we would be at CAD385 [million]. And now I think that everybody understands that we will be in the neighborhood of CAD385 [million].

If you had six months of America, America trailing 12 months they were flying at about CAD55 [million] in EBITDA. So I would probably say that the last six months of the year, they will get in about CAD30 [million]. So CAD385 [million] plus CAD30 [million], you're at, what? CAD450 [million].

And then you had the last quarter of Contrans. Now going forward in 2015, that's a complete different story. Because if we end up the year with one quarter, and so we're at, let's say, CAD440 [million]. But we have only one quarter of Contrans, we have only two quarters of America and we have only three quarters of Vitran.

That's fair. Okay, thank you. And just one more on -- so your rationalization of that, since you're doing quite well here, especially on the P&C side.

Can you talk a little bit about how things are going there? And how much do you think we could see in terms of margin there? And maybe in 2015?

Things are going very well over there. I'm very happy with the team that's there, very happy with the results over there.

We're really -- we were a little bit slow in last year, in putting in place our plans, so this is why we had to make some changes. Now, under the leadership of Brian Kohut and [Rick Ashe] and [Larry Procole] and [Ping]. I'm very happy with what's going on over there.

And I think that what we said, going back to a double-digit EBIT, it's going to be there in 2015. In my mind, no question about that.

Okay, perfect. That's helpful, thank you very much.

And also, Turan, before I forget. The improvement of our same-day business in the US, because don't forget, Velocity has been a huge drag for us for the last 12 months. And now, really right now, we are starting to see the effect of cleaning that mess of that Velocity thing there.

Okay, thank you very much, Alain.

Pleasure.

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

Hey, good morning, Alain. Congratulations for the announcement.

Yes, well, thank you, Benoit.

To come back on the debt comment. You mentioned that you will be eventually a little bit closer to three times. How many months did you say it will take time to bring that down?

After the close of Contrans, what we believe is that we're going to be around 3.5, just shy of 3.5. 3.4, 3.5, in that neighborhood, okay?

One thing also that we have to keep in mind is that we're going to be selling about CAD25 million of real estate that we own. For instance, we are selling a piece of land in Oakville for CAD7 million or CAD8 million.

We are selling a terminal and Prince George. We are selling a terminal in Prince Rupert. Those two terminals is about CAD12 million. So that is also another thing that we are doing to get rid of assets that we don't need. Okay?

So that being said, at the close we're going to be around 3.5, 3.45 or 3.4. But we believe that with the high cash flow generation of TFI, we're going to be done within a year of the close. We're going to be down under 3.

So this is why we've got the financing in place, we're going to be down under 3. If the price is right, like I said earlier I think on the call, if the price is right, if the price is where we think it's fair, we may do a small equity deal. I say, may, okay? At the right price, but not at CAD24 CAD25. This is out of the question.

So this is why we put the financing in place. We have adjusted covenant that will be known very soon. Because I can not have a 3.5 and be a at 3.45. So we have adjusted that. We have everything on file, everything to go. And that's where we're going.

And what you feel, Alain, is the proper price, if I may?

Proper price? It's very difficult to say. What I've said publicly is that under CAD23, we are buying our stock. I think that at CAD27, CAD28 we're starting to get closer to where we should be.

This is why now people will see the value of our waste management business, because this was an unknown before. Now it's known, How good we could do with that.

The Veolia acquisition, this is a CAD40 million business that -- and when we bought it, those guys did make any money with it. That's going to change. That's going to change fast, so that's going to help us also.

It's always difficult to predict market. We don't control the market. But one thing we control is our business and our debt level. So if the market likes what we are doing and the price is reasonable, well, we may do something like that.

In terms of free cash, Alain, what can we expect for this year and probably 2015 once everything is incorporated?

Once everything is incorporated, we put on our website a little flash on that transaction, and it's there. We believe in 2015 we're going to generate about CAD275 [million] to CAD285 [million] of free cash with the Company, Contrans, in our numbers.

Okay, and --

Because, don't forget, we have --

About CAD20 million, CAD25 million of typical asset sales you perform every year?

Yes, that is not in the numbers, because this is only operational numbers.

Oh okay, that's great. And do think that there's any asset sale that could come from Contrans eventually? A little bit similar to the previous acquisitions you've done, Alain?

No, no, I don't think so I don't think so because Contrans is a lean machine. They don't like fat.

Okay, perfect. And to come back on waste management. Obviously you just acquired Veolia. That seems a very nice tuck-in. Could you mention where you are now on the EBITDA basis per year? And obviously you're fortunate to improve margins.

If you look at our MD&A, you see what we've done last year. So you take the last year number and you add to that, in my mind, once Veolia is really operating out of TFI, you have about CAD15 million. With the growth we had we had with Lafleche, with the growth we had with the new Champlain airspace that we bought.

With the airspace that we bought at Lachute, with all the agreements we have all over the place. With the new volume that we got from Longueuil, all of that. You take last year, 2013 and add a good CAD15 million and that will give you some insight of where we should be.

Okay. Any other opportunities to consolidate the waste management, Alain?

Yes, there are some small things that we've always looked at, but nothing of importance between now and probably the summer of 2015.

Okay, perfect. Okay, and any comments about the uncontrolled bidding war? I understand there's a soft agreement here. What kind of preparation you can do in that case? Or what's -- or any thoughts on that front, Alain?

Well, you know, this is not Vitran. Vitran was a special situation where it was really a different story.

In this case, Contrans is, we have an agreement between us and Mr. Dunford that built the Company, and his President, Mr. Rumble, that assisted him in building that Company. And it's based on the recommendation of their financial advisor.

So to me this is the deal, and I've accepted it. If somebody thinks that is worth more money, I can't stop that. If the shareholders say no, I can't stop that.

If for any reason this deal wouldn't go through as it is, we've got so many opportunities. I've got my guy in Minneapolis that says, Alain, what you doing? You're spending a lot of money that we could invest in the US. And I said Scott, no, wait a second. This is really the creation of a dominant player in Canada. We'll work on the US after. Okay?

Okay, perfect. On the P&C side, 8.4% of the EBIT margin, is it fair that we should assume a gradual improvement toward the 10% level for 2015? And is it more a number that you and tend to hit toward the end of the year? Or it's a full-year number, Alain?

Well, P&C double-digit EBIT, in my mind, it's a 2015 deal, because we had a rough start in Q1. We had a much better Q2, where we ended up at 9.7%. We'll have a good Q3 and Q4, but I don't think that we'll hit the 10%. Maybe, but I don't think it we'll hit the 10% this year. But in my mind, we'll definitely get the 10% next year.

Yes, for the full year in 2015. Okay, got it. And last question, when your CFO, Alain Raquepas, is starting?

He already started.

Okay, good, good.

He's working now. Everybody that joins a Company of our size, it's like he's at school right now.

(laughter) Okay, so congratulations again, Alain, and thanks for the time.

Thank you, Benoit.

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

Hi, thanks for taking my questions, Alain. And congratulations on a good quarter and the Contrans announcement

Thank you, Kevin.

Maybe I'll start with e-commerce, actually. I know you have a number of pilot programs with Google and you started one with Target not too long ago. Can I get an update in terms on how that's going? And potentially other pilot programs you're looking at to grow that same-day service in the US?

Yes, well, you see, I think, Kevin, what's going on in the US right now is everybody is trying to find an alternative that is more efficient and is more cost-efficient than using a next-day guy, which is expensive. So that's why a lot of people are talking to us, and other players, in the last mile industry.

What I can tell you is that what we have going on right now works very well. I think that we're on the right track. I think that the solution of one of our customers is really second to none. They're signing new customers on their own platform. I think it's the future, for some.

Don't forget, the last mile operates only in high-density areas. Boise, Idaho, it's very difficult. It's too small of a town. But in my mind, LA, San Francisco, Chicago, New York, Houston, Dallas, Miami, and all those big US cities, Boston, it makes a lot of sense.

We are still in a kind of a transition. We'll see what happens in Q3 and Q4 of this coming year. Are we going to see the same pressure that UPS, not to say the name, or FedEx, have? We don't know; we'll see what happens.

But what I could tell you is that the guys that we're working on, and we're working with other big names, too. I think that we're trying to fine tune the solution. There is room for the same-day last mile in the e-commerce. No question about that. How big is that going to be? Too early to say.

Are you seeing -- I heard FedEx is trying to expand their same-day service. I don't think UPS has a service now that's comparable. But are you seeing more competition from some of the larger couriers?

No.

No, you're not, okay. I'll turn on to the waste, your comment earlier on the waste assets. It sounds like you'll look to grow that to eventually crystallize that value sometime down the line.

How much bigger would you like waste to be before you would engage in some sort of transaction? Would you like to expand the scope of the operations in terms of geographic? Or the type of waste you handle today?

I think that the waste business right now is under-valued within TFI. We're going to have to do something about that. Is not fair for our shareholders to have a diamond that valued so badly.

Now, my project, my top priority, is really to close this deal with Contrans, which is a great Company and close our 2014. Coming into 2015, this is when I'm going to be spending more time in trying to do what needs to be done with this division.

Is too early to tell. I'm looking at all kinds of possibilities. We're working with some financial advisors. It could be selling the unit, although I'm more a buyer than a seller. I don't like to sell. Or we could join force with somebody, but definitely within TFI.

If you look at a 26% EBIT Company. I mean, this is so poorly valued. It's small, I understand it small. It's only CAD200 million revenue, but it's a great base. It's great beachhead for a Company.

It's still not to its potential, because our Lachute landfill, which has a permit of 750,000 tons, operates today at 500,000 tons. So we still have lots of good things to do.

We have a compost operation in Lafleche, but we'll have more than one. We'll have compost operations somewhere in Quebec within the next, probably, year. Because we have a great recipe.

We are very successful with our project in Moose Creek. So, lots to do. But the problem is that those guys ask me for capital all the time. We've built three transfer stations in Ontario over the last two years. My cost of capital, at six point something or seven point times EBITDA versus somebody else in the waste business at 20% better valuation, it creates a problem.

Fair enough. A couple questions on the transaction, here. From an industry perspective, now that you're a significantly larger player in Canada, does that put you in a position to drive the yields higher? I know the commentary in the TL section in your MD&A suggested yields are starting to edge higher. Are you able to push the envelope further because of your size?

I don't think so, Kevin. We are going to be more disciplined, that's for sure. No question about that.

Working in concert with our friends that Contrans, more disciplined. But push the envelope, we're not a monopoly. We are making money because we are efficient, us and Contrans.

Now, the market will decide if rates are acceptable or not. It's not us. We can't control the market. The market will decide, and it's offer and demand.

But one thing we understand is that return on assets has to be fair because then we don't invest. A lot of trucking companies are starting to understand this principle.

This is why I think some of the smarter truckers are starting to say, you know what? Why would I spend or invest CAD1 million to have a 2% return? Doesn't make any sense.

Fair enough. Great point there. Two more questions for me. Firstly, given the two big acquisitions you made on the TL side, how do you see some of your other, say, cash flow initiatives, such as your NCIB, growing the dividend, other acquisitions over the next 6 to 12 months? Are those on pause now as you integrate and digest the Transport America?

The NCIB is definitely on pause for now. Because as I explained, I'm going to be at 3.45 for two quarters, or about. So this is why this is going to be put on hold.

Now our dividend, we have a policy. In my plan for 2015, there is a dividend increase in the plan. For sure that will be announced probably with our Q3 results, if we are on plan. If we are on plan, yes.

Now that being said, NCIB we're not going to do it, but we're not going to issue equity if the price is not reasonable. And that's why we put in place a financing that is acceptable. We're going to live through it, and in a year we'll be in a position to say, okay, fine, now let's do -- what's next?

Those are great points and thank you for the color. Last question. Is there an opportunity to roll some of your other TL assets into Contrans? You highlighted the great performers. Are there underperforming assets with your own TL operation that could potentially be better managed under Contrans' oversight?

Could be, could be. That's a discussion that I'm going to have with Greg and the guys over there. But one thing in my mind that's clear, is the Matrec opportunity for Contrans. Those guys have done a great job for waste management and progressive waste and hauling waste from transfer station to landfill.

I think they could do a better job than what we do internally at Matrec. It's not the focus of Matrec. The Matrec focus is to operate landfills, to operate the collection. That's their focus.

Transfer station to landfill, that's transport to me. And this is why, in my mind, within our world, it's a Contrans operation.

That's going to be a nice improvement for Contrans. It's also going to be a nice improvement for Matrec because they won't have to worry about that.

Fair enough. Again, always great color, Alain, and congratulations, again. Thank you

Thank you, Kevin

(Operator Instructions)

Your next question comes the line of David Tyerman with Canaccord Genuity Please go ahead.

Yes, good morning, Alain.

Hey, good morning, David

How are you?

I'm very good, how about you?

I'm doing well. Quick question. Just wanted to confirm, the CAD10 million synergies, is that all-in? Or is that over and above the public company costs?

This is over and above the public company costs.

So total ballpark, CAD15 million?

Total CAD15 million, yes. Which I think is conservative. Because if you look at a great Company like Heartland buying Gordon, they talked about CAD30 million. Us, we shoot for CAD15 million.

We're going to be working with Greg, because I think in our people, we got lots to do between ourselves. And I think that CAD10 million is very conservative, but we like to be conservative. Under promise, over deliver.

All right, that's a good strategy. Second question. On the double-digit EBIT for P&C, I want to confirm, that's the target for all of 2015? Or to be reached at some point during the year?

No, all the year 2015. I believe, because we are at 9.7% in Q2, but we were way behind that in Q1, because of all kinds of reasons. But you'll see us trending higher in Q3 and in Q4. So this is why, in my mind, we have to be at least 10% for the year, complete year, 2015.

Okay, just want to confirm the number. Your EBIT margin in Q2 for package and courier was 8.4%.

Right, yes. We are shooting for the year, two thousand and, not fourteen, but 2015, double digit.

Okay, so you're going to see very large improvements. What is the big driver that you see to take you from 8.4% currently to 10% for a whole year?

The big driver, just look at our Q2 of this year versus Q2 of last year. We improved by a little bit more than 1 point. And this comes from -- don't forget that we also did that at the same time we had lower revenue.

But we dished out CAD20 million of Velocity's (expletive) business. We still have some of that in the US. And we're replacing that (expletive) business by good business with other customers.

So that's why I see our revenue being close to flat. But because we're in the US, we are getting rid of that (expletive) accounts that we have from Velocity. The fact also that the combination of our operation in the next-day service in Canada will definitely provide way better results, I think that the goal of 10%, which has always been our goal, because don't forget, before the acquisition of Dynamex and Loomis, we were running at 12% to 14%.

Yes.

So it is doable. We're at 8.4%. Probably we're going to get closer to 9% by the end of this year. And the Q1 disaster we had, I think it's not going to repeat itself.

Because there we had the Velocity, we had a lot also of buyback of rent. When you buy back the rent you also have to fix the location.

So we have lots of maintenance issues in the US because of that. We just shut down one of our -- or transferred one of our Atlanta operations to another carrier for a specific customer.

And in that situation, for this customer and this operation in Atlanta, I was losing CAD75,000 a month, since I bought Velocity. I've got the same customer in Houston, and I'm getting out of there by October 1. But it took us close to year to really understand the mess that was in those kinds of operations there.

Okay, that's helpful

That's why a lot of that, plus some also in Canada, the same-day business in Canada, our guy that runs it through there, which is a great operator, he sees a lot of potential. And we agree with him, so our same-day last-mile business in Canada will grow. And it will also grow in terms of profitability.

The integration of TBS will be completed within two months. So this is why it's going to help in terms of profitability. So I think the goal of double-digit for next year is attainable.

Okay and so on the same-day, the drivers here are more of these terminal consolidations and IT and that sort of thing?

Exactly. Plus some new business in the US that relates to e-commerce. That's got significant profitability compared to the bad business that we are getting rid of right now.

Sure. Okay, that's very helpful. And then in the other category, what is in that? There's rig hauling, obviously. Is there anything else of material size in there?

Yes, everything of our logistics department is in there.

Okay.

So this is why our logistics operation in Canada, you can think of gross margin of maybe 15% to 16%, and an overhead of 8 points. So 16 minus 8, your EBIT margin should be in the neighborhood of 5 to 9 points. So if you do that, then you see that our rig moving business, for the first six months of the year, are still operating at a small loss.

But we believe that that small operation in the US is turning around. I got full confidence in Jay and his team. We have a much better operation now in Williston, North Dakota, which used to be a gold mine for us. It turned into a sand mine for the last two years.

So we have a new team there. We believe that this will turn around. So a lot of good stuff I think will happen between now and the end of the year.

Got you. So that business, it sounds like it's running around CAD150 million in the first half. It sounds like about half of it is rig moving and half is the logistics. Is that the way to think of it?

No, rig moving is about CAD100 million and the rest is logistics.

Okay, got you. And then the last question I had is on the truckload in general. And maybe more so the US than Canada.

The rails, which I cover and many of my counterparts also cover. Haven't been making a big deal about converting truckload traffic. A lot of intermodal, which I don't think you're big player in, but they look like they're targeting everything.

I guess in the US this a bigger deal since you got issues with changes in rules for hours and what have you, congestion and so on. I was wondering what your thoughts are in terms of the risk here to that business, especially since you have a lot more exposure to the US from the rails. They sound like they're really going after trucking business now in a significant way.

Well, listen, they've been there for a long time. JB Hunt is doing a great job with the contract that they have with the railway over there, and no question about that.

Now, I think the most important thing that is not known, in the trucking world the service performers is very close to 100%. So what you say to a customer, I'll be there in 20 hours. We are there in 20 hours at 99% of the time. We're on time.

Now, that promise from a rail company, if you look at the statistics coming out of the rail, if you find me a rail company that what they promise they deliver at 75% of the time, I'll be surprised. So it's one thing to run after the volume, but then you have to provide the service.

To say that we are really competing with the rail in the US, based on what I can see so far with America, not really. As a matter of fact, our intermodal division at America, the revenue was down in Q2 because of poor service.

It's a very difficult question. What we see us in Canada, because we have more experience in Canada, if you look at Contrans and if you look at what we do, us, we don't really compete with the rail. Because the specialty truckload is more like regional Ontario-Quebec, where you don't really compete with the rail.

And then in the van division, we are running into the US with a average length of haul that is about 600 miles. So if you're shipping Procter & Gamble products, Tide for instance, from Toronto to Vancouver, you would be stupid not to put that on the rail. Doesn't make any sense.

But if you're trying to ship steel from, I don't know, Hamilton to Vancouver, you have to put that on the rail. But if you're shipping from Hamilton to, I don't know, Toronto, it's got to be truck.

So the rails are doing very well. But I'd rather be a shareholder of a rail company than a customer.

Okay, fair enough. I appreciate the good comments.

It is what it is. The service of all the rail companies are public. And I was saying to my guys, the problem we have within the trucking world is that we don't publicize how good service we provide. And I'm talking about us, or Contrans.

We all provide very good service. But it's not known. So we'll try to make it known. I got issues with my intermodal customers during Q1, where we had to ship their freight over the road. Because there was no way we could use the rail.

Right. Okay, that's helpful. I appreciate the good detail on the answers.

It's always a pleasure, David

Your next question comes from line of Maxim Sytchev from Dundee Capital Markets. Please go ahead.

Hey, good morning, Alain.

Hey, good morning, Maxim.

A bit of technical question in relation to the acquisition. When we look at the approvals for class A and class B shares, those things have to be done separately, right? So you have to have -- the B is obviously being supported by the insiders and management team. But class A shares, this is this is on a stand-alone basis, is that correct?

You know what, Maxim, you caught me now. That I don't know.

Okay, maybe if you don't mind, just --

The only thing I know is that we need 66% of the vote, and we have the support of the Board and the management. What I am being told is that with the multiple voting shares, maybe you're right that every class has to vote by itself. This I'm not a specialist at that, Maxim.

Do you mind asking somebody to call me back on that?

Absolutely, yes.

Okay, excellent. Then, quick question, also in relation to Contrans' exposure to the US, I know that they never disclosed that information. But did you have an idea in terms of what percentage of the business comes from the states for them?

For them, I think it's pretty small. I know that their LTL really runs from Ontario-Quebec to the US, which is probably very small in terms of total revenue for Contrans. But running from truckload specialty truckload, I know that they do some of that. But to me it's not very important.

Okay, so is it fair to say maybe less than 10%?

I think so.

Okay, less than 10%, okay. Then in general, on the macro environment. It looks like we have been lagging the US in terms of the fundamentals in transportation.

What's your sense when you think we could converge in terms of the trends? What is necessary to happen in terms of the leading indicators that you would track right now?

Well, I think that, Maxim, the economy in the US is improving. Although it's improving slowly, it's improving. What we see in Canada is that the economy is not improving. It's like we have two different worlds, where Alberta is improving and getting better, et cetera, et cetera. But BC, Ontario and Quebec are flat.

So until such time that we have the consumer that is not oppressed by increasing tax, like they do in Ontario right now or in Quebec. He's got more available or income to spend. We're going to see the Canadian economy flat.

When is this going to happen? Is it in a year? Is it two years? I don't know. So that's why our model, all the forecast that we do, us, in Canada it's all about flat.

But we work on the cost. We adjust ourselves. The goal that we have is to improve at least 1 point, 1 percentage EBIT year over year just on the cost.

We know that the market will start to improve at one time in Canada. Is it in 12 months? Is it in 18 months? Hard to say.

The dollar at CAD0.93, that may help. CAD0.93, CAD0.94, that may help trying to send more of our Canadian product to the US, because we have a CAD0.93 dollar now.

So that may boost a little bit the export and that will help us in the transportation world. But so far it's very difficult -- normally the Canadian economy is piggy-backed on the US. So if the US improves, the Canadian should improve, but we haven't seen that yet.

Okay, that's very helpful. And one last question in relation to rig moving. Not to belabor the point, but after the goodwill write-down, right now it's a stand-alone clean entity. You've reduced the capacity there.

Again, strategically speaking, is this the business that you want and you have to be in? What is the synergy right now between that stand-alone business vis-a-vis everything else that you're doing?

No, there's no synergies. Right now, like I said earlier, Max, is if the return on asset makes sense, we'll see what happens. If the return on asset doesn't make any sense, then we'll have to do what we did in Canada.

And the guys, they know about it. And they are working tirelessly, like there's no tomorrow, to turn that thing around. I think that they will be doing it.

Now, like you said, it's very small for us. It's CAD75 million. It doesn't fit with anything. We will see down the road what happens there, but it's not my priority.

My priority with Jay is to make sure that we stop the bleeding, which we did. Then the next step is make sure that we have a nice return on asset, which the guys are working on.

My real priority is to get this Contrans deal done, work with the management team there to get the synergies, and also look at different alternatives for growth in our truckload business down the road. And then after, like I said, summer o 2015, no later than that, I got to do something with the waste, because it's a diamond that's undervalued. It's like an unpolished diamond.

Well, anyway, the trading multiples reflect that, right? The waste guys are trading at materially high multiples. Just, not all the time.

And then, on the rig moving, is there any additional capacity that you have to remove from that business? Or you feel that right now at least in terms of the asset base, it's appropriate?

I think we're very close, or not at the level that we should be. Based on -- we still have some assets to dispose of, but nothing like the CAD15 million to CAD20 million.

Right, okay

According to the operation that I see now, we are getting closer to the right level of assets invested for that type of business.

Okay, excellent, thanks a lot.

Pleasure, Max.

Your next question comes the line of David Tyerman with Canaccord Genuity. Please go ahead.

Hi, Alain. I just wanted to clarify something. When we were talking about the other segment, so it looks like you're running at a CAD300 million annual run rate. So the rig moving is CAD75 million to CAD100 million and the rest is logistics at the right 9% EBIT margin?

Yes.

Okay, thank you. That's makes sense, thank you.

Okay, very good.

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

Well, thank you for joining us today. I look forward to speaking with you again following our third-quarter. So have a great day. Thanks, all, for your interest in our Company. Thank you.

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