TFI International Inc. (TFII) Q3 2013 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen, and welcome to Vitran Corporation Inc. Third Quarter 2013 Results Conference Call. At this time all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (Operator Instructions) This call is being recorded on Friday, November 1, 2013. I would now like to turn the conference over to your host, William Deluce, Interim President and CEO, and Fayaz Suleman, CFO. Please go ahead.

Thank you and good morning everybody. Welcome to Vitran's third quarter 2013 con call. I am joined today by Fayaz Suleman, Vitran’s CFO and Tony Trichilo, President of our Canadian LTL. I would expect by now that you have had an opportunity to read the press release from earlier this morning. Before I provide some further commentary, Fayaz will read the safe harbor clause and give you a brief financial overview.

Thanks, Bill. This call contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian Securities Laws. Forward-looking statements may be generally identifiable by use of the words; believe, anticipate, intend, estimate, expect, project, may, plans, continue, will, focus, should, endeavor or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on current expectations and are naturally subject to uncertainty and changes in circumstances that may cause actual results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause Vitran's actual results, performance or achievements to differ materially from those projected in the forward-looking statements. Factors that may cause such differences include, but are not limited to, technological change, increases in fuel costs, regulatory change, the general health of the economy, seasonal fluctuations, unanticipated changes in railroad capacities, exposure to credit risks, changes in labor relations, geographic expansion, capital requirements, availability of financing, claims and insurance costs, environmental hazards and competitive factors. More detailed information about these and other factors are included in the annual report on Form 10-K under Item 1A – Risk Factors. Many of these factors are beyond the company's control. Therefore, future events may vary substantially from what the company currently foresees. You should not place undue reliance on such forward-looking statements. Vitran Corporation, Inc. does not assume the obligation to revise or update these forward-looking statements after the date of this call, or to revise them to reflect the occurrence of future, unanticipated events. As a reminder, with the sale of our U.S. LTL business and earlier in the year, our SCO business, Vitran’s results from continuing operations now only include our Canadian LTL business and corporate office expenses. For the third quarter of 2013, Vitran’s revenue increased 3.9% adjusting for the impact of foreign exchange. In Canadian dollars, revenue increased to $51.3 million compared to $49.3 million in the third quarter of 2012. This revenue increase was driven by a 2.2% increase in shipments per day while the increase in volume is slightly below the 5.5% increase per day we had experienced through the first nine months of 2013, we were extremely pleased with the volume increases given the tepid nature of the Canadian market and the ancillary factors that our Canadian operations had to deal with this quarter, most notably the noise surrounding the sale of our U.S. operations. For the nine months period ended September 30, 2013, revenue increased 4.2%, again adjusting for the impact of foreign exchange. In Canadian dollars, revenue increased to $149.5 million compared to $143.6 million for the first nine months of 2012. The Canadian LTL business had another solid quarter operationally, posting a 93.1% OR compared to a 93.4% OR in the third quarter of 2012. Along with revenue growth, the OR improvement was driven by several organic efficiency initiatives, implemented this past summer, most notably, in [lane] balance and load factor, which has led to an overall decrease in our per shipment cost. While fairly young in its implementation, we expect to see more benefits from these initiatives down the road. The Canadian LTL division generated $3.4 million in income from operations in the third quarter of 2013 compared to $3.3 million in the third quarter of 2012. Adjusting for foreign exchange, in Canadian dollars, income from continuing operations increased 9.5% year-over-year. For the first nine months of 2013, the Canadian LTL income from operations was $8.3 million and the operating ratio was 94.3% compared to $6.8 million and 95.2% in the comparable prior year period. Again, adjusting for foreign exchange in Canadian dollars, Canadian LTL income from operation increased 24.1% year-over-year. Corporate and other expenses were $1.2 million in the third quarter of 2013 compared to $1.3 million in the third quarter of 2012. For the nine months ended September 30 2013, corporate and other expenses were $5.8 million compared to $4 million in the comparable period of 2012. Should note included in the 2013 figures is $1.7 million of severance expense related to the exit of Vitran’s previous President and CEO. Given our exit from the U.S. marketplace, we are currently evaluating our corporate expenses to better match them with the needs of our continued operations. As Bill will discuss here in a little bit in more detail, this evaluation is in conjunction with our evaluation of all strategic alternatives for the business and could potentially result in material savings. We plan to provide updates on our progress in both these areas at the appropriate time. Income tax expense from continuing operations for the third quarter of 2013 was $0.1 million compared to $0.5 million a year ago. At September 30, the company continued to record a valuation allowance for all U.S. deferred tax assets. Going forward you can expect an effective tax rate in the 27% to 29% range. Vitran posted net income from continuing operations of $1.4 million or $0.09 per share compared to net income from continuing operations of $0.04 per share in the 2012 third quarter. For the nine months ended September 30 2013, adjusted net income from continuing operations increased to $1.4 million or 0.09 per share compared to a loss of $47,000 in the prior year period. The adjusted net income from continuing operations is normalized for the aforementioned $1.7 million of severance expense and $0.4 million of deferred financing costs written off [ph] as part of the company’s amended credit agreement related to the sale of the supply chain business back in March. As previously announced, on October 7, the company completed the sale of the U.S. LTL business. The purchase price was $2 million cash plus $32.8 million – I am sorry, plus the assumption of $32.8 million of real estate debt and capital leases. The U.S. LTL business has been recorded as a discontinued operation. The company also recorded a $49.7 million non-cash expense to write-down the net assets of the U.S. LTL business to fair value, which is equal to the purchase price less cost to sell. This amounts to a nil or zero fair value for the U.S. LTL business. This is a requirement under U.S. GAAP although the sale took place post-quarter. This charge, along with the operating results of the U.S. LTL business, is recorded in discontinued operations. Cash flow from continuing operations for the third quarter of 2013 was $2.3 million compared to $1.5 million in 2012. For the 2013 nine months period, cash flow from continuing operations was $1 million compared to $0.6 million for the nine-month period in 2012. Our average days sales outstanding was 35.8 days at September 30, 2013 compared to 35 days at September 30 2012. Capital expenditures in the quarter and nine months period was $0.1 million and $0.7 million respectively. The majority of which was for real estate improvement. We anticipate that cash capital expenditures for the remainder of 2013 will be fairly minimal. The company has purchased 75 [ph] new trailers, 82 new containers and 30 new chassis this year with expected delivery in the fourth quarter. The total cost of the trailing fleet was $5.1 million financed through capital leases. Vitran concluded the third quarter with interest bearing debt net of cash of $23.2 million, consisting of $48 million of real estate term debt and $1.1 million of capital leases. At the end of October, after the completion of the U.S. LTL transaction, the company’s net debt is approximately $31 million. Bill?

Thanks, Fayaz. The third quarter was a very important time in Vitran’s history and what we view as the pivotal period for all of our stakeholders. The most notable event was the sale of our U.S. LTL operation to trucking industry veteran Matt Moroun, which closed on October 7. This divestiture of our U.S. LTL business was an important event for several reasons. Firstly, it materially improves the financial health of Vitran. As Fayaz has mentioned earlier, this was the first quarter since the third quarter of 2010 that Vitran posted positive net income from continuing operations. And while we did not provide forward-looking guidance we do feel comfortable saying that Vitran’s Canadian LTL business has generated positive operating income in every year since the late 1990s. Additionally, the asset-light nature of Vitran’s Canadian business has historically led to capital returns, well in excess of LTL industry norms and with relatively small CapEx needs. When factoring in the strength of our balance sheet, we feel very comfortable where we are now from a financial perspective. Second, the U.S. LTL divestiture allows us to focus a 100% of our resources on our Canadian LTL operation -- something we are very excited about. Over the last 23 years, Tony and his team have built what we believe as the premier asset light provider of LTL services in Canada. With the U.S. sale now complete, we can redirect our efforts, both financial and managerial, to further strengthening our market position and value proposition to our customers. Thirdly, the sale of the U.S. business puts us in a much better position to evaluate strategic alternatives to enhance shareholder value. We realize that the sale of the U.S. changes the landscape of potential opportunities for the company. The board remains fully committed to maximizing shareholder value and is working diligently with financial advisors to evaluate all opportunities, including a potential sale of the company. We plan to update the investment community on our strategic alternative process when we have something definitive to announce. In closing, the last several months have been a crucial period for Vitran. Through the strong efforts of our employees who showed teamwork, perseverance and loyalty, we have built a premier LTL business in Canada. As I mentioned, the board will review all strategic alternatives for the business, with not only the view of enhancing shareholder value, which is paramount but respecting all our stakeholders, including customers and employees. With that, I will turn the call back to the operator and we’d be pleased to respond to any of your questions. Thank you.

(Operator Instructions) Your first question comes from David Ross, Stifel Inc. David, please go ahead. David Ross – Stifel Inc.: Can you just talk about the big drop in average weight per shipment that we are seeing? Your shipment count was up, which is great, but the tonnage was down. What’s going on there?

David, this is Tony. I will answer that question. Our Canadian business is impacted greatly – some of the metrics were impacted greatly by our freight mix, and the freight mix can vary on our intermodal side of the business. And the numbers that you see changed specifically because of some change in our mix on our long haul, we move a combination of LTL and some truckloads for balance purposes. We do a lot of truckloads and distribution on the intermodal side. So if there is a change in account base or mix for whatever reason, that will impact the numbers greater than in our regional side of the business. David Ross – Stifel Inc.: Is that a trend you have been seeing all year or did that just pop up in the third quarter?

No, that can change quarter to quarter, depends on customer fluctuations. It can change with an account that may have a promotional run. One of our large retail clients may be running certain product in a quarter. They can change from season to season and from quarter to quarter. David Ross – Stifel Inc.: Okay, and then you talked about the growth rates slowing a little bit in the third quarter, and that’s understandable with all the other issues going on from the corporate side of things. Going forward, are you expecting kind of a low single digit or mid-single digit volume growth and would you look at that by shipment or tonnage?

Well, I guess the best way to answer that is that we are always looking for volume growth. And with the events that have occurred in our company during the past quarter, I can tell you that we have been playing a lot of defense on all fronts and it’s a lot harder to play defense than offense. So I guess the best way to answer your question is that I guess our ability to get more aggressive on increased market share and growth will come as things stabilize and we can go about doing our business and not having to play so much defense. David Ross – Stifel Inc.: And Fayaz, was your comment about the 5.5% first half growth related to shipment count?

Shipments per day. Shipments per day for the first nine months was 5.5% per day. David Ross – Stifel Inc.: And then it slowed to 3.8% in the third quarter, or was that just kind of the overall quarter shipment –

That was overall; it was 2.2% per day in the third quarter. David Ross – Stifel Inc.: Okay. In the first quarter, I guess the first half of the year, when you look maybe 5.5%, that seems to be outpacing economic growth. Can you talk about any initiatives you have had in place to take market share during that time and then also, if you could comment on the current pricing environment in Canada?

David, this is Tony again. I guess we could be here a long time if we got into a lot of details. But let me say that when coming out of the economic slump there in ’08 and ’09, we kind of realized that unless we raised the bar in a number of areas, that we weren’t going to get back to the pre-slump times. I think that our Canadian business, we probably felt not as far as some of our other domestic competitors because of the way that we handled it. But at the same time we climbed out of this faster but we still, I don't think, would have been able to get to where we are today, if we didn’t make some changes. And I am talking about changes on approaching a number of different areas. One of them was our sales effort. We needed to get a little more hungry, get out of that maintenance mode that we got into during those bad economic times, and just become more aggressive and attack the market and get our sales guys to help us increase market share. So this started about two years ago. So we turned a lot of our sales force over in the past 24 months and went into the year – I guess it started mid last year that we started to see some sales momentum, despite a sluggish market economy. And that continued through the first couple of quarters of this year and into the third quarter but like I said, we have been playing a lot of defense in the third quarter. David Ross – Stifel Inc.: And then lastly, just a comment on the pricing environment currently?

It sucks. It’s been very challenging to get any type of a cost recovery from the market. And it’s something that – David Ross – Stifel Inc.: You’re getting some increases but maybe not enough to offset cost increases?

Correct.

Thank you. Your next question comes from Brad Delco, Stephens Company. Brad Delco – Stephens Inc.: So I wanted to know if you could expand on the corporate overhead expense. It looks like it’s running roughly $5 million a year. Granted there has been a lot of changes with the divestiture of both the logistics assets and U.S. LTL, where do you think is the right number – or where do you think that number should go to, should Vitran be a standalone entity with just the Canadian operations?

Yes, so Brad for sure, clearly some of the costs will come down naturally because without U.S. business, there is a lot of the travel and things of that nature will come down naturally over time. I would say there is probably somewhere in the range of $2 million to $2.5 million of savings there. But that will all come out of this on our strategic review here and what comes out of that, Brad. Brad Delco – Stephens Inc.: That’s people, though, right?

What do you mean it’s people? Brad Delco – Stephens Inc.: To support I guess the smaller enterprise.

That’s right. Just people support smaller – a smaller enterprise and it will depend on lot of factors if you remain a public company – is there someone who purchased the business who wouldn’t necessarily need all the corporate costs. So it could go down to $2 million, $2.5 million, it could go to zero. Brad Delco – Stephens Inc.: And then question is probably for Tony, and maybe Bill, I guess in light of kind of the news that came out with an acquisition in the Canadian LTL landscape, where do you think kind of the market share is for you in the Canadian market versus your competitors?

I guess, when you say market share, you’ve got different players that have a different collection of services. So you probably have to be a little bit more specific but Tony, I guess so far as it relates to our business, globally our market share would be in our space –

Yes, I would say Brad, one of the difficulties in the Canadian market is that there is still a lot of large privately held companies that we don’t have access to those numbers. But I would say that our market share is significant and we would be in the top three for sure. Brad Delco – Stephens Inc.: And then Bill, you kind of alluded to the asset-light nature of the Canadian LTL business and it generates high returns. Is there any way you can kind of give us more color on kind of what you view the return on invested capital is for that business, so we can kind of compare it to some of the other either U.S. LTL or some U.S. non-asset based LTL businesses?

I am just going to let Fayaz, who has a couple of notes in front of him here.

Yes, I mean Brad, our return on capital employed is – for the first nine months of this year pre-tax would be in excess of 14%. And we have seen that trend over the last few years in that kind of 14% to up to even 19% range. Brad Delco – Stephens Inc.: And then finally, Fayaz, is there any way you can kind of talk to the seasonality or maybe this is for Tony – the seasonality in the Canadian LTL business? I mean, what kind of fluctuations do you see in OR through the various quarters based on that seasonality?

Well, there is a lot of fluctuation, Brad. We kind of, in general, if you look at two kind of spikes throughout the year. One would be leading up to the end of the first quarter. So volumes would start to climb beginning of March and then kind of crests a couple of months after that and then start to dip a little bit going into the summer and then start to ramp up again, end of summer for the fall transition, and then into the holiday season. So the heaviest months would be September, October – September, October would be very heavy months. March, April, May would be heavy months. January, February would be our lowest volume months as well as December. And the ORs – the OR would kind of follow those fluctuations.

Brad, it’s a trend typical of what you would see over a U.S. carrier, doesn’t change for Canada. Brad Delco – Stephens Inc.: So I guess you tend to see OR the strongest in the second quarter, maybe slightly worse in the third and then a little bit more degradation in the fourth?

No, I would say probably the strongest OR would be from August to October, would straddle three and four.

(Operator Instructions) Your next question comes from Thom Albrecht, BB&T Company. Thom Albrecht – BB&T Capital Markets: Just a couple of different questions. I don’t know if you know yet, but do you – can you describe whether or not you intend to remain listed in the United States markets?

Thom, it’s something that we are looking at. But we still have a number of U.S. based shareholders and we want them to have the opportunity to buy in and sell on a U.S. market. So for now it’s something that we are looking at and evaluating, no decision has been made as of yet. Thom Albrecht – BB&T Capital Markets: And then in your opening comments, you alluded to some of the disruptions going on in the United States. I was wondering if that actually had an impact upon your volumes in Canada or whether it was just something you had to answer questions about, in other words, did you actually lose business, did it hinder your ability to get pricing, or was it just more something you had to have a conservation about and the customers went on from there?

Thom, this is Tony. I guess it didn’t what it did, again going back to my comments about playing defense, it kind of prevented us from growing certain opportunities that were there. For example, our trans-border revenues and activity were flat compared to the rest of our business. I think it didn’t cause us to lose any business per se but it certainly kind of retarded our efforts to grow the business, especially in August and September. Thom Albrecht – BB&T Capital Markets: And then you just had a 95.6% OR, including corporate overhead. But year-to-date it’s a 98.3%. So how much – I mean it seems like either Q1 or Q2 had to be maybe both close to 100%. Can you talk about what the first and second quarter ORs might have been?

You’re going to have to back out, Thom, the $1.7 million in severance. That could have caused a fluctuation in the second quarter.

Thom, I will just – I will just add from a Canadian LTL perspective, I can tell you that year-to-date end of September, our OR for ’13 to the end of September was running 94.6%, compared to 95.5% the previous year. Thom Albrecht – BB&T Capital Markets: You’re talking just the month of September?

No, no, I am talking year to date, January to September. Okay, because you had a question on the year-to-date OR, just so that you know that Canadian LTL business, the OR was 94.6%. Thom Albrecht – BB&T Capital Markets: I guess I am a little confused by that, because even if I back out the $1.7 million from the nine months number, that gets you to about 97.2%. So are you describing it before the corporate overhead?

Yes, before the corporate input.

Before the corporate, yes.

Just to give you a flavor on Canada.

Thank you. Your next question comes from Jason Seidl, Cowen. Jason Seidl – Cowen & Company: A quick question. Fayaz, are we going to be able to get detailed quarterly numbers on the Canadian operations any time soon?

Yes, that’s a very good question. Jason Seidl – Cowen & Company: Is this going to eliminate all the questions that like Thom had and the rest of the guys had?

Yes, we will find a way to get that out. Jason Seidl – Cowen & Company: Okay, perfect. And Tony, long time no chat, but couple questions for you. When you look at sort of your stance going forward with customers, now that the sale is behind you, you get to go on offense – should we expect sort of that cross-border business to start picking up a lot more? And if it does, how is that going to impact some of the metrics that you just reported today?

Well, I think overall you can expect us to get back into a more aggressive growth mode and increase market share as things settle down here for us. Specifically on the trans-border, nothing is going to change there for the next six months. It’s part of our agreement in the sale of Central. So I think it’s going to be status quo for the next six months. So we are kind of in hold pattern there until we see when we end up. And it’s too early in that transaction to kind of commit any direction. Jason Seidl – Cowen & Company: So is that sort of why the website still lists the Vitran US operations?

Yes, part of the commitment was that – the main focus was to try to stabilize and keep market share there. So we wanted to be transparent to the customer, leave everything as close to the way it was before the transaction for the next six months. Jason Seidl – Cowen & Company: And Fayaz and maybe Bill, you guys could address this. You mentioned there is obviously a lot of corporate overhead savings. But if you were to remain a standalone entity, I am assuming you probably wouldn’t need the corporate headquarters office and then you could probably tie something closer to your facility in Toronto. But how long do you have left on that lease there and how much of that rent year over year?

This lease is up in September 15, and the rent is $100,000 annually. Jason Seidl – Cowen & Company: And I guess my next question is since unfortunately you guys had all those issues with the U.S., we as analysts we didn’t focus as much on the Canadian operations and this is something I just am not aware of. I know two of your terminals are unionized. I believe you have the Auto Workers and the Teamsters Canada. Could you remind us when those labor agreements expire?

Jason, this is Tony. Those were inherited by Vitran when they bought the businesses years ago. And I can tell you that for having unionized operations, they are probably – the relationships that are probably as good as you will ever see. We have never had a work stoppage in our history. And we have been able to negotiate long-term agreements with those individual unions. They kind of – they understand our issues and have bought in and stability is important. So I am happy to tell you that we just received a couple months back a three-year extension to our Toronto agreement. We had two years remaining on it and we’ve just added another three. So we’ve got five year stability in Toronto, and in Vancouver we were able to negotiate a six-year extension. We have another year left in Vancouver. So when that expires, we will renew for another six years. So we have a long-term stability.

Jason, this is Bill. I am just going to add and really compliment Tony and his management team with a very long term solid relationship that he has developed not only with our two small pieces of unionized sites but the non-union group. Clearly the Canadian business has been extremely well led, well run and together as a team, they have consistently produced great results up here in Canada. Jason Seidl – Cowen & Company: Now, Canada was never the issue, Bill, that’s for sure. Listen, gentlemen, I appreciate the time, as always.

Thank you. Your next question comes from David Ross, Stifel Inc. David Ross – Stifel Inc.: Yes, just a couple of follow-up questions. Mix of business in the Canadian LTL side, if Tony could talk about kind of the breakdown is in terms of manufacturing versus retail, or how you look at it?

Yes, I would say we’ve got a pretty diverse mix. There is a lot of retail related customers in our base, hard goods, apparel accounts of that nature. They would comprise probably a good portion of it. But we also have industrial and distribution type accounts in our network. It’s a pretty diversified base of accounts. David Ross – Stifel Inc.: So not necessarily the industrial production in Canada drives your volume more than retail sales?

No, no, not necessarily. And we have done by design, David. Like we have tried not to get too heavily in any one segment, because they can impact your business so much. So we have tried to keep a balance there. That’s by design. David Ross – Stifel Inc.: And then if you guys had any driver recruiting and retention issues, recently either with the mix of corporate or just because the drivers were difficult?

No, I think in Canada, we face the same problems that we have faced historically. It’s hard to get long haul drivers and drivers to cross the border. But because of our business model and our philosophy on how we approach City P&D [ph], that has not been an issue for our terminals.

David, we’ve got – we use owner operator model in Canada, just as a reminder. David Ross – Stifel Inc.: I understand that. I just didn’t know if the owner operators are few and far between, or if there is an upward pay pressure there. But that’s it. Thanks guys.

(Operator Instructions) There are no further questions. Please proceed.

Great, thank you everyone and we look forward to speaking in the future.

Thank you.