TFI International Inc. (TFII) Q2 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, thank you for standing by. Welcome to TransForce's Second Quarter 2015 Results Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions]. Before turning the meeting over to management please be advised that this conference all 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 24, 2015. I will now turn the conference over to Monsieur Alain Bedard, Chairman, President and CEO. Please go ahead.

Well thank you operator and good morning ladies gentlemen. Our 2015 second quarter results press release was issued yesterday after market close. Let me start by giving you an overview of the most important performance metrics of the quarter. And then I'll provide some details for each operating segment. Economy in Canada has contracted since the beginning of this year. Reduced business activity in the oil patch has had more far reaching impacts than originally anticipated. As a result, our specialized truck load division servicing the oil and gas industry were hit hard. Low oil prices also further impacted our U.S. rig moving activity, but we reacted quickly to reduce capacity to eliminate operating losses. Despite these realities, TransForce had a very solid quarter, mainly due to the positive contribution of acquisition made last year. The decentralized operating structure we built over the years really allowed us to respond quickly to specific economic circumstances and helped us mitigate the effects of challenging business environments at the local level. Total revenue for Q2 was $1.1 billion, up 22% over the comparable quarter last year. Net of fuel surcharge revenue increased 27%. Adjusted EBIT was $97.8 million, up 22% over last year and represented 9.9% of revenue before fuel surcharge. The increase in EBIT was basically due to the contribution from the significant acquisition we made this past year. Adjusted net income rose to $71.3 million or $0.69 per diluted shares, up from $53.6 million or $0.55 per diluted shares in the prior period. We also managed to generate a very healthy free cash flow of $98.2 million or $0.97 a share in the second quarter. Higher cash flow from operating activities as well as sales of property and equipment drove this increase. We've repurchased 1.9 million common shares for $52.1 million, provided dividend payment for $17.4 million and reduced our long-term debt by a net amount of $6.1 million. I'll now give you some insight into our each of our business segment. In our P&C, revenue before fuel surcharge was $305 million, up 6% over the last year. Most of this increase is due to Hazen Final Mile acquisition concluded this past May with trailing 12 months revenue of $45 million. Package and courier EBIT declined 3% in the second quarter of this year and EBIT margin decreased slightly to 8.7% as increased transportation cost more than offset benefits from rightsizing activities. In LTL, revenue before fuel surcharge was down slightly to $198 million compared to $204 million last year. Tonnage was down slightly but the dollar yield per ton was up 1.9% in the second quarter. Also the stronger U.S. dollar had a positive effect on the segment’s Q2 revenue. EBIT in LTL decreased $0.3 million but the EBIT margin was up 10 basis points versus last year to reach 10%. Lower equipment, terminal alignment, employee cost resulting from consolidation helped our margin. In truckload year-over-year revenue before fuel surcharge more than doubled to $366 million essentially because of the Transport America and Contrans acquisition we made last year as well as the favorable foreign -- 1.2 in Q2, exchange impact, I'm sorry. Excluding acquisition revenue decreased by 11% mainly due to the weaker results from our Alberta based division. EBIT in truckload grew from $20.9 million to $41.1 million year-over-year, while the margins remained slightly stable at 11.2%. Given the revenue decrease our effort to align cost with demand allowed us to maintain the operating margins. In the waste management segment total revenue increased by 15% to $55.7 million. The increase comes primarily from the Veolia acquisition as well as organic growth from the landfill operation at Laflèche Environmental complex in Ontario. EBIT in this segment was $12.8 million compared to $11.9 million during the same period last year. EBIT margin was 22%, down 1.6 from last year basically because of higher depreciation expenses at our landfill. Strategic initiatives to optimize the Veolia operation is now -- are well under way and we are seeing some positive impacts on margins. Finally, in our logistics and other services segment revenue grew by $7.7 million or 11%. $23.9 million comes from the Cornerstone Logistics, which is part of the Contrans group. The growth in our existing logistics division was $1.4 million in Q2. Our revenue from rig moving was down $17.6 million in the quarter. Adjusted EBIT was down by $4 million year-over-year. In rig moving services the adjusted EBIT was negative $8.8 million. So going forward we expect that adjusted EBIT for the rig moving services to be closer to breakeven in the second half of 2015. In terms of our outlook we expected that the Canadian economy will continue to be weaker than initially anticipated, as the impact of the downturn in the oil price will continue to be a significant factor in the Canadian economy. On the upside an uptick in consumer confidence and spending in the U.S. is generating more businesses in the P&C and key [ph] haul segments. Given these economic circumstances we've reassessed our anticipated result for 2015 and now expect our revenue to reach $4.3 billion, adjusted EBITDA should be between $510 million and $530 million and basic adjusted EPS in the neighborhood of $1.97 to $2.12 range. Finally, we expect free cash flow to be slightly over $300 million. Given the centralized operation structure we are confident that we have the flexibility and the agility to effectively adapt to evolving market conditions. While organic growth will remain limited over the short term, revenue and EBIT will be driven by continuous efficiency improvements, cost control, asset rationalization as well as our disciplined acquisition strategy. It is gratifying that our strategy of selective accretive acquisition over the past year has proven effective, allowing us to improve shareholder value and buy back shares which we will continue to do. At this moment we will be pleased to answer your question. So please operator?

Thank you. [Operator Instructions]. Your first question comes from the line of Mona Nazir from Laurentian Bank. Your line is open.

Good morning, Alain.

Hey, good morning, Mona.

Just a couple of questions from me here. Thank you for the update on the guidance and you provided color on how the back half of the year is going to look and overall it's about a 5% reduction in EBITDA versus what you were previously expecting.

Yeah.

I'm just wondering how should we think about activity levels as we move into 2016. Do you think that tonnage will continue to be under pressure? And on that you mentioned some right-sizing of operations in the quarter? Do you think the starting levels will remain in the truckload and rig moving divisions or more downsizing to come?

Okay. Well, first of all, when we're making our plan in 2014 October-September, we never anticipated the backlash of this oil situation that affected so much, okay Alberta Saskatchewan and also some ripple effect to Ontario. And with a C$0.75 or C$0.78, okay I mean we thought that if this happens, I mean Ontario and to a certain degree maybe Quebec manufacturing base, although a lot of that has disappeared overtime, should get a boost. Well, we had major issues with Alberta and Saskatchewan and we didn't get the benefit in Ontario. So now that being said this is a story after two quarters in 2015. We think that back half of this year, 2015 our waste management will have a very solid Q3 and Q4. In our P&C business, our same day last mile, is going to have a much stronger last six months of the year than the first six months of the year. I mean our Canadian guys are doing a fantastic job of growing the business. We anticipate some new business coming in Canada, our U.S. guys are doing a fantastic job. We're downsizing in terms of people, yes, but it's because we have better tools and then we could do a better job. In terms of our last mile -- our next day service and our P&C, with all the moves that we'll be taking place in Q3, we will have about $2.5 million of severance cost because probably 100 people would be let go in Q3. But this is just being more efficient and adapting to a volume that is stable. So this is why all-in-all we feel pretty good with the last six months of this year. The rig moving situation in the U.S. has been a disaster for us. I mean we thought we had the dream team over there and as a matter of fact maybe they were dreaming more than the reality. They always thought that the market would start to turnaround but it never happened. So what we did is we closed down the head office in Denver. That was done in Q2. So it cost a lot of money to do that. We shut down all other terminals except three. So the three terminals remain now in operation are in North Dakota, Texas and Louisiana. These are the best performing terminals that we have today. If I look at my month of June and my month of July, I mean we're operating very close to breakeven point now and that is very, very good compared to what we were going through in the month of April and May. We had to make a change. So now we have new executive team which is mostly -- some of our Canadian team out of the Edmonton that is supervising what's going on in U.S. and that's why I feel very good about what's going to be happening in the last six months of the year. In our LTL, I mean we said it before, it’s a very difficult market in the east and our gold market, which was really Alberta. This is where we were the most profitable. I mean we're down 28% in revenue. We don't anticipate any improvement there, because oil prices seems like it will stayed depressed for a long time, maybe a year, maybe two years, nobody knows really. So we're getting adjusted to that, the new reality that Alberta, it's never going to be like it was a year ago, or two years ago. So that is what we've been facing. This will still be a situation for us in Q3 and Q4 of this year and into '16. But that being said our truckload division are doing very well, with very, very little growth in volume. I mean if you look at our Canadian operation, our base truckload operation is doing fine, our profitability is improving, our cost is really under control, doing better and the only issues we had in our truckload is really what is Alberta base. Alberta base we've been suffering in Q2 and in Q1. We believe that Q3 and Q4 will see a slight improvement because the oil sand is where we have most of our business is going to improve. I mean they were affected by forest fires and all, everything went wrong in Q2 for us in that province. But basically I mean we feel good that this situation will improve. So that being said ‘16 I don't want to say it's still too early, okay to say anything about '16. We have to see Q3 of this year, how good we're going to be improving our situation. And then, we're preparing our plan for '16 and then I'll be in a better position, probably on the next conference call to give you a little bit better color on '16. But it's still too early to talk about '16.

Okay, perfect. Thank you, that was great color. Secondly here, you've mentioned two main priorities for this year, number one was debt reduction and number two was a potential divestiture of the waste management or extracting additional value from that. Now on the debt reduction side you generated really solid free cash flow this quarter, nearing $100 million. Much of that went to the buyback with some on the debt side. I'm just wondering how do you think about debt reduction versus your share buyback and of the $300 million free cash flow generation this year, how much do you think that will go towards debt reduction.

Well, you see first of all our debt is up, okay because of the dollar. We have $600 million of U.S. dollar denomination debt. So that $600 million at the end of the December last year was -- I don't remember the exchange rate at the time. But now we're up to a $1.25 or $1.30 U.S. So that's one of the reasons why our debt is up okay. But with this kind of exchange rate, based on our plan our debt at the end of December of 2015 is going to be in the neighborhood of $1.5 billion. So we're at 1.6 something at the end of Q2. So the debt will be reduced by, probably some in the neighborhood of $100 million. In terms of buyback, okay all the buyback was funded by assets sales, real estate. Not the equipped because the equipment, we do a lot of equipment sales and this is part of our business. This is just normal, that we do about $30 million to $35 million of equipment that we're selling every year. But what has been very good for us in Q2 is our real estate department has done a great job of selling buildings that we don't have any use for. So this $50 some millions of building that we sold, that's the cash that we used to buyback the stock. It had no effect on the debt. And what I'm saying is that going forward, with that $24 stock, I mean for sure we're going to buy a lot of stock. So I mean I've got plan to buyback more stock in Q3 and Q4 because we're going to be selling more of this excess real estate. I mean we are working, our real estate department is working on three properties right now that we will probably close between now and the end of Q3 or at maybe Q4. So we'll see more action towards that. As long as our stock is depressed like it is right now we'll do more, because to your second question, on the waste side we are working on it. I mean it takes time. We anticipate that something is probably going to be in the cards for this, the end of this year, 2015. And we have lots of other projects that will create value for our shareholders. So I would be stupid with what I'm working on, seeing the depressed valuation of our stock, say to my broker please, buy more stock.

Okay, thank you, I'll step back in queue.

Okay.

Your next question comes from the line of Jason Seidl of Cowen & Company. Your line is open.

Good morning, Alain. How are you?

Hey, I'm good Jason. How you're doing?

Earnings season, just trying to get through it. I wanted to focus a little bit on the truck load side and CK, Matrec [ph]. So I know last time we spoke you were sort of conducting a meeting at the mines, if you will, among the different truck load entities. Could you tell us sort of where you guys are at and what you think the future look of your truck load business is going to be like, is going to start skewing more to owner operators. Just let us know.

Well, you don't -- in the U.S. I could not say that, Jason. I mean our TCA team has done a great job of adding more drivers to our fleet, and I'm very happy with what's going on there with Keith and the market there. So the U.S. it's not really an issue but in Canada okay, what I could tell you though is that if I look at my truck load operation, just had a meeting with the Clarke guys about two days ago and we are adding owner-ops over there. In our P&C sector, in Canada with the Canpar Loomis we are adding owner ops. And we had to let go some drivers, because if you look our small terminals, you cannot manage five or six drivers with a manager. It's not cost efficient. But if you turn these five or six guys into four or five because with ICS in [ph], always need less than drivers. So if you change that to four or five ICS, I mean sure we'll do very good with that. So this is what's going on now. But on the U.S. side what I could tell over and above that is that Hazen Last Mile acquisition is going to do very, very good for us and what we are doing now. Let me just explain you what we are doing. Hazen was really focused in servicing one niche industry that is also being serviced by Dynamex, which is the world of the old Office Depot, OfficeMax, Staples and all that. And what we are doing now is that more and more we're going to move business away from Dynamex into the specialties and carrier. And now Dynamex focus is going to be more onto the e-commerce sector. We just added that e-commerce guys have come up finally with a profit just a few days ago. Well, we just started in three markets for them and we're doing great, finally we're doing great with these guys and we're in discussion with more markets with them. So that is now the focus of the Dynamex team that is really move away from that business of these customers in the stationary and all that, move away from these guys, transfer that to the specialty carrier that we have within the family, which is Hazen and we did the same thing in Canada. If you look at Canada, ICS is really a specialty, niche guy that services the financial, the optical, to a certain degree dental and hearing aids all that. So these are a niche carrier and ICS is doing very well. So we're trying to replicate with Hazen. Hazen, that’s the only thing they have been doing. So they are the specials, they are the pros. So that's what we're doing with them. And at the same time that leaves more time for our Dynamex team to focus more on the e-commerce, to try to get more of that profitable e-commerce business that we believe now finally there is a change in the U.S. And a lot of these e-commerce guys that used to deal a lot with next day guys, the big guys, in some market where it makes sense, they are moving into a last mile guy like us and others. So this is why we are saying earlier, I feel very, very good with our Q3 and Q4 in our Dynamex U.S. operation and the same thing in Canada too.

Alain, that’s great color. Can you just, I guess go in a little bit more to the last mile e-commerce exposure? The initial read, I think so far from peak season from a lot of the transportation companies has been modestly up, except for those, I think that are more skewed, just for online retailing. Could you tell us what your customers are telling you to expect?

Yeah, well exactly that e-commerce guy I was talking about, I mean those guys, they anticipate some major growth in the revenue. And as we are servicing them only in three small markets we do, San Diego, we do Tampa, right now, we're going to be doing Orlando soon. We're in discussion with LA. So this is why I'm saying that by having our Dynamex team more focused servicing this area of the business, now that we have Hazen in the family, it's going to be wonderful for us and I think we'll be in a better position to grab more of that changes in approach to the market by the e-commerce guys.

And what about the business that you are doing for Google?

That's been slow. I mean we're doing well in some markets, in other not so much. So I think that the guys over there are working on the product, because don't forget we're piggyback on them. If the product goes well, we do well. And it's been slow. So in some markets like on the West Coast they are doing very good, and in New York for instance. But in other markets, not so good. So I think that the guys are -- according to what my guys are telling me, is the team there is looking at probably adapting the product, making some changes, to be more in a position to compete and offer a solution to the brick and mortar guys, because that is really what these guys are trying to do.

Okay. Alain, thank you so much for the time. I appreciate it.

Jason, it's always a pleasure.

Your next question comes from the line of Benoit Poirier from Desjardins Capital Markets. Your line is open.

Yeah, thank you very much. Good morning, Alain.

Good morning, Benoit.

Just to come back on the previous question on the waste management divestiture, just want to know how close are you and what makes you confident to make an announcement in 2015?

Well, I've been working on it for a long time, Benoit. And we looked at all kinds of possibilities and finally I think that recipe is in place, but we have the recipe now, but it's the summer. So in the summer you know what happens. Lot of people are on vacation, so that delays. The cook is on holiday right now, not me, but the guy in-charge of the recipe. So that means that it's been delayed a bit because it's summer, but for sure I mean come Q3 or Q4, we'll come with something that's going to start. We need to bring the value. I mean when you look at the valuation of TFI today, I don't know, 10, 12 times earnings, which is really stupid. But it's the reality. So you think that make sense to have $50 million of earnings coming from waste to be valued so cheap. It doesn't make any sense. So we got to do something. So that's why I am saying something will happen. I've been working on it for a long time. It's my priority. And the same thing, the same priority is the Last Mile in the U.S., it is also my second priority. I see a lot of potential there. That's why, as I was explaining to Jason, with this Hazen thing there, okay now the new focus of the Dynamex scene, we're going to do very good there. So let's find a good solution for the waste, which I think is soon, and then we'll probably wait, work on a great solution also for the last mile, the asset light business that we have within TFI that's not valued at all properly.

Okay, very good color, Alain. And you mentioned you still have $75 million of assets for sale. I'm just wondering what the timeframe for selling those assets is.

Well, my real estate guys, which have been very busy tell me that in Q3 we're going to be disposing about $10 mill, and I am pushing these guys, we need not 10, we need 20, okay. So the market because low interest rates, I mean we have some very attractive properties that we don't need, because we are becoming more and more efficient, and so we have three that they're working on. I just advised them this morning that there is a fourth one, that they start working on it. So I mean it's not going to be $50 [ph] million in Q3 and Q4 but the goal is to be close to 20 in three and four and all that cash will be used to buy back stock because at 24 bucks I am telling you we are buyers.

Perfect. Okay, so $20 million consolidated in total for the second half, right?

Yeah, that's on the real estate sale, yes.

Okay. Perfect. And now as we look at your EBIT margin for P&C has been down 80 basis points year-over-year. You mentioned that you experienced negative organic growth because of the non-renewal of unprofitable business.

Yeah. That's one thing. But at the same time Benoit, we are growing our business in U.S. So it looks bad because year-over-year it's like we're going down, but as matter of fact we're growing our business. So one account that we've been growing our business with in Texas is that this account decided to let go all of his drivers in Houston, San Antonio and Austin. So all this happened in Q2. But think about the number of drivers that these guys had to let go, I mean we're talking hundreds of people. So when you take over an operation like that and they let go 150 drivers and you take it overnight, over a period of a month I mean that creates big pressure on the system. So if you think that you're going to make money in the first day it's impossible. There is a transition period. There is a cost, that's a long term contract but the first three months you're not making any money. As matter of fact we were losing money. And this is I am talking now the customer is asking us for Dallas, and I said to my guys hold on. I mean we can't -- let's solve the issue that we have within Texas and then we'll keep Dallas for last. But that's also affected us in Q2. So Q3 already we see that the business is now better under control because you understand, it's a transition. You take over the business, you know the drivers are our own drivers. They don't know the business. They're new. And you're talking in Houston 150 guys, that's a big city. So that was also one reason why our profitability in Q2 was a little bit affected. Severance also affected us in Q2 and severance will affect us even more in Q3, because like I said earlier, we're going to have about 100 people that will be let go in Canada and in the U.S., in our P&C business. So that's going to cost me $2.5 million.

Okay, and what about, because you're focusing a lot on growing your e-commerce initiative and can you comment a little bit about the growth potential and also, I questioned profitability of e-commerce given it’s still early days. Could you provide more color on that Alain?

The story has always been the same. With the e-commerce guy nobody made money. And us we kept on pushing back and say, no, we're not going to work on that thing, we're not going to do that. So the big e-commerce guy was not a good customer of ours. He was probably a customer of somebody else but not us. But there has been some changes in the U.S. with the next day guys pushing back and saying we need -- with the story of Q4 of this year, the Q4, I mean of last year, Q4 of the year before. So there are some push back and those big e-commerce guy are building a distribution network to use lesser of the next day guys which are expensive. So that being said, this is ongoing now. Like for instance, the big e-commerce guy is just opening up in Orlando. That's why I am saying we're going to get the Orlando business pretty soon. Now what's happening is all that, and at the same time, us we're saying to those e-commerce guys, I mean we're not in the business of practicing deliveries. We're in the business of making money. We work for our shareholders. We don't work for the volume, we don't work for the top line, we're not a 2% bottom line company. So I mean if you can find a guy at 2% well, deal with this guy.

Okay.

But you can't find a guy, or there is not enough guys, so now those guys are talking to us and we're happy to see this customer coming on board with us, at a reasonable price where we can make a living and where we could give a return to our shareholders. So that's what's happening now and this is why I was explaining the vision with Hazen taking care of a lot of our business in U.S., great business that we have in that sector, so that the other team, Dynamex and the super team we have there, can be more focused in growing our healthcare business in the U.S., growing our e-commerce business because healthcare is about 20% some of our revenue. So growing that, growing the e-commerce profitable, okay and that's what we're doing now.

Okay and the last quick question just on the rig moving. It seems that you're running at about $45 million on a run rate basis a year.

Less than that, Benoit, we're running about $35 million.

$35 million, okay. And what's the goal going forward? Do you expect to keep those three facilities or the goal is totally to exit that and when could be the timeframe on the exit?

No, I mean like I said to my guys, I mean energy is cyclical. So now that we cut the bleeding, because under the previous dream team that I had, those guys were dreamers and I was losing money every day with what they're doing. With the good leadership of Bob McGonagall [ph] and his team, I feel confident that at least we will be able to operate in those three terminals and not lose money in a very bad environment. That being said, at one point the tide will turn, the wind will turn around. My guys are telling me in Texas for the first time they're adding some rigs, I mean small five, six, seven rigs, it's nothing. I mean there were 1,800 rigs, they were down to 600. So if you add six, I mean you're not adding a lot. But at the same time a lot of other truckers are downsizing. A lot of other truckers cannot support the business environment right now and are going out of business or just selling assets. So that's why I am saying is they keep the boat afloat, $35 million for TFI is nothing. It's nothing and maybe when the better time comes by we could start to make a lot of money or a little bit of money. But it's going to be small for us. But at least we save jobs as much as we can and we protect our asset base.

Okay. Thank you very much for the time, Alain.

Benoit, it's a pleasure.

Your next question comes from the line of Fadi Chamoun from BMO Capital Markets. Your line is open.

Good morning, Alain.

Hey, good morning, Fadi.

Thank you for all this good color. A lot of the topics I wanted to discuss have been discussed. But maybe if we can dig in, into the demand a little bit. So when you look at it in the East and some of the sort of Canadian dollars set of markets, have you seen any sense of things are getting better as the year progress over the course now?

No, not yet and this is a big disappointment that we had as we thought in theory that oil is down 50 bucks, dollar will drop, Canadian dollar will drop in value. That's going to help the manufacturing guys in Ontario and Quebec. So that will help us in our truckload division to a certain degree, maybe a little bit of our LTL. But up to now we haven't seen anything. Now what the guys are telling me is that inventory level are to the ground. So my guys, what they believe is that Q3, probably mid-August we should start to see some action, but right now, no.

Okay, so if you envision a market where Western Canada sort of stabilizes at some point in the second half and the East starts to maybe grow at a modest rate, so should be think that we can transition into some neutral to positive organic growth some time later this year?

In theory Fadi you are right, in theory the Canadian dollar being at $0.75 we should start to see things moving in Ontario. But we haven't seen it. Our guys think it's going to happen. But we haven't seen it. So if in theory you are right. I mean the Canadian, the Bank of Canada lowered its interest rate a few days ago, to 0.5. That tells you the story, is that the Canadian economy is not moving at all. It's stable and maybe a little bit down. But the Canadian dollars being so low now, we are going to start -- according to our best information is we should be busy in the fall. But I reviewed our guidance to some lower numbers, because based on what I have seen so far in Q2 and in Q1 has been a major disappointed for me now. For sure I mean this $8 million of operating loss I have in my rig moving in Q2, this is not going to happen again, because we got rid of all the people and all the -- we shut down the Denver head office. We closed down all the terminals and we took all the hit in Q2. So that's done. So that being said, that's why we are cautious, because in October last year we were optimistic. Now we were more cautious. This Alberta situation is really bad and I think it's going to get worse. I think now we have a situation there where a lot of people are losing their jobs, their salary has rolled back and they have a new government there, taxes are increased and all that. So that's why we are very cautious about Western Canada. So that's why overall, while we are very optimistic in the U.S. our same day last mile thing in the U.S., same thing in Canada too at last mile, our P&C because of all the action there -- if you let go 100 people it's sad. We don't like to do that. But this is what we need to do to be more efficient. So we are going to take a hit of 2.5 million in Q3. But the payback is short.

Okay and you provided some good color about the sort of e-commerce opportunities in the U.S. in last mile. So maybe that's a part of the pie that’s growing, the pie is growing sort of in Canada as well. Can you characterize a little bit the opportunity here in terms of that market for you?

Yeah, well in terms of numbers it’s still hard to see, Fadi. But what I could tell in principal is that finally [ph] the largest e-commerce guy in the world, maybe not in the world, but in North America, we’re finally able to service the customer and make money and have a reasonable return. The only reason I think that this is happening is because the next day guys, those are the big guys in the next day service, they say, we don't want that much volume, in Q4 or in Q3. I mean it's too expensive for us. We don't have our return on that. So guys find another solution and those e-commerce guys are building DCs. So when you have a DC with the same day guy you can service an area of, depending on the city maybe 50 miles. And that is where we have the opportunities.

Okay, great. Thanks for the color.

Okay, Fadi. Take care.

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

Thanks very much. Good morning, Alain.

Good morning, Walter.

So just to follow-up on Fadi’s question there, in the East you said it's not getting better from the Canadian dollar.

No.

Is it getting worse at all or is it just kind of stable?

No, it's not getting worse. What my guys are saying is that the volume is okay. We are not very busy. But we are busy. But we haven't seen any uptick based on the theory that a low Canadian dollar should help the Canadian manufacturing to export into the U.S.

Okay, got it. Just wanted to make sure.

We haven't seen that yet. We are not down. The only place we're down in our truckload is in Alberta.

Right, okay.

And we believe that this reduction in revenue, that we faced in Q2, it relates to the oil sands, some of our customers have been shut down in Q2 because of forest fire and all kinds of reasons. But we believe that this is going to improve. It's not going to be as good as last year out West. But it's going to improve to a certain degree in Q3 and Q4.

Okay. Turning to the CapEx trend, given some of the weakness that you are seeing in the West, you are currently -- are we still going to see in 2015 about a $100 million in net CapEx after disposal of rolling stock not including your property sales? Are you still looking at a $100 million for this year?

Yes, Walter, you know why because don't forget now we are buying equipment in U.S. dollars. So the $100 million that we had a year ago Canadian, net of disposal, now because of that dollar effect it's not $100 million anymore, it's $115 million because we...

You reduced it, but it's offset by foreign exchange. Is that correct?

Exactly.

Okay. So when we look in to next year and if you continue, as you see current trends, is it likely we see that $100 million come down there for next year based on what you are seeing today?

No, I don't think so Walter. I mean it's still early to talk about '16, but I think that '16 will be better than '15. I thought that about '15 compared to '14 and I was wrong, at least for the first six months. But the feeling that we are getting is that it takes time for the low dollar to create some activity in Canada. So the discussion I'm having with my guys is be patient, it's coming and I say, yeah, it’s coming.

Okay, all right. Just turning back on the waste, we were listening it on the waste management call yesterday and they said they are coming close to closing or announcing about $50 million to $75 million in EBITDA of acquisitions. That got me to thinking, but I'm not asking you to comment on that other than is it impossible for waste management to get more involved with you in Quebec given the market share dynamic or the competitive concerns or is it a possibility that something might -- is it just possible that something could happen with waste management or is it impossible due to the competitive dynamic?

I think it's for them to invest more in Quebec and in Ontario would be difficult for them. I think it would be difficult for them. It's different with the other guy. The other guy is different, that is more possible. But them it would be difficult thing. If you look at our asset base, our land fill in Ottawa, our environmental complex we have in Ottawa, I mean either them or the other guys it's got no effect. It would be great assets for them. But in the Montreal situation, there could be upfront [ph] for the other guy, because he just brought our CI a year ago, something like that. So on the collection side of it, okay that could be an issue. But on the Ontario side it would be a great benefit to either one of the two.

Okay, would you split the two or no, you’d rather look at it as one transaction, right?

No, no. It’s going to be one transaction.

Yeah, okay. And then last question here just on your potential divestitures or acquisitions in general, would you consider this market to be a buyers’ market right now or a sellers’ market, in other words are you seeing any potential pushback on the notion of selling some of your -- disposing some of your businesses and therefore would you perhaps look at acquisitions if people get really in tough straight, potentially in Western Canada. How would you characterize what the environment is doing in terms of the acquisition market favoring buyers over sellers?

Walter, we are M&A guys and right now what we’re buying is our stock because it’s so cheap but don’t think that I am not getting ready for ’16. I mean I have got a few deals that I am working on right now, that’s going to be a huge benefit for our shareholders I mean down the road. So I mean we’re going to be buying our stock now because this is easy to do. I mean we just call the broker and it’s done and we know what we’re buying. But we’ve got some good potential in the cards, okay, and once the waste situation is settled and everybody knows what we’re doing then the next phase will be out. And the next phase could be -- waste is poorly valued, fine. But what our asset light division, last mile guys it’s even worse. Don’t forget, we have about $500 million of last mile asset like highly profitable business in the U.S. Don’t forget that.

Okay.

And this, I think it’s going to get tired one day.

I don’t believe it. Yeah, understood, okay. And what areas do you like in terms of potential acquisition opportunities, Alain?

Well, I think that what we’ve done lately was we did this Hazen deal which is going to turn very good for us. We just brought All Canadian Courier also in Canada, it’s small but good, good, well managed, Roger Sandhu, the guy -- I mean he is an ex-Dynamex guy, so he knows the business well. So this is going to be good for us. So that’s one sector that will keep on growing, both on the Canadian and U.S. side.

Perfect.

The waste is really, if you know, like I said to one of the CEO of a waste company not so long ago, is I like the waste. I’d like to be a CEO of a good waste company. So maybe if I can’t get your job, maybe I’ll have to build one waste company. So on the waste side for sure, I mean that is the other sector that we’re really looking at. On the truckload sector I think we still have our project. It’s in the back of our mind, okay, we’re still looking at it. The U.S. truckload market has cooled up a bit, so -- but the Canadian dollar is so cheap now, so we still have that in the back of our mind, that if an opportunity comes by I mean we’re going to be looking at it for sure. And last but not least, I mean in the LTL, our guys are working day and night to just to cause, I mean, we look bad but because we lost a lot of revenue in our best market, which is Alberta. I have always said it. Our toughest market is Ontario, Quebec and there we are doing okay, but we lost -- we lost the cream, a lot of revenue in the cream markets. So nothing we can do but we’re working on it. There may be a partnership that we could develop in there, lot of things that we’re working on right now, that will prove, that probably ’16 is going to be a great year for us. ’15 we’re going to finish the year strong but even ’16 is going to be even better.

Okay. That’s all my questions. Thanks very much Alain.

Okay. It’s a pleasure Walter.

Your next question comes from the line of Hilda Maraachlian from Cormack Securities. Your line is open.

Good morning Alain.

Hey, good morning, Hilda.

Good morning. Most of my questions have been answered. But coming back to the guidance, so you lowered your guidance by $30 million and in Q1 you said you were behind plan by $80 million, can you just say how much were behind plan in Q2. I just want a sense, get a sense of how much of this decline is because of the performance in the first half and how confident you are in the second?

Yeah. So what we did in Q1, we were $8 million behind plan in Q1 and we're about -- if I exclude the energy sector, which is $8 million loss which was not really -- just on the energy we're $10 million behind plan. But if I exclude that the rest of our business were about $4 million behind plan. So $8 million plus $4 million is $12 million plus $8 million, it's 20. The $8 million of energy. So after Q2 we're behind plan 20, but we believe that the last part of the year we'll be on plan. But we're very conservative. I mean I don't want to be another optimistic like I was thus far and get hit on my head with not making the plan.

Okay, and what is giving you the confidence mostly, like just in the P&C business in the U.S. what's giving you confidence for the second half?

First of all I think that although it's small for us, but our waste management is going to do very good in Q2 and Q4. We are sure that. That is a known fact. On the P&C side our last mile guys, both Canada and U.S. will do very good. And our next day guys if you exclude the $2.5 million or $3 million of severance they will make the plan. Revenue is soft but I'm convinced that these guys will make the plan. So where is the problem? The problem is in our truckload, based in Alberta. These guys won't make the plan. So that's one of the reason why we are little bit behind the plan in our truckload, very small. But it’s the LTL, our LTL has been suffering for the last six years and it's still a shrinking market. So this is the only area where we have to work at it harder to get the cost out because we can't do anything with the revenue. Now I say that, but on the other side maybe we could work on something different and that's something I'm working on right now to maybe -- I don't know maybe have some partnership of some kind with some players, just to be more efficient. So I mean we have lots of potentials.

And you just said that you didn’t see a whole lot of exports to the U.S. because of the weaker Canadian dollar. So you are not really banking on picking that up in the second half of the year?

No, we think it's going to happen. But it's not in the cards, it's not in the plan. It's not something that we think is going to happen and it's in the plan, no. We think it's going to happen, but it's really not in the plan today.

Okay, great and on the pricing side, on the cross border you are not really seeing much there either, are you?

No.

Okay, great. Thank you.

It's a pleasure.

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

Yeah, good morning.

Hey, good morning, Cameron.

Yeah, most of my question has been answered too. But I just wanted to ask a couple of questions on, I guess on foreign exchange. Can you just update us on what your estimate is of the sensitivity to a Canadian dollar change to the EPS? Or another metric if you want?

Yeah, every cent should help us by about close to $1 million. So that being said we got also to take into account that the assets that we are buying or leasing, like the new trucks, are costing us about 20% more. So that's a positive but we also have a negative. So the sum of the two, I would say probably today you talking about $600,000.

Okay, and given that the Canadian dollar is sitting here at a $1.30, just wondering your thoughts on hedging, is there any desire to sort of lock in the current rate on the U.S. dollar cash flows?

No, not yet, Cameron, not yet. What we are trying to do, as we speak is we are locking the interest rate on our U.S. debt. So we have swap today that amounts to about $325 million. So we are on the spot for the rest. We're going to be adding to our protection something like a $200 million because we believe that the interest rates in the U.S. will start creeping up. So that's why we are going to be protecting ourselves there. So we have 100 million that is due in a year. We have another $125 or $100 million that's due in two years and we have another one $125 million, I think or $100 million that's due in five years. So we're going to double that to -- so that we're going to have probably $250 million in five years. And so that's what we're doing in terms of swapping for interest. We will definitely be working on -- okay as soon as the waste situation is resolved, on our banking deal. We have a lender that was good for us at the time, that's now he’s like a shylock, we're paying 685 on the $125 million. So this is going to be priority for us to reimburse that in November, to reduce our cost of fund. And on the dollar, Cameron, it looks good but every time I lock myself with the dollar I lose money. So I said wait, wait and that's what we're doing for now.

Fair enough. And just one other question, this is just really a clarification I guess on the EBITDA guidance specifically. Correct me if I'm wrong but it does look like in the segmented results this quarter you've started to include asset gains in the number, and it was not a big number in previous quarters but it was a big number in Q2. So I'm wondering if your guidance for the full year includes those gains on the sale of assets.

You see Cameron, that's the mistake that we made over the course of the last 10 years. We've looked at, because we're now more heavy into truckload, we look at all the U.S. guys, we look at what Contrans was doing. And all the gain and disposal has always been part of EBITDA. But us at TFI, we never included anything, so after discussing with our auditors and Greg comes from Contrans, and I say Greg, why don’t we guys do it? He says, I think and this is part of the EBITDA calculation, I mean it's just normal. Everybody does it. So that's why we made the change. Now true that the exceptional in Q2, we had a gain on disposal of fixed assets. But I've said that from day one, I mean we are selling real estate and every time we sell real estate we make a lot of money. So that $75 million of real estate we have in the book, so the gain on that is probably $50 million. But it's like nobody understands that. And then I sell $50 million in the quarter and they say, oh, yeah, you have a gain of $10 million-$12 million, this is not normal. But I told you, I mean we have more to come, okay. And that is part of our business because we are not magicians. What we're doing is that we're doing more with less. So when we do more with less we have excess asset that we sell okay. That is exactly what's happening.

Okay, no that makes sense. That's all I had. Thanks very much.

Okay, very good Cameron.

Your next question comes from the line of Kevin Chiang from CIBC. Your line is open.

Hi, Alain, good morning and thanks for the color so far. Just couple of quick ones for you. Just back on Cameron’s question, I know Q2 was exceptional in terms of the asset gains that dropped down to EBITDA. But when you look at your guidance before and your revised guidance, just trying to get a sense of what you built in, in terms of the asset gains and is that increase given the strong performance in Q2 on that line item.

In there, in our numbers, Kevin we never included the gain on disposal of assets until now. But there was always some, on the equipment. So it was not included. When we did our plan in October it wasn't there. What happened in Q2 is we did way better than ever anticipated. We sold a property in Ontario that has been for sell for five years. And finally we're able to unload that and had a reasonable gain, okay. So but what was also unforeseen is the disastrous Q2 in the rig moving business. I lost $3 million in selling assets in the U.S. okay, why, because I shut so many terminals that I had to do it. I could have done it over the period of two years. My loss would have been less, but I said hey, we're cleaning the house, like I did in December ’13, okay in Canada. I said, clean the house, get rid of that, but the rest of the excessive asset we're going to be selling slower, and we’re not going to lose as much money. So yes in Q2 I had the benefit of a nice gain on disposal of real estate. But also had the disastrous loss which is gone. It’s never going to happen again in the energy sector.

Fair enough, thanks for the color there. And then just looking at your expectations for margin improvement over the next couple of years here, I think on previous calls you’ve talked about targeting, call it roughly 100 basis points improvement in margins this year and next year.

Yes.

On this call you’ve talked a lot of the right sizing you’re doing, just trying to get a sense of how you see margins progressing, maybe not in 2015 but even 2016 onwards do you see an acceleration in that margin improvement given some of the stuff and steps you’re taking today?

Yeah, well you see it’s a little bit of deception when you look at our P&C and you look at that and say you’ve done nothing in Q1 and Q2 compared to last year. You didn’t improve at all, and the answer to that is yes you’re right but here’s why. Number one is, like I was explaining about some new contracts, okay that’s one thing. The other thing also that affected us in our P&C is the fact that fuel surcharge is killing us right now and let me explain to you why. As we have the chance of having high density, so when you have high density, a high cost of fuel helps you a little bit. Low cost of fuel it doesn’t help you as much. So we had the small situation, it’s small but every penny counts and also we had the disastrous Alberta situation, affecting all our sectors. So when you’re running a network like our P&C next day service or an LTL operation, if you have a drop in Alberta of 20% of your business because the economy is in the shift, I mean forget about your improvement, I mean just staying afloat like you were last year, is an accomplishment. So these are all the small things that we never anticipate. So but what we’re saying is that with our new tools, with our new approach we’ll be reducing our workforce in the P&C by 100 people over the course of Q3. That’s going to cost us a few million dollars but it’s going to help us improve that operating profit and getting maybe 50 basis points because the Alberta situation we never thought that would be so bad. And from there we’ll keep on building. Our same last mile operation in the U.S. or in Canada, that’s where we’re going to have a 100 basis points improvement, for sure. Q3 and Q4 this year versus last year we’re counting on these guys improving by 50 to 100 basis points.

That’s helpful and just maybe lastly from me, I guess is reports of UPS looking to acquire Coyote Logistics, can I get a sense of how do you look at your own logistics division? I know it’s not a large contributor today, but it did show some organic growth in the second quarter. So just broadly speaking how do you feel logistics division maybe growing or maybe playing into this trend here?

Well you see what’s happening right now is that in the U.S. you say logistics, you say asset light and everybody goes banana. It’s worth a lot of money. There was a company that just bought a $500 million revenue company, based out in Canada with no profit or very little profit and boom okay, this is the next XPO. So when you look at us, what we’re doing with our logistics company and our Last Mile asset light, because the two go hand in hand. And you did the sum of that and you look at that and you say what is Alain doing? Is that guy stupid? I mean he’s got a $70 [ph] million EBIT Company which is my Last Mile and my logistics company and he lives with a valuation of stupid 10, 12, 13, 14 times earnings. What is he doing? He should stop working like a maniac and talk to some investment bankers and maybe start looking at doing something. It doesn’t make any sense and this is most of that business is U.S. based.

That’s right.

So maybe something is going happen at one point, that’s why I was saying to Walther maybe Alain is tired of getting -- not tired of working but tired of getting pricing that does not reflect the market. And we talked about the waste and now if you look at what you just talked about for your ease, and what’s going on, okay in the U.S. and there is lots of appetite for Dynamex. I could sell Dynamex tomorrow. I don’t want to do that, because we’re building it. But the price that the guys are offering me, okay, for Dynamex, now I’m starting to question myself whether $24, I mean -- stressed, should sell it but I am not going to sell it, Kevin. I am not going to sell because we’re builders, okay. But just to say that but we may do something with it though. We may put in the right place.

Fair enough. As always thanks for the color Alain.

Okay, Kevin. Have a great day.

Your next question comes from the line of Turan Quettawala from Scotia Bank. Your line is open.

Good morning, Alain. How are you?

Hey, I am good Turan. How about you?

Pretty well. Thank you very much. I have couple of quick clarifications first, I guess. First of all on, I think the earlier question on the sensitivity to U.S. dollar just so I am clear, that $600,000 that’s a net income, is that right?

Yeah, net income.

Okay. Thank you. And then I guess the question I had earlier was looking at the truckload business, your organic growth there was pretty weak. I know you talked about Alberta, but in 11% decline, can you give me some color on which segment that is coming from in the sense of like which company?

Yeah, if you look at Ontario and Quebec-based business, okay, in our truckload, I mean we’re flat.

Okay.

We’re not growing but we’re flat. Where we got it really bad is our Westfreight business for instance, which is a great company that I bought, I think in 2006. If you look at my Winalta business, okay there we do a lot of pipe storage, and pipe hauling for the drillers. And we are down 30%-40%. Farmer in the U.S. okay, I do the same thing in the U.S., much bigger. I’m down 40% in that business. So Farmer was $65 million company. Now it’s a $25 million company or a $30 million company. I mean this is where we got it really bad in Q2. Now Farmer on the pipe hauling side in the U.S. we don’t anticipate this is going to improve, okay, in three and four, a little bit. Not as bad as Q2, okay, but not a lot. But my Westfreight guys in Alberta and my Winalta guys, my Winalta guys are doing a fantastic job with this market environment. Our rebel operation, I mean those guys are like rebels, I mean not so good, okay, because it’s been really, really bad. So that is where Turan we missed the boat, okay. So it’s been terrible for us, okay this Alberta situation, but we feel that what relates to the oil sand should improve in three and four. Well related to the Texas pipe hauling, it’s not going to improve, it’s going to stay slow.

That’s helpful. Okay, so it was Farmers well, right? Okay, that’s good. Thank you. And I guess the other question on P&C, I know you’ve talked about the unprofitable business, you also talked about the new contracts that you have and then there are obviously more new contracts coming here over the next few quarters, which obviously is good news but just wondering, so from a margin perspective then it seems like that’s going to remain pressured here for the next couple of years?

No, I don’t think so, Turan, because if you look at my same day last mile in the U.S. I said just a few minutes ago that we believe that this is where we’re going to see some improvement in the bottom line in Q3 and in Q4. The next day guys in Canada, a little bit not so much. So we will be behind the goal of improving a 100 basis point in the next day service. But we’re positioning ourselves really good for 2016 with all those moves that are taking place right now into our next day service in Canada. In the U.S. or in Canada, in our last mile customers like the ecommerce guys, it’s not a big deal. But when you have a customer like an Office Depot or something like that, this is causing you some money to start up because you have to sort. Most of the times you get the business and you have to sort it. So when you have sorting involved, it takes more time to educate the sorter and educate the drivers. When you have an e-commerce guy like the largest e-commerce player in North America, you run off his doc. So everything has been sorted by him. You understand what I’m saying?

Yeah.

So it's not as contentious when you start the operation. So the learning curve is not as bad with an e-commerce guy then versus the other guys.

Okay. So basically margin improvement then next year?

Yeah. We feel good. I mean we didn't deliver so far this year, but I am telling you we will deliver some into Q3 and Q4, because of our last mile guys. I am telling you Turan my next day guys, Brian Kohut, Rick Ashe [ph], Payne [ph] and these guys are working day and night to -- they are not happy with the situation. Nobody is happy at TFI. Nobody is happy to deliver results on the P&C which is no better than last year. So I mean action is being taken and we will definitely keep on improving that business. Same thing with LTL.

Okay. Fair enough and I guess maybe how's the Contrans integration going overall?

Very good. I mean I had a meeting with the Executive yesterday afternoon with all the Contrans executives. I am very happy, very happy to have Greg also as our CFO. I mean Greg is going to help our team in TFI. He’s got the experience. I am very happy with the executives over there. I mean in the specialty truckload and the van, I mean I am very happy with what's going on over there. But don't forget, I mean they are going through the same thing. I mean the big boom that we expected, in Ontario, I mean even Contrans is not feeling it, but guys are working. So for instance we're opening up the doors to the Contrans team to a lot of our -- what we do about the waste. So they will do more in the hauling of waste from our transfer station to landfill. I mean we just acquired a few assets from a small company in Ontario. We're looking at doing more. I mean the exchange between America and Contrans, exchange of best practice; I mean the exchange of information between our Kingsway operation out of Quebec and versus the little operation in Ontario on the dump operation, all kinds of good things, that are coming out of that acquisition. So talking about -- on the board now we have Stan and Stan said the only thing I don't like about this is the fact that I didn't sell my company, I sell it too cheap to Alain, I said, no don’t say that.

Well, that's good to hear, Alain. Hey one more last question and it’s a bit of an odd ball question here, but I mean you said you like waste quite a bit here. You don’t think you could get the valuation bump if you had bought more waste, instead of selling it?

Maybe, I am going to listen to your recommendation Turan.

Okay. Thank you.

Welcome.

The next question comes from the line of Walter Spracklin from RBC. Your line is open.

Hi, Alain, sorry, just coming back on -- just a clarification here. On the EBIDTA, excluding gain in sale, I know other companies used to and did do it, and I think the analyst communities and certainly myself, we do exclude it when we see reported within EBIDTA. So I am curious when you give your guidance there for how much do you bake into the new guidance range for sale of property -- gain on sale of property and equipment?

Okay. The gain on equipment Walter is specific to truckload, because if you look at my LTL, I never have a gain because LTL we use the equipment for so long that when we sell it, it's worth nothing. So there's never any gain. So you sell a $5,000 truck I mean you cannot have a gain on the $5,000 truck, right?

Yeah.

So LTL and parcel we don’t have any gain. The fact that we have more gain now is because we're more heavy in the truckload, truckload that's a different story. The fact that the way we operate, let's say with the existing TFI business we're releasing most of these trucks. So when you have an option to buy, which we always have and the market is good. So you buy the truck and you sell it back you have a gain. Within America or Contrans most of the time they were buying the trucks and selling it back and making money just deliver the same thing. So if you look at what we're saying for the rest of 2015 baked in our numbers, you're talking -- we're getting above let's say between $300,000 to $400,000 of gains right now a month. So if you take 300 times six, maybe $2 million.

Okay and then you had, I guess you had a quarter or year-to-date about 15.

15 includes the real estate.

Right. So if we were to back all that out, 15 and 17, you take $17 million off your guidance would be your kind of your ex gain on sales.

Yeah, okay but don't forget that I lost three on the rig moving side.

Right, right.

Which is not going to happen again. So my gain is a little bit more -- I always make money except if you go back to my Q1 of '14, I made about $1.5 million selling my rig asset equipment that I had in Canada. Markets were different. So this quarter I lost C$2.9 million, which is about US$2 million selling. And most of the loss, not most, all of the loss came from cranes. On average I lost about $300,000 selling cranes. On the trucks and trailers I didn't lose any. I lost money on the cranes.

Right, okay. Okay that's all I have. Thanks for that clarification, Alain, it’s much appreciated.

Okay, very good.

Mr. Bedard, there are no further questions at this time. I turn the call back over to you.

Okay, well thank you for joining us today. So I look forward to speaking with you again following the release of our third quarter results. So have a great day and a pleasant rest of the summer. Thank you, bye.

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