TFI International Inc. (TFII) Q3 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, thank you for standing by. Welcome to TransForce's Third 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 call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Friday, October 23rd, 2015. I will now turn the conference over to Alain Bedard, Chairman, President and CEO. Please go ahead.

Well thank you operator and good morning ladies and gentlemen. We issued our 2015 third quarter results press release yesterday after the market closed. We'll start with an overview of the most important performance figures for the quarter and then I'll provide you with more details for each operating segment. There are two main points I'd like to make at the outset. First as you know the economy in Canada has continued to struggle especially with the extending slot in global oil prices. While the US economy has been more resilient to the oil sector as also suffered there with no clear signs of recovery. As a result and because we're always focused on realizing the greatest return possible in our assets, we decided to terminate our residual US rig moving business and sell or redeploy remaining assets into high return activities. For this reason rig moving is now classified as a discontinued operation in our financial statements. Second despite the mixed economic situation our results were strong with solid organic growth in our waste management and logistic segments and a significant contribution from the Contrans acquisition into revenue and operating income. Total revenue from continuing operation was 1.1 billion up to 18% over a comparable quarter of last year. Before fuel surcharge the revenue increase was 18%. Foreign currency exchange movement also added positive impact. Operating income from continuing operations reached 88 million, up 9% over last year. Adjusted net income from continuing operation came in at 60.6 million or $0.60 per diluted shares, up from 58.1 million or $0.58 per diluted shares in Q3 of 2014. Free cash flow from continuing operation was 60.7 million or $0.60 per share while the discontinued operation added another 19.7 million as a result of the ongoing sales of excess assets. This free cash flow in Q3 was returned to shareholders through the repurchase of 60 million -- $62 million in common shares and a dividend payment of 17.4 million. I will now take a closer look at each business segments. Package and courier revenue before fuel surcharge was 318 million, up 7% over the same period of last year. This increase was due to the acquisition of Hazen Final Last Mile and All Canadian Courier in the current year. We are expecting another revenue of 45 million from Hazen and 25 million from ACC going forward. Excluding acquisition, results were flat reflecting lower shipping activity offset by the foreign exchange impact. All Canadian Courier’s operating income declined 8% in Q3 this year with a decline in operating margin from 8.2% to 7% down 120 basis point. Severance and higher transportation cost negatively impacted the margin but these were partially offset by lower operating expenses. In LTL revenue before fuel surcharge was 192 million versus 198 million last year. Tonnage was down but the dollar yield per ton grew by solid 6.5%. Stronger U.S. dollar also had a positive impact in the quarter. Operating income in LTL decreased by 9.7 million to 12.2 million, also this variation was due to an 8.2 million reduction in gains of sales of assets this year versus last. Turning to our Truckload segment year-over-year revenue before fuel surcharge reached 362 million up 45% over Q3 of 2014. This is mainly due to the Contrans acquisition and a favorable foreign exchange impact. Excluding the acquisition revenue decreased 1% largely because of economic factors in the oil and gas sector. Operating income in our truckload jumped by 11.1 million to 37.3 million. The Contrans acquisition contributed 14.2 million to the rise in operating income. The operating margin was essentially the same as last year at 10.3%. Our strict discipline of aligning supply with demand has allowed us to maintain margin in this segment. In Waste Management, total revenue increased by 6% to 58 million, much of this increase is attributable to higher volume at the AES soil landfill and to organic growth at the Lafleche environmental complex. Operating income also saw a healthy increase from 11.8 million in Q3 of 2014 to 15.2 million in Q3 of 2015. Operating margin was up 4.8 percent points to 26.4. This improvement results from lower fuel price, stronger results in our material recovery facility and a more favorable service mix. Finally, in the Logistics segment which is now presented as a separate reportable segment, revenue grew by 44% to 59 million up 41 million last year. The Cornerstone division which we acquired as part of the Contrans transaction accounts for much of this increase. Excluding the acquisition, revenue increased by 6%. Operating income rose by 62% in the logistics segment to 6 million. Again, this is partly because of the acquisition but also due to improvement in existing operations. The operating margin grew by 110 basis point year-over-year reaching 10.1 essentially because of the efficiency improvements. Going forward we don’t anticipate significant change in the North American economic landscape. Lower oil prices have reduced activity in Western Canada, which puts a brake on business activity in some of our main operating markets. On the flip side, the lower Canadian dollar should spark more manufacturing and export activity in Central Canada. Meanwhile, higher consumer confidence and spending in U.S. should lead to improved P&C and truckload activity south of the border; factoring up the negative contribution of the discontinued operation; we adjusted our 2015 anticipated result upwards; continuing our operation should generate total revenue of approximately $4.3 billion with EBITDA in the $520 million to $540 million range; and basic adjusted EPS between $2.07 and $2.22. We remain committed to maximizing free cash flow and we expect it to reach about $300 million for the year with $250 million coming from continuing operation and $50 million from asset sales in our discontinued operation. Over the short term it is our priority to use this cash flow to reduce that. As we shown our decentralized operation structure gives us the ability to move quickly in response to changing market conditions and to deploy resources where they can generate the highest returns. We will continue to strengthen our performance by executing on our strategy of implementing stringent cost control, efficiency improvements and asset rationalization as well as by making selective and prudent acquisition. So at this point, I am pleased to answer your questions. Operator?

Thank you, and ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions]. Your first question comes from Mona Nazirwith Laurentian Bank. Please go ahead.

So just a couple of questions from me, I know that the U.S. rig moving was challenged for a period of time, and that negatively impacted results, even going back to 2014. Is there any other segment or subsectors where you’re seeing some prolonged losses, or you could divest or redeploy those assets, and if that’s not the case to do now then maybe in the future?

The only sector that is still weak within TFI is really our truckload that is in Texas. And Alberta based truckload we’re doing okay, it’s not really an issue. And our truckload base in Texas which is mostly hauling pipe and storing pipe for customers, we slowed down but we’re not really losing any money but we’re losing the profit that we normally had though. So I don’t see anything in the future. In terms of another discontinued operation, that would be because of its negatively impacting TFI. I mean, we could see a discontinued operation if we were we would sell one of our division. But that’s not the case. I don’t see anything in the future.

And then just kind of maybe more of a macro question, or your vision, I was just wondering if you could talk about the acquisition strategy and your outlook for the Company. How much of where you are today has been planned or is it primarily opportunistic? So did you have a vision that you wanted to get into waste management and then grow it to ex-size?

We got involved in to waste management, because we had an opportunity and that goes back to 2004-2005. And we did a great job I mean with the team we have there under the leadership of Dave Richmond and previously Marc Fox. So we did a great job with the team there and we grew that to a size that now I mean we’re at a cross road, and I’ve said it many times. Our priority is to really unlock the value of this division because right now it is fully valued. So if you look at TFI on a global picture does value today around 7.4 times EBITDA enterprise value. I mean it doesn’t make any sense. To me our waste management division is worth way more than that. So this is what we’ll be trying to do. So waste is probably not going to be part of the TFI’s future as it is today. But, we also have a plan to grow our truckload and we said that. So priority number one is really let’s fix the situation with the waste management. And then truckload becomes the next thing that we’re going to be looking at. And probably Mona, that's something I'll be working on early next year. Okay, because I think that we will have a solution okay coming pretty soon on the wayside.

Thank you and then just lastly from me before I step back in queue. While the outlook sections stated that organic growth remains restrained, Q3 only saw slight organic growth contraction 0.5% versus 5% last quarter. Is the sequential variance due to the exit from rig moving or the fundamentals in other segments are stabilizing.

No I think that if you look at our truckload and if you look at our LTL and our P&C, I mean it's pretty stable, we're not growing fast, whereas our logistics and our waste has been growing organically. But the rest of our sector, we lacked volume so if you look at the Contrans operation this is a well-oiled machine but it's not pumping up the profit that it should because of lack of some volume. A, if you look at our Quebec based truckload, it's the same thing. If we put a little bit more volume into our machine that would be fantastic. If you look at our P&C or LTL business, our LTL business on the intermodal side we’re doing well with you know the Quickex and the Vitran, Clarke not so much because they've been affected badly with the steel industry, Clarke is a big hauler of steel, and so that's why Clarke has been a little affected. If you look at our LTL over the road, our best market has always been Alberta and you know with the situation there it affected us big time in terms of volume. But all in all what we see so far in '16 is, it all flat and we are budgeting, we're planning for the same kind of situation in '16 for the Canadian operation. So it's going to be improving what we're doing and doing better with less, or doing more with less I would say.

Your next question comes from Hilda Maraachlian with Cormack Securities, please go ahead.

You gave some color here on the outlook segment but any initial thoughts in terms of the volume growth next year, do you think things will get worse here before they get any better or more of the same, or are we at the bottom here?

Well, you know what, I think that if ever this low Canadian dollar sparks, the manufacturing in central Canada. We should start to see some volume growth. That's the way we see 2016. If this doesn't happen we think that the volume for all of PFI Canada except on the logistics side and on the waste side, the volumes should be flat. But we believe that you know with such a low Canadian dollar I mean something should happen pretty soon. That's our thought but our plan is based on stable volume for 2016, we don't budget according to what we hope is going to happen, we budget very conservatively, so that you know we match costs with volume, so going back to your question, I believe that we're not going to do worse in '16 than we did in '14 or '15. We should probably do better but my comment is that let's think that it's going to stay stable.

And so in terms of FX, I mean it's been low for almost a year now. Did you start seeing some impact here or are things changing or we're the same as we were in January of this year in terms of volume pick up from FX.

I mean, if we look at our truckload business or LTL or parts sold, FX didn't help us yet.

Okay, and second question here is, it looks like organic growth is being limited so topline growth will come from acquisitions. Can you comment on M&A activity here, are you going to be active next year or you're going to focus on integrating the businesses that you bought and spinning off the waste, it looks like it's going to be done here. So what's your thought on M&As in terms of M&A here.

Well I think 2015, '16 we decided '15 was going to be a quite year because we had to take care of our waste management division, and M&A was really buying own shares in 2015 so we know what we are doing. ‘16 will be a different year, for sure. And I can really tell you that our focus is going to be probably in to growing our U.S. truckload base. If you look at valuation of truckload companies in U.S., valuation have come down big time. So I think that the focus for M&A is going to be in the U.S. for us in 2016. So once we have more information, and I would say that probably within next few months I mean it’s going to be clear for me to explain what is really our next step once we get all things public about what we are doing.

Okay. And in terms of the size, it looks like you are going to do M&A, are they going to be big sizable companies or more smaller, a lot of bunch of smaller ones?

No, I think that if we look at the U.S. truckload market today, we are let’s say a $400 million company, so it’s way too small. So we are not going to try to buy a $60 million guy or a $40 million guy. So we will probably do something that is more significant. So that we end up with a solid business in the U.S. and we have a great team at Transport America and for sure that’s where I am now with Greg and the team there. So I mean we have a solid team, so we could build with this team in the U.S. No question about it.

Your next question comes from Walter Spracklin with RBC Capital Markets. Please go ahead.

So just following up on a few of those questions. First of all, on the truckload side where you want to start becoming acquisition focused. Do you have to have a transaction affected with a kind of a spin out, have a publicly listed TL company, U.S. listed TL company before you do those acquisitions, is that a necessary precursor or could you be buying companies and then down the road kind of spin it into a U.S. listed?

Well there is many ways to skin a cat, hey Walter, but one thing that I am thinking of is let’s say that we come to a deal with a U.S. publicly traded company and what I would probably do is combine our U.S. based truckload with them as a first step.

Right.

You understand what I am saying?

Yes.

Okay. So this company would be only U.S. truckload okay?

Yes.

So which would be America and the other company.

Yes.

And for sure because the target is a publicly traded company I mean we would use their publicly traded company to do that. So that becomes, let’s say I don’t know may be $900 million truckload company, standalone listed in New York which TFI owns a share of that and probably some other U.S. shareholders would own maybe 30%, 25% I don’t know, okay?

Okay.

So that is probably the first step. And then we use that corporation to keep on growing to a certain size, so let’s say a 1.1 billion, 1.2 billion in revenue and then if TFI’s intention is to get out of truckload then they could always sell the Canadian division to the U.S. truckload company if and even more interesting if the dollar is at $0.75 still.

Right, right.

Right?

Okay.

So this is different than most people think. And this is why it’s so important but it’s still early in the game Walter. I want to clarify the waste first and once this is done, I will come up with the plan and but you are always fast, you always ask me the right question, so I mean I have to come out with a little bit of my strategy there. So that’s the way I see it. So that would be a very strong U.S. based truckload being a public corporation, where TFI would be a shareholder, majority shareholder to start with and then down the road we keep on growing this U.S. company and then at one point maybe, it makes sense for this U.S. corporation to buy a Canadian truckload operation, right?

Got it, yes, makes sense, understood. And then in terms of the waste transaction, you had lots of -- I think there was lots of theories out there as to which way you would be leaning some more complicated than others. I think are we moving toward a JV complicated structure where there is still some, or is it more of a cleaner transaction you think?

No, I think that we just had our Board meeting yesterday and discussion we had with the Board which they approve what we’re doing. And it’s not going to be a very complex transaction.

And then just in terms of an update on the integration of your recent transactions, can you give us an idea of what’s left in terms of upside in your view over the next one year, two years from the continued integration of all of your recent transactions going back as far as kind of the Dynamex right up until as recently as the Contrans, most recent large one?

So if we talk about our next day service in the P&C in Canada, the Loomis Canpar integration, the team there is doing a fantastic job. I mean we are penalized in Q3 with $2.5 million of severance in our P&C, that’s because of all of this integration that’s taking place and in Q3 we integrated the Toronto operation of Loomis and Canpar into the Canpar hub. In October we’re integrating [Edmonton]. We’ve integrated Quebec City in late September early October. So, these are integrations that are still going on and when you look at my P&C and say, hey you didn’t do too good, I mean you’re high last year in Q3. So where are you guys going? I mean, on the next day service, that we have in Canada, I mean, I am very happy with what Brian Kohut, and Rick Ashe [ph] and Ping Yang [ph] and all these guys what the work that these guys are doing is fantastic. On the same day service with Dynamex, last mile in Canada I mean we had some major challenges this year. We started the year on a wrong foot. We had too many turnover changes in this and that and so Dynamex Canada is won by a young guy, highly dedicated individual. This guy will be successful, I’ve got no doubt about that we just earned a major contract in Canada with large customer of ours that’s going to amount to a little bit more than $20 million of revenue in 2016. So while we had a rough start and the same thing in the U.S. with Scott and his team there we had tremendous challenges in Texas with the startup of one customer that we -- the guy overloaded us with revenue and all that. But on the good side though, is that the ecommerce business that we have with the largest ecommerce player in the world, we’re going to do about $18 million of business with this guy in four or five markets this year. Next year based on what we know in additional market we’ll probably be serving in about eight to 10 markets with $35 million revenue. So, things are going to get better in 2016 on the P&C side, both next day and same day. Now the Hazen acquisition was a great acquisition in the U.S. I mean these guys are specialist in serving OD, so we’re using the strength and the talent that’s in this company to help us move away from the OD business and Dynamex so that we could focus more on the ecommerce side. On the Canadian side ACC small company doing very well. It’s managed by next Dynamex guy,Roger Sandhu. Roger has got a great team doing a great job. I mean those guys are coming out right now with an EBIT that’s close to being double digit, so I am very happy with the work that’s been done there. And our LTL that’s the big problem I mean that’s the problem we have is that the market is shrinking and the beauty though is that our intermodal guys are doing well except for Clarke because he’s penalized with the steel business. So if you look at my intermodal I don’t have any asset in there, so very little asset so my return on asset is great even if my EBIT is only 6 or 7 points, my big problem is the overall guys. I mean my best market was Alberta. I got kicked out big time over there, it’s market that shrunk like there is no tomorrow. So I've got a big issue with the over the road, but we're working on trying to diversify partnership. Get more partnership with some big US players that could beef up our LTL. So Rob O'Reilly he's highly involved in that with Jeff King and the rest of our team over there. So in order to try to get more business from some new partners that we could or new partnerships that we could develop and I think we said it before, we just start serving FedEx freight in Vancouver about two months ago, so that's a great addition to our business. But there's more to do in that sector, so that's what we're trying to accomplish without rocking the boat of that market, that is really weak. On the Contrans side, we're very happy, Contrans has always been a great company. The only problem we have now is that we're missing a little bit of volume, it's the activity is not what we anticipated it would be. We hope that '16 will be a better year, we hope that, this Canadian dollar will start to spark a little bit more of activity in Ontario and in Quebec. But the team there is fully dedicated, the cornerstone logistics now, and you know the fact that we got out of that rig moving and now it's a discontinued operation you can see how nice of a logistics company we have outside of our truckload operation. It's a great business, I mean we're coming out with an EBIT of a little bit above 10 points. I mean compare us with a I don't know a CH or a Landstar, these guys are running an average of 6.7 points and Echo is 2 to 3, so we're doing a fantastic job on the logistics side and we have some growth there.

So I guess where I'm going is that, if in that kind of tepid volume environment, tepid pricing environment going into 2016, if you take the midpoint of your new range at say 530 million on EBITDA for 2016, what do you have that can be upside generated internally to your 530 for 2016 if you don't have any topline growth for that year or are we essentially saying now we have enough visibility with enough expectation that we could build in some growth for 2016. How would you point us in that direction for 2016?

Well you know Walter, let's be conservative although we have a liberal government now. But let's be conservative on the numbers, us, what I could tell you Walter is that, let’s say market stays the same. We believe that where we'll show up in the improvement between $20 million to $30 million bottomline. Same markets, everything stays the same, so if the midpoint is 530, so we should be in the 550 to 565 range next year.

Your next question comes from Benoit Poirier with Desjardins Capital Markets, please go ahead.

Just to come back on 2016, a very good color about the 20-30 million you could improve on the bottom line, could you maybe point out on which segment could benefit the most in terms of margin improvement and what could be left beyond 2016?

Okay, well number one is, if we would be the owner of our waste business in 2016 we know that the waste will definitely improve between 5 and 8 million, okay, so that's number. Our P&C next day service in Canada, there again the goal there and for sure Brian and his team they will come in with an $8 million improvement to our bottom line, which is about 100 basis point of the next day business we have in Canada. Now our same day guys, which is about 175 in Canada and let’s say 450 in the US. Those guys, they have to be above one, so it’s probably going to be between a 100 points to 150 points. LTL we cannot do worse in '16 as we did in 2015. So there again we will probably improve that by about 3 to 5 million, conservatively speaking. And then if you look at our truckload, if we have the same volume, if everything staysthe same, there again working closer with America and the rest of our division, there again, if you look at, we are a C$1.8 billion company Canadian dollars, so it’s not going to be a 100 basis points but it could be something in the neighborhood of 50 basis point improvement there.

Okay, that is very good color, Alain. And maybe just in terms of free cash flow, obviously still solid for the year, 300 million but your funded debt EBITDA improved to 3.3 time which is getting closer to your covenant. So I am just wondering especially in light of your M&A comments for 2016, what is kind of your [plan] for deleveraging the balance sheet for 2016 and where you could be in terms of debt EBITDA ratio?

So you know what Benoit if I wasn’t sure that we had a trade coming soon, I would never have bought $60 million of shares in Q3, right, to be frank. So we know that something will be happening soon, I mean that’s -- we have been talking about that for the last year, right. So we are very close to coming out with what we have been working on. And once this is known, everybody will understand that this leverage, is going to be down big time. And after that, that’s the only -- because we don’t want to issue any shares, as a matter of fact we’re buying back our shares. We kept on buying back our shares. So we are not going to issue a new equity. But once this is done, you will see our leverage go down in the neighborhood of a 2. So I mean that opens up 2016 to be able to start moving into back into the M&A and like I said valuation of truckload in U.S. have come down big time. You look at all these nice truckload company in the U.S. and they were down what 30%, 40% from peak valuation less than a year ago, right.

Yes, I know definitely. Okay. That's very --

So the timing -- hey you know what Benoit the timing is fantastic for us, if we can come up with -- we have been working big time on selling this way situation and once this is done now we are in a position to make some moves and I think that will surprise all other people in ‘16. We are very quitebut we are working behind the scene. And I think that our shareholders will be really satisfied.

Okay. And just on the e-commerce side, it seems that there is a lot of promising growth going forward. So I am just wondering if you could provide more color on the current revenue right now. It seems that you might be running close to 50 million and could almost achieve more than 115 million next year. So maybe if you can walk us through what are the current contribution and also if the volume could positively impact margins going forward?

Well you see Benoit, what’s happening is that more and more, small share of the e-commerce is going to the same day last mile guy, a small, itsnothing big. And we started slowwith guys like Google Express which they are not doing that well but it’s still a very good customer of ours, in terms of growth they are not doing that well. But if you look at the largest e-commerce player, I mean we started small with these guys because we are not in the business of practicing delivery, we have to make money and we can’t work for somebody where we are losing money. So that’s why now finally we are servicing them, slowly we started this year in San Diego, we started in Orlando, we started in Tampa. We just opened up LA with them, and Chicago and we have eight new markets scheduled for 2016 with them, but we are making the normal gross margin with these guys in the normal EBIT. So that is the direction we are going and we are trying to work with other e-commerce players. And this is why the focus of dynamics is let’s move the staples and OD business that we have within Dynamexto the specialty shop that is Hazen. That is their specialty. So once you do that then the Dynamex team is going to have more time to focus on growing the ecommerce with those retailers and also grow our pharmaceutical business but our health related business that represents about 20% of our business today.

And logistic first time you disclosed totally the division is obviously a nice business with good margins. Could you talk a little bit about your growth prospect and also how it fits with the rest of the business? And given the current valuation in the logistic guide, whether it could be also an opportunity to divest that division over time?

It could be Benoit. But you know what, if you look at the best company in the world, UPS and FedEx I mean those are the two best companies in the world. And you see these guys are running an LTL operation, a P&C operation and a logistics operation. So those three [indiscernible] very-very well together. So really our goal is to keep on growing our logistic organically and maybe at one point. And I say maybe at one point some M&A activity in that sector, so nothing. The small deals I don’t -- I am not a big fan of the small deals into that sector because you always rely to one or two guys. So maybe that could grow to an M&A but a more significant acquisition down the road. So, and maybe at one point if the truckload becomes like I was explaining to Walter a standalone division, it makes sense to keep LTL P&C and logistics all together to be able to be comparable to the best company in the world which are UPS and FedEx and DHL to some degree.

Your next question comes from Kevin Chiang with CIBC. Please go ahead.

Maybe just going back to your de-leveraging comments, it sounds like in order to get down to two times I guess by end of this year, it sounds like you’re going to need more than just some of the smaller asset dispositions and internally generating cash. I might have read between the lines that suggest a waste deal could be happening quite eminently here not just an announcement but a national transaction could be happening quite eminently here?

Well, we’ve been working at that Kevin for the last 12 months, and it’s been our priority. So we start to a lot of people. We’ve met a lot of people. We have lots of interest from three or four strategic players. So, you’re right, Kevin. I mean I think it’s time that we call a horse a horse and we should be coming out pretty soon with a final solution for this great Company. I mean it’s always sad, you look at that and you look at my Q3, the team there is doing a fantastic job. I mean look at what these guys have done in Q3, and I was looking at my forecast for October and we’re just fine with the improvements that Dave and his team is doing there. But, there is a time that you have to make a decision for the benefit of the shareholders and maybe we’re getting close to that time.

That’s very helpful to hear, and then just a point of clarification. Are you done with your gross CapEx for the year? Looks like you’re at the upper end of, I think the guidance you released earlier this year, so should I be thinking of CapEx being, or growth CapEx being effectively nil in the fourth quarter?

It’s not going to be nil, but it’s going to be much lower than Q3. Q3 was a big-big CapEx month for us, yes, absolutely.

Maybe just turning on to ecommerce, lot of helpful comments you provided earlier. But when I look at the headlines, I am reading more about Canada Post setting up pick up sites so then becoming much more competitive on the ecommerce phase. I think I read somewhere recently Uber is looking to get into the same day delivery. So I am just trying to -- I am just wondering from your perspective the tension points between the growing pie versus increasing competition and maybe what you’re facing from just from technology perspective as you look to grow the ecommerce platform?

The ecommerce will grow a big time over the next 10-15 years, no question about that. And the best player in Canada is really Canada Post, because they have a great coverage and they don't charge anything for their service, they're cheap. So for sure where there is no density like all the remote location in Canada, I mean us, we'll never be a player, never. Unless it goes through our [indiscernible] for our next day service which is you know not really something that will probably happen big time. So our [game is], are really our market is the high density area of the US and in Canada. So if you think about Canada, you think about Vancouver, you think about maybe Calgary and Edmonton, you think about Toronto, you think about Montreal, the big markets in Canada, we could be a major player. We could -- it could be important to us. But if you think about Sadberis in Ontario, I mean we'll never be an e-commerce player in Sadberis, it’s impossible. there's nobody in Sadberis, it’s a small town, rightor [Red Deer] or [Cantaloupes], or [indiscernible], no it's not going to work, so our model is very efficient. It's very lean and mean but it works only in large metropolitan area, that's it. So LA for instance it's going to be a great market for us. Tampa, it's going to be a great market for us, we're doing about 4,000 in a day in Tampa today. So Tampa, it’s big, it's not a 200,000 population town, right. So we can't fight guys like Canada Post or USPS in the US in the small town but we could be a player in New York City, we could be a player in Chicago. So this is why we serving right now for the largest e-commerce guy about six markets and next year we'll probably be in 15 markets with them.

Okay, that's very helpful. Just last one from me, when I look at your TL operations, if I recall correctly one of the broader strategies when you acquired Transport America were, were reducing your dead miles on some of the trans-border traffic, in and out of the US and potentially just improving your flow of goods through the continent. I know it's still early days here, but have you started to see the benefit of that from your network in adding Transport America, or is this still acting as a separate entity, kind of separate from the rest of your TL operations?

We're doing that Kevin but really small. So far it's really small, because don't forget if you look at the footprint of America, I mean they're more like a Midwest type carrier, than an East Coast type carrier, so to be able to connect with our Quebec based truckload guy and Ontario based truckload guy, it's got to be more of an East Coast type of guy than a Midwest type of guy. But I mean America is one of our foothold in the US. So the next one will probably be more of a player on the East Coast, so then it would be easier. But what we see in America, we see a great team running a company with an [88OR] okay, so that's middle of the pack. I mean you got guys at 84 okay, but America's an 88 guy. So they're better than guys at 92 but 88 is still far from 85, so the goal right now working with Keith and his team is to bring America down to an 85, over time, it's not going to happen overnight, number one. Number two, is to also the capital intensity, America is much higher than anybody else within the TFI family. If you compare America with the other truckload in the US you say well they're not bad, well, me I want to compare America with what we can do in Canada, sorry capital intensity is much less in Canada so that's the other thing that we're working with the folks here at Transport America. And it takes time, you know, it takes time and we're moving in the right direction so this is why for me once we have the situation resolved for the waste, our next step really is to find the right partner where we could combine down the road our solid America team with somebody else and create size and to me that would be a standalone US based truckload company where TFI has an ownership and listed in New York and the rest of the shares could be owned by other investors.

Your next question comes from Jason Seidl with Cowen, please go ahead.

Well just a couple of quick ones from me since a bunch has already been asked. I guess when you are looking at [indiscernible] and their fleet, is there anything they might need to do on the CapEx side in 2016 or is the fleet sort of looking like the rest of the publicly traded truckload guys extremely young?

It’s still extremely young here. I mean we are running America like the comparable like the [indiscernible] or the Hartland guys. I was just talking to our guys here were -- no absolutely I mean we are in the same ballpark. Yes.

Okay. So when we think about CapEx for that particular segment probably going to be maybe down or flat next year?

Well we are talking CapEx as a matter of fact we're in Minneapolis right now and we are going to be reviewing budget [indiscernible] and the first number of CapEx for America is going to be in the 30 million neighborhood. So I mean it’s comparable to what we’ve done this year so far.

Okay. So about flat, okay. If I can switch also maybe to sort of the last mile business, I think you mentioned that you’d like to do some more acquisitions. Are you talking in the U.S. or you talking Canada?

U.S.

In the U.S. okay.

U.S. Jason, yes, yes U.S. I mean absolutely.

And what are you seeing in terms of demand, I mean we just saw Amazon out last night just blowing numbers off the cover. We’ve heard from other carriers that serviced Amazon like the covenants of the world that there were a lot of [expedited] work that, expectations for the e-commerce peak season is actually very, very good, I just love to hear what you are hearing for your company.

Well when I talk to my guys Jason I mean they are just going crazywith these -- don’t forget, we are servicing them only in a few markets, six or seven markets so far, next year it’s going to be probably a bigger issues for us. But today the guys are -- I was looking at the forecast for October, November and December and we are just going to go through the roof. To give you an example we are going to be doing let’s say a little bit more than 1.5 million with them in October but December is going to be double that.

Now when you say them, are you talking Amazon are you talking Google?

I am talking the same guy that you are talking about.

Oh! Got you.

Same.

Yes.

No one has said the name because then the guy, so [multiple speakers].

The unnamed e-commerce player.

Right.

Your next question comes from Cameron Doerksen with National Bank Financial. Please go ahead.

Just a couple of quick ones from me. First, I just wanted to quickly go back to the waste, I mean I think it’s pretty clear you articulated what the strategy is there and the timeline on it. But I am just wondering if it still might be your intention that whatever happens with waste that TransForce would continue to be a minority shareholder, or is it your intention to do something with the entire business?

Well you know what I am a big fan of waste and I would like to be just a waste company because it’s such a nice business and it’s easy to run. I would have more hair and less grey hair if I would be just in the waste business. But Cameron this is not the reality, so waste is only 5% of our revenue. Now are we going to be a minority shareholder in a new company? This is I don’t know, I can’t really answer that Cameron today. It all depends on at what pricing, what would be our influence and who is the partners. So it’s a tough question to answer now. But as soon as we can come out publicly with what’s happening then I will be in a position to explain exactly what’s happening.

Okay, fair enough. On the rig hauling, the assets that are for sale, maybe it’s in the MD&A, I didn’t, maybe didn’t see it but what’s left to sell there on a dollar value?

Well if you look at our assets held for resale which is I don’t remember the number but it’s something around $25 million, okay?

Yes.

So that is really what’s left there and we believe that most of that should be sold before the end of the year or sometimes early in 2016. We don’t have any issues with truck and trailers, it’s not an issue at all. Every time we sell these assets, we make money. The problem that I have is with the cranes. Cranes is a big problem that we have. And slowly we’re selling them one at a time and so we’re moving forward. But I don’t want to dump those assets on the market and lose $2 million, $3 million, so this is why I said to the guys, listen. We’ll go slowly in Texas, in Denver, selling those assets. So it may take a little bit of time because I don’t want to lose any capital on these assets or a little, as little as we can.

And you mentioned in the truckload business in Texas, which is mainly pipe moving. Is that business going to be managedas a separate entity or is that something you would roll into the Transport America? I am just wondering how are you going to treat that business.

This is under the responsibility of Bob McGonagall. Bob runs all of our energy business in Western Canada, so [indiscernible] and [see how] dedicated and all that. So, he’s involved in running Winalta which does the same thing as farmer in Texas. So, no it’s not going to be under America's belt, it’s still going to be run with our energy specialist the part thing.

And on the logistics business now we’ve got a little more information about as a standalone. I am just wondering if you could talk about what the seasonality is in that business and whether the margin that you reported in Q3, is that something that is sustainable on a full year basis?

I think so Cameron. I mean you will see us going forward, and it’s a great business. We run a great-great business. And don’t forget this is only part of our logistics, because we have more than that within our truckload sector. 20% of our bottom line in our truckload division today is asset light based, which is fantastic. I mean, that’s why our capital intensity is so low compared to let’s say a U.S. truckload guy. So what you’re seeing there in our logistic is standalone company that have no asset whatsoever, like an Echo or like a Landstar or like CH in the U.S. But we also have asset like revenue within our truckload division, because 20% of my profit in my truckload comes operation that doesn’t involve any assets. And that is something that America doesn’t have today and that’s something that working with key -- they have some but small.

Maybe just final question from me, just on M&A. You talked about the truckload in the U.S. Is there anything more you’d like to do in the P&C space in the U.S. to kind of grow your network there?

Well, the P&C space now, you’re right if we see something that makes sense, so right now we’re looking at a small guy in the U.S. that fits. But it’s nothing going to be big. So it’s a small $15 million guy, it’s a $20 million guy, like we bought Hazen, great acquisition. So we’re always on the lookout. But it’s not going to be anything major for now because our focus is really to beef up our presence right now in the truckload in the U.S. because I see an opportunity. We have a solid team in America and we could build with this team to have a little bit more size. And because valuations are more reasonable today, then you could do a deal.

Your next question comes from Turan Quettawala with Scotia Bank. Please go ahead.

So I guess most of my questions have been asked and answered. On the yield side on the LTL, those are really nicely up about 6.5% here in that business. Can you just share with us are those price increases or is that just mix, and how sustainable is that?

No, you see, price increase is a little bit of that Turan but not really much. It’s really yield. It’s improving [surcharges]. It’s a little bit also the U.S. exchange that’s helping us okay, and it's also low margin accounts that if we can't get better margin, I mean we just say, guys I'm sorry but we can't service you. You know the chance we have now more and more in the LTL world is we have good operators like Mullen, getting involved more into the LTL sector, that definitely will help us. The only problem is that Marie's only in Alberta and Saskatchewan for now. So for sure, more that we have those professional guys that want to make money. That's going to help that LTL market that's for sure, because we still have too many guys losing money. Just look at one company, about two months ago and these guys were like another DHL Canada, when we bought DHL those guys were losing 6-7%, that's the same thing with this guy. He's fairly big guy and they don't have any solution but to lose more money every day, right. So to answer your question, yes, it's a little bit of this, a little bit of that and Rob and his team they're working like slaves to, it's the worst market that we have right now, it used to be the best market in 2008 now it's our worst market. We also made some changes in our regional LTL company so now if you look at CF, okay, CF is becoming more and more of a regional carrier. Well that was always their base, I mean CF was always the solid regional guy and now it's going back to being just a regional Western Canada carrier and we’re doing the same thing what Kingsway, he is now more of a regional carrier only in Ontario and Quebec and also the leadership, has changed there. So we announced that Bob McGonagall which is based out of Edmonton now will be responsible for leading the pack there of CF and Quebec guy one of our EVP, Geoff will be responsible for improving the Kingsway results, so that will take effect, it's taking effect now. And the guys are working, because the over the road LTL business that we have, we have to do better. Our [intermodal] we're doing fine, we're doing better than 2014, we'll do better in '16, but the over the road is costing me a fortune because I've got tons of asset and the return is so poor. So whereas I've got better returns -- way better returns with the intermodal. So the pricing improvement that you see, that's the direction we're trying to go, work on the cost and try to get some improvement on the revenue side.

Got it, that's really helpful, thank you Alain. And I guess the next one that I had was, this is a follow up on the Canada Post stuff that you were talking about earlier, I understand your comments about being more focused on the urban centers. I guess my question is if Canada Post were to come out with more stores in the urban centers would you consider something similar for your business on the e-commerce side?

Well we have some network already set up today but we're nothing close to Canada Post. We don't have any store but we have some partnership where we could drop the parcel for the customers. But we have a small network, I don't remember exactly the number of the spot that we have in Canada but I think we're about 150 to 200, still very small. So, that's one aspect of the e-commerce, because if you look at the e-commerce, what the brick and mortar guys are trying to do now is you order online and you pick up at the store. So that's one way of doing it, or you order online and they drop it to a point close to the guy's home, and he goes and he picks it up there, or the other solution which is more favorable to the buyer is, it's home delivery. So the consumer prefers the home delivery for sure, but it's more complex but that is exactly what we're doing us, more than just the drop spot, but we have the facility to do that, but it's limited.

Fair enough, okay. Yes, I know, I agree with you like I think I prefer home delivery, but I was reading some research and they were suggesting that a lot of people like the pick up option as well because they can sort of work on their own time, right.

Oh, absolutely….

Just one more question Alain, on the leverage. I understand your comments about deleveraging here pretty quickly but it seems like your covenant came down a little bit from 3.15 …

Yes.

… to 3.5. Can you just give us some clarity as to why that occurred?

Yes, well the thing, what happens is that our covenant moved up when we acquired Contrans, okay?

Okay.

So the deal we had with the banks at the time is that okay over a year you have to go back to the 3.5.

Got it.

So a year is now, okay?

Okay.

So that’s why we are back to the 3.5 and 3.5 is the normal covenant that we have to respect.

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

Just two very quick questions from me Alain. I was wondering if you can please provide the percentage of revenue which is actually coming from Western Canada right now, not just related to E&P directly but just out of that province in general.

Oh! That’s a tough question, I have to tell you that off the top of my head. So I would say total if I include the P&C, if I include the LTL, if I include -- I would say between 6% and 8% of total revenue for TFI.

6 and 8? Okay. And because yes.

6% to 8%.

Right, because that has shrunk because of the absence of rig moving, right?

Absolutely, yes.

And then …

And also --

Yes.

You know Max also we are down big time. If I look at my CF for instance or if I look at my truckload base operation I mean the activity is much less in Alberta than it was just a year ago. So that’s why if I look at 6% or 4% that’s 250 million, so that’s the minimum and it’s probably between 250 million and 400 million today.

Okay, now that’s helpful. And then in relation to when we are talking about Canadian dollar depreciation and hopefully exports rebounding down the road, I don’t want to get, just I am sort of kind of [indiscernible] modeling, but do you have a sense in terms of how much of your business would be potentially levered to that increasing or improving dynamic come sort of 2016?

Well the big influence of that Canadian dollar depreciation is our truckload. For sure normally what we've seen in the past if you go back to 2005, ‘06, ‘07 and ‘08 when the dollar appreciate to par I lost about $200 million of my truckload business from let’s say 2004, 2005 to 2008 because now I lost that 200 million on 800 million so I lost 25% of my revenue overnight over a period of a year, year and a half because of the Canadian dollar appreciation. Now if you look at the size of our business today, and you say that’s you will recuperate only 30% of what we lost because it’s never going to be the same et cetera, et cetera. But we are a C$1.2 billion, C$1.3 billion because of Contrans now. So could that be a $100 million over and above the truckload? If finally we start to see some action, to me, it’s a minimum.

Right, okay. Now that’s very helpful. That’s actually that for me. Thank you very much.

Pleasure Maxim.

Your next question comes from David Tyerman with Canaccord Genuity. Please go ahead.

Good morning Alain.

Hey good morning David.

First question, just on the CapEx. It looks like you are going to come in around 150 million, 160 million, maybe 170 million this year on the gross CapEx. Can you give us some sense of what you think the number could be for next year?

It’s about the same David. Now you have to take into consideration this is gross CapEx.

Yes.

You have to deduct the disposal, right?

Yes. No I understand and I have that table separately.

Okay. And you know what David, one thing I have to add is that CapEx is more because of the U.S. dollar appreciation. So a year ago we were buying trucks at $1.12, today we are buying trucks at $1.30. So that means the truck is 18% more money in Canadian dollars that it was just a year ago. So if you are buying $60 million of trucks in Canada, while you’re paying 18% more money today than you were paying a year ago, because of foreign exchange. So it’s the same number of trucks, it’s just costing you 18% more money.

And do you think this is kind of a run rate for the Company now going forward?

I would say it’s in that neighborhood. So, what I’ve always said David is that we should be running net of all the disposals in the neighborhood of $100 million, this year we did a little bit more than that because don’t forget in our CapEx this year we had two acquisition that Contrans meet. We bought [indiscernible] but that cost us about $6 million or $7 million and this went through CapEx not to business acquisition because we didn’t buy the company we just bought the assets. So, that’s why I am saying my $100 million has to be tweaked because of FX. So let’s say $100 million a year ago is $120 million today, net of disposal. So that should be the number. And with Contrans in Ontario, we are the king of the king and for sure there’ll more of these kind of small tuck-in deals here and there to beef up our position as leader of the leader in Ontario.

And then on the P&C and the LTL, my impression is that the margins haven’t improved as much as we might have thought a couple of years ago. And so two questions on that one, why is that? Are there any big things? I mean you talked about a lot of things to the severance et cetera. But I know Alain holistically whether there is some big themes here that have caused a bit slower improvement. And then the other one is where are we going? At one P&C was supposed to go double digits and the LTL was too. And so I am just wondering what your thoughts are on that also?

So if you go back to the P&C…

So what happens and where are we going?

So the P&C business we have next day service in Canada. We’re improving all the time. Now when you look at my numbers, you don’t see that because it’s been dragged down by my same day which is doing worse this year than last year. I mean my same day business, both Canada and the U.S., I am $8 million behind last year so far after nine months. So it’s been a very challenging environment for my same day because my next day is improving. And for sure I’ve said it many times our next day service in Canada will definitely be a double-digit EBIT company within the next year, two years, the goal is there to improve by 100 basis point. We have to let go about 75 people in Toronto just a few months ago because of all the change that we made, that’s why it’s costing me $2.5 million in severance. Now think about those 75 people that cost us maybe $40,000 a year, those guys are gone, so that’s $2 million or $3 million saving next year. And these are all the changes that we keep on doing. So my next day service in Canada with Brian Kaut, Steve and then Rick Ashe [ph] and all these guys are definitely improving. My same day operation in Canada under Chris, he had a very rough start of 2015, that’s not going to happen again. And we’re adding some new businesses. So he should be -- he will never be a double digit within the next year or two. But instead of being a 6, he’s going to be an 8 next year. And the same thing in the U.S. So I am very confident David that over the next year or two, we’ll keep on improving our P&C. We look bad this year because we’re behind last year. So you say hey where are you going? You’re not going up, you’re going down. But, if you exclude and if you look at the picture next year, we will definitely improve that by, at least 100 basis points, on the LTL side, that’s a different picture. The LTL over the road it’s really a very-very difficult market. Our best market is still Western Canada. But our most difficult market is still Ontario and Quebec where the activity is not picking up, volume is less, we’re working on the rates, we’re working on the yields, we’re working on accessorial -- we're making some leader changes to be closer to our people and that's the goal. But to say that LTL will be a double digit EBIT within the next year or two, it's not going to happen. So we're a 6-7 point guy, maybe the goal could be a 7.5 next year, an improvement but definitely not being a double digit within a year or two. The P&C guys, I've got more faith there, and don't forget that Alberta really affected our P&C and LTL business. I mean our volume in Alberta are down like there's no tomorrow. So that's another reason why it's been difficult for us to make our plan for 2015. This oil situation is really not helping us at all.

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

Pleasure, David.

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

Okay, so ladies and gentlemen thank you for joining us today and I look forward to speaking with you again following the release of our fourth quarter results. So, everybody have a great day, thank you all.

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