TFI International Inc. (TFII) Q3 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the TransForce Third Quarter 2016 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 21, 2016. I will now turn the conference over to Alain Bédard, Chairman, President and CEO. Please go ahead. Alain Bédard: Well, thank you, operator. And good morning, ladies and gentlemen, and thank you for joining us this morning. As you know we released our 2016 third quarter results press release yesterday after market close. I'd like to begin the discussion today by providing you with the principal highlights of the third quarter. The economic conditions affecting the freight market across America remains fragile. Soft manufacturing activity as affected volumes especially in the – in our truckload sector and the lower value of the Canadian dollar has not yet provided the Canadian economy with an appreciable boost. In spite of those conditions and other TransForce results remain solid. The company's asset like business model and the cost of efforts across the organization to improve the efficiencies and strictly align supply with demand continue to serve us well. In our P&C segment, e-commerce activities on the increase and our LTL segment has made significant operational efficiency gain and our free cash flow remains robust. Third quarter total revenue from continuing operation reached C$975 million, down 3%, compared to the same period in 2015. Before the fuel surcharge revenue from continuing operation was down 2% to C$897 million. The decrease stems from lower business volume in our Truckload and LTL segments, partially offset by revenue from small acquisition completed over last 12 months and high volume in our P&C segment. Operating income from continuing operation was C$72.4 million, compared to C$72.8 million last year. As a percentage of revenue, operating income stood at 8.1% of revenue, versus 8% a year ago. The slight improvement essentially reflects margin gains in our P&C and LTL segments, which were offset by lower margin in our truckload operations. Adjusted net income from continuing operation was C$56.4 million or C$0.60 per diluted share, compared to C$48.6 million or C$0.48 in 2015. Finally, TransForce generated the free cash flow from continuing operation of C$81.3 million or C$0.80 per share. We used this free cash flow mainly to repurchase 1.6 million common shares for a total conservation of C$41.8 million, and to provide shareholders of C$0.70 a quarter dividend in the amount of C$15.8 million. I will now provide you with more insight into each of our business segment. Driven by e-commerce growth, Package and Courier had a great quarter. Revenue before fuel surcharge grew 3% to C$328 million with e-commerce revenue increasing 26% to reach C$71 million. E-commerce now accounts for more than 20% of this segments revenue, and we're continuing to make significant inroad in this area. Operating income in P&C significantly increased to reach C$33.6 million, which is a 50% increase in the quarter. As a percentage of revenue fuel surcharge, before fuel surcharge the operating margin rose 320 basis point to 10.2%. In addition to the favorable effect of high volume, we also realize efficiency gains that were a direct result of operational improvements and cost saving initiatives. In the LTL segment, third quarter revenue before fuel surcharge was C$181 million, down 6% from last year, in large part the revenue decline reflects the soft condition, economic conditions in Western Canada, where demand continue to decline year-over-year. On the positive side, even though shipments counts were down, the average revenue per shipment has increased slightly year-over-year. Over the short-term, despite the lower Canadian dollar value, we do not foresee any significant uptick in price or volumes. The company is focused on cost control and the operational improvements has allowed to mitigate the decrease in the LTL demand. In fact, operating income in the segment increased by C$3.1 million and reached C$15.3 million in the quarter. Driven by efficiency gains, the operating margin has a percentage of revenue before fuel surcharge increased by 120 basis point to 7.5%, excluding gains on a sale of a property. The Truckload segment is feeling the impact of a very challenging freight market in the U.S., where both volume and rates have been under constant pressure in the quarter. We've also had to deal with a drop-off in activity for our specialized division, servicing the energy industry. Revenue before fuel surcharge in Truckload fell 5% to C$343 million. Our asset-like brokerage service generated C$53 million of revenue during the period. This represents about 14% of our total revenue, which is about the same as last year. Operating income in our Truckload decreased by C$12.4 million to C$24.9 million, representing an operating margin down to 7.2% compared to 10.3% in 2015. The bottom line is that the U.S. market remains very difficult, there is a raise in volume. Volume from our Canadian Truckload division was also under pressure and our focus here will remain on implementing effective measures to that supply to the demand. Logistics revenue in Q3 was C$58 million, down slightly year-over-year. Excluding business acquisition, revenue decreased by 9%, largely due to lower volumes. Operating income for the quarter rose from C$6 million to C$6.7 million. The increase was mainly generated by a gain on the sale of property. Excluding this gain, operating income decreased by C$1 million, and the operating margin decreased as well from 10.1% to 8.6%. In terms of our outlook, we anticipate the soft manufacturing activity to North America will persist in the months ahead. Slow, slowing economic growth and that the Canadian economy will continue to be challenged by low energy prices. Given these market condition, our decentralized and diversified business model should serve us well as it gives us the flexibility to adapt rapidly to change in market condition. Asset-light activity remains a priority as they provide TransForce with superior returns and solid free cash flow. Increasing our reach in the e-commerce, intermodal and brokerage sector will allow us to capitalize on this strategy. As always, our primary commitment is to enhance shareholder value. To do so, TransForce will continue to generate profitable growth through its existing operation and our selective acquisition strategy, as well, we will aggressively pursue every avenue available to reduce cost, improve operating efficiency and enhance margins. Additionally, we will continue to employ our free cash flow for M&A activities, reimburse debt and return cash to our shareholder to dividend and share repurchase program. In this regard, I'm also pleased to announce that our Board of Directors has approved a 12% increase in our quarterly dividend from C$0.17 to C$0.19 a share. So, now I would like to open the line to your question. Please operator?

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

Good morning. Alain Bédard: Good morning, Mona.

Sir, just a couple of questions from me. On the last call you provided an updated guidance range for the year of C$435 million to C$450 million in EBITDA. I'm just wondering, does that range still hold true, is there any change given the outlook? Alain Bédard: Well, I think so Mona because if you look at our Q1, we were behind plans, behind last year. Q2 was even worst, behind plan and behind last year. If you look at our Q3, okay we're – we're flat versus last year and in this Q3 we had also some very exceptional cost that really affected our numbers mostly stemming up our insurance claim, which was a disaster for us in Q3, which we don't, hopefully, we don't anticipate the same thing in Q4. We think that this has been exceptional, U.S. Truckload Division there. So, we believe that Q4, this year will be better than Q4 of last year. So that's why we feel pretty good that this objective is still attainable. We believe that our e-commerce business will be a tailwind for us in Q4. If you look at what's going on in the U.S. even in Canada, we're starting to see more and more growth in the e-commerce business. I think that this should help us boost our results in Q4. And the cloud that we have over our head, which is the gain in economy, sure we don't really anticipate that this is going to get any better with oil price of C$50 a barrel, with this situation in Alberta, which is a disaster, it's a big recession there. Hopefully, it's one of the bottom of barrel now, it's not going to go any lower, and with the election behind us in the U.S. we feel pretty good that 2017 is also our Q4 with e-commerce in the U.S. We feel pretty good that disaster that we went through in our Truckload Division, U.S. domestic Truckload Division in 2016 will start to subside because if you look at what's happening with trucks in the U.S., they have a tough time selling trucks. There is a reduction year-over-year, so the supply is shrinking. Okay, the demand is not improving but at least supply is shrinking. So we feel good that sometimes in 2017 also with the fact that ELD will have to be adopted, okay, by the end of 2017. So we have a good feeling. So we should finish the year 2016, stronger than what we did last year. And I think, I feel very good about 2017 with our P&C, our LTL. We know LTL is, it's a terrible business, it's been really bad for the last five years, six years. We know there is a lot of carrier that are dying, okay because they don't adapt volume. The offer with the demand on the volume, so their cost is going through the roof. So there will be some kind of correction in the LTL in Canada within the next two years, three years in terms of offer. The offer has to reduce. So we feel – that C$435 million to C$450 million, we feel good about that.

Okay. That's helpful. Thank you. And spoke specifically about the e-commerce side and the very, very strong growth that we saw this quarter continuing. And the MD&A you speak about increasing your market share, just wondering if that is planned to come organically or acquisitions out there that you can make in the space? Alain Bédard: Well, so far in our P&C business, we haven't done any acquisition. So what you see in Q3 year-over-year is really organic growth, right. And don't forget that our e-commerce is not really growing to acquisition because there's not much to do in Canada on the e-commerce side in terms of M&A, and in the U.S. It's very difficult because if you look at the trade that was done between GLS which is a sub Royal Mail. They bought DSO goal that has stayed overnight, GSO at a price that we can afford. I mean, when you're buying a company 15 times, 18 times earnings, and us, we trade at 10 times to 12 times, how can I do any M&A in the U.S., maybe it's better if I sale my business because I am so poorly value. But that being said, no, M&A for us, yes, small deals here and there is doable for us, but the growth has to come from our existing business.

Okay. And just a last question from me. In regard to the dividend increase that we just saw and the heavy investment in the share buyback program, should we take that as a signal that the M&A landscape particularly on the truckload side is not as attractive or that you're not seeing any near-term opportunities? I am just saying that as you had explicitly spoken a few quarters ago about timing for adding onto the truckload division and then timing to potentially spin it off, is that still on you radar? Alain Bédard: Absolutely. That's still on our radar. I mean, the share buyback is the safest way that we could do because we know what we're buying because every time we do some M&A deals, all that you do, all kinds of due deals, there is always risk. When I am buying my stock, I know what I am doing, I know what I am buying, I know the company inside out. And with the stupid price that we have, okay, that's why we bought again in the quarter about C$40 million of shares that we bought back. And that also allows us to with our free cash flow in our policy and our number of shares are down year-over-year, so we said listen, let's raise our dividend 12.12% and the sum of the dividend payment to our shareholder will stay the same because we have about C$7 million in our shares, okay. But, in terms of M&A, okay in the Truckload, don't forget my philosophy has always been you buy and buy and you sell good news. So Truckload now is the shit, it's really bad in the U.S. it's time to buy, well.

Okay. Alain Bédard: So, no it has not changed. So we're working, I have been working on deals that for the last nine months – 12 months, but if you want to buy at the right price or sell at the right price, it takes time, okay. So, mission is still there okay. And hopefully we could see some interesting news within the next six months to 12 months.

Okay. Thank you so much. That was a great color. Alain Bédard: It's a pleasure, Mona.

Your next question comes from the line of Jason Seidl of Cowen. Please go ahead.

Hey Alain, how are you? Alain Bédard: Hey, I'm good. How about you, Jason?

No, complaints, sir. No complaints. I wanted to touch on a couple of things here. First of all, getting back to the e-commerce growth, you mentioned obviously this has been organic for you guys. Alain Bédard: Yeah.

What types investments from here on out as we look for like the next, call it, 12 months to 24 months, do you think are needed to, not only keep pace with the growth as in e-commerce for your company, but even grow your presence beyond that organically? Alain Bédard: Well, that's a very good question, Jason because you see everything that we've done so far in the U.S. or in the – in our last mile business, has been done through our IC model, Independent Contractor model, but we're assigned to get more and more demand from customers that want an employee model. An employee, okay, delivering, that is one of ours delivering on behalf of the customer, which is something that we already do in Canada, okay, for the last – I would say, six months to nine months for e-commerce customers. So that's something new for us in the U.S., we just started the Boston market with that. We have two or three location now in the Boston area running with the employee model. So when you talk about employee, you talk about a truck or a mini-van or something like that. So, so far, what we've done is we leased equipment, okay. But down the road, we'll have to buy, okay. So what we – what we're doing now is, we're just building that, okay. We anticipate that our employee model, okay, will be at a run rate which is still small of a C$1 million a month by the end of this year, right. I don't know, okay, what's our forecast for 2017 because next week, I'm going to be with my friend at Dynamics and we're reviewing their plan for 2017. So no more then, but I mean, this is really something that's going to grow. But don't forget, we're talking small piece of equipment. We're not talking US$100,000 a truck. So we're talking US$25,000, US$35,000, US$40,000. And these are the same kind of trucks that we use in our ICS business here in Canada, where we're buying the Sprinters, or the Ford, the Transit, I think, is the name, a little bit smaller truck. So this is what we're looking at or that GMC, Savana type of thing there. So you're talking US$25,000 to US$40,000 okay, with the – a life of probably between six years to eight years. So, in terms of CapEx for us growing the e-commerce in 2017 I haven't seen the total plan, but to me it's going to be less than C$5 million.

Okay, less than C$5 million. No, that, that, that's good. Let me shift the conversation back a little bit to a division that hasn't been doing that well based on I think the Canadian economy. The LTL division, now you guys have taken many, many steps Alain Bédard: Yeah.

To try to streamline that division to try to keep profitability... Alain Bédard: Yeah.

At least a respectable level. Alain Bédard: Yeah.

When do you see that turning a little bit. So, when you guys could start reaping the rewards of the massive investments that you guys made. Alain Bédard: Well, you see Jason, first of all in our LTL we've got two kind of LTL. We got the intermodal and we got the overrule. Our intermodal at least the good thing is that we have no capital invested in that, in those divisions because the rail are doing line haul and we have the P&D operations all given to third party, but on the over the road, okay, this is where we're getting killed where we have lots of investment in real estate. Okay and that's why we're moving away from the small towns and we're selling terminals that's why you keep on seeing us selling real estate and with huge gains. Now, for sure the Canadian LTL market will keep on shrinking. There's no dream there, okay. The market will keep on shrinking because of the e-commerce and the e-commerce affects positively the P&C guy and its negative to the LTL. That's a fact. And the offer has to reduce so, you will probably see us during probably 2017, we're in discussion with a few LTL carriers that are just dying, okay because they don't make any money. And, in the solution in the Canadian LTL is really to adjust the offer to the demand, which is reducing every hour, okay, because the Canadian economy is not growing. The retail level is very small, and the e-commerce is really the big growth engine. And, that is not positive for the LTL. So, LTL for me in 2017, Jason is still going to be a drag on the average quality of profit. But, I think the good news is that we're starting to see some LTL players reducing their fleet looking at selling their company. I went through about three or four files so far. So far, we've not been really successful, but I mean it's we will see some action there I think on our side, on the M&A side, on the LTL, Canadian LTL in 2017. And then, when you do that, you're in a position to really adjust the costs, get rid of the equipment, get rid of the excess terminal and all that. And then, you're in a position where you stop fighting okay, for a rate of C$1 when it costs you a C$1.25, right. And, that's why you see us our revenue is always going down because our mission is to return on assets. So, I'm not going to give asset to our customer that says I'll pay you a C$1.20, I'll pay you C$1 and the service cost is C$1.25. We're not in that businesses.

Listen, I appreciate the color, and I'll turn it over to somebody else right now. Thanks again, Alain. Alain Bédard: Okay. Thank you, Jason.

Your next question comes from the line of Cameron Doerksen of National Bank Financial. Please go ahead.

Thanks. Good morning. Alain Bédard: Hey, good morning, Cameron.

Question on the Truckload, just as a clarification the – the I guess the insurance claim or accident related cost up C$2.9 million, why was it up so much year-over-year? Alain Bédard: Because, we had too many accidents.

Okay. So it's just – just an unusual quarter for accidents? Alain Bédard: Well, maybe – maybe our leadership at America, we have to go church not just once, but twice a week and pray. So that we don't have another quarter of this disastrous accident situation, and sometimes it's not our fault. I mean we get involve into an accident and, but in the U.S. it's a very expensive market. Although, if you look at our Transport America division, we are making all the right investments in people, in training, in education, in equipment where we have Keith was tell me, that 80% of our fleet now has got all the driver assisted technology like the collision avoidance and lane change and the rollover thing and all that and I'm looking at, so gee with. We've not been too lucky in this Q3. So it's really another negative to our results in our U.S. domestic operation, but I think this is exceptional. And when I'm saying, when I'm talking to the guys, is that guys, I mean we're doing all the right thing, its' probably that we've not been – we've been unlucky, I would say.

Okay. So just on the Truckload outlook, there is you mentioned this earlier, but there is I guess maybe some positive commentary coming out of mulling on their view of the Western Canada, Alberta specifically. I know there is some autism, and maybe things are stabilize there, but are you actually seeing that – customers may be coming back a bit, or at least the supply in the industry kind of being reduced, is that something you're actually seeing in Western Canada? Alain Bédard: Not really, I mean, we just bought a small company a few months ago in Alberta through contracts, and before buying the company, we went and talk to, I mean, it was small, so we talked to few customers and one them. I mean they said no issues, no, no, no, no, and then after we bought the company, while the business was put out for bid and the reach was just down 20%. So it's still – Murray knows that area way better than me, so maybe he knows things that I don't know, but I don't have a lot of faith in Western Canada right now, maybe if oil goes back to C$75 well, okay. So that's why us, we keep in the – in Western Canada what we have, but you'll see that our investment are not going to be done in Western Canada. I mean, us, I think it's clear, okay, what we're doing. Our vision is really south of the border and in the eastern part of Canada where the large population is BC and I hope Murray is right, okay. It's going to help us, it's going to help everybody, but I don't have a lot of faith right now with what we're seeing us, okay. So, our leadership team, they are fighting days in and days out just to protect what we have, because I mean, we have a waste hauling contract that we had so much competition there with our friend Progressive, bidding the business, and we've been doing that for a long time in Alberta. And it cost us a fortunate because we had to lower in order to protect the business. So, Cameron, I don't know. I hope he is right, but I don't know.

All right. Alain Bédard: That's why as we know what's going to happen in the U.S., we know that the truckload and the e-commerce is going to be very positive for us in 2017. So, BC, we know that it's growing. Alberta and Saskatchewan and Newfoundland, it's going to be a different story. So, I hope, he is right.

Okay. Just on the packaging carrier, when you had double-digit EBIT margin the percentage in the quarter showed some very strong result. Alain Bédard: Finally.

Is that still I guess more sort of cost savings to come? And I would think that just from a sequential point of view, Q4, we potentially see and even higher margin given that I would think the e-commerce volumes would be sort of peaking in Q4. Is that the right way to look at it? Alain Bédard: Cameron what's happening is that you have to go back in time. We bought Dynamics in 2011, okay, with a shitty 2% bottom line, right. And our first mission – while first was to learn the business and understand and we lost a year okay. So, we lost really 2011 and most of 2012. So finally, okay, our approach has been to reduce our overhead, which we did very well in the U.S. and the Canadian operation was not so bad at the time, in terms of overhead. But the quality of revenue in the U.S. was good when we bought the company, okay. And I made the mistake of buying Velocity, okay, which was like a defensive move, okay. And then it's always the same thing. You put dirty water with clean water, well what happens is that, the water becomes dirty, right. And we had a tough time digesting all the dirty customers of velocity, so we lost a year and we – our margin at Dynamex U.S. went from a good 28% to 30%, down to 25% to 26%. So, what we've been doing because of the growth of e-commerce, this allows us in the U.S., okay, which we did in 2015 to get rid of that 2% guy, bottom-line guy in all these guys and clean that and replace that with better margin business, which we did in the U.S. in 2014-2015. And now, we're starting to see the benefit of that in 2016. The Canadian operation, okay, as I said on Q2, we have about C$40 million of city business, okay, that will be turned over. So, you'll see growth in the e-commerce, but you'll see probably a little bit of our growth in the total revenue because we're replacing low-margin business, okay, with better margin business because that's what we want. We're not in the business of – we're not 2% guy, right. A 2% is not for us, we'll leave that to the other guys. So, that's why I was a little bit more optimistic when I was talking to many about our Q4 is we believe that our Q4, okay, our P&C will keep on improving on the back of growing e-commerce. And on the Canadian side, the e-commerce is, we're just starting to see the tip of the iceberg, right, so we're servicing only two markets right now, Toronto, Montreal, that's it. On our next-day operation like Canpar and Loomis, yes but it's still small over there, okay. So all-in-all, I think that there was a pleasant surprise, our P&C, Margin improvement, I said it for a long time that this got to run double-digit EBIT. So we're there now, even after the depreciation of intangible. So we still have a long way to go. Our team at Canpar, Loomis and ICS and TForce are working day and night to keep on reducing the cost and being more efficient et cetera, et cetera. And when last year our Q3 result were affected by severance, okay. Our Q2 result this year, okay, in P&C was affected by severance. Our Q2 will also be affected by severance because we're investing in technology, we're combining sorting location and that brings efficiency for the future but there is always a cost, okay, on our severance. So that's why if you look – when you read our MD&A, you'll see that we're commenting that this quarter our severance is C$1.4 million, I think, less than last year, okay. But that will be – in Q4, it's going to be probably more in Q4 than last year, just to keep the cost and efficiency going down.

Okay. That's great color. Thanks very much. Alain Bédard: Pleasure Cameron.

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

Hey, Alain. Thanks for taking my question here. Just... Alain Bédard: Pleasure Kevin.

Thanks. Just turning to maybe some of the more macro commentary you have, you've noted that the difficulties in the LTL market in Canada that the challenges you have in the U.S. LTL market there. Just wondering – and do you feel like you've found a floor though that things aren't getting worst per se, even if they're still down and maybe we can bounce off the bottom here as supply adjusted demand or as maybe the overall economy gets better, is that the feeling here or do you think there is still more downside to what you're seeing in the broader market? Alain Bédard: Yeah. You see the U.S. market and the Canadian market to me is different. Say, if you look at the U.S. truckload market in my mind, okay, I think that Q2 and Q3 have been really, really rough, okay. But I believe that we're going to be getting out of that mess, either early in 2017 like Q1 or Q2. Okay, because the offer is being reduced now. All the large fleets are reducing the number of trucks, et cetera, et cetera. So, this will have an effect on the offer and finally it will bring back profitability because I think also that the – in 2017, the U.S. Truckload market will grow because of the consumer demand. I don't think it's going to grow because of the industrial demand because the dollar will be expensive, U.S. dollar will be expensive, and that is going to have some kind of a pressure on the capacity to sell their industrial product. And as a matter of fact, we have very good race with the shipping products from Canada to the U.S., but right now we're going through a nightmare, trying to find a backhaul into Canada, why, because the Canadians are not buying anything from the U.S., right, or much less because of the value of the U.S. dollar. So that I think it's an issue that will stay with us. Now, on the Canadian side in the LTL, I think the LTL carriers in Canada, they have to understand that you have to reduce – you have to reduce the number of trucks, you have to reduce the number of terminal, you have to reduce the number of doors, you have to reduce because although the population is growing in Canada, okay, but the biggest market of our LTL has always been the industrial, and right now it's not because we've lost most of our industrial base in Canada, so it's retail. So, retail, okay the brick and mortar guys that have been serviced by LTL guys like us and others, okay, we're suffering because our customers are suffering because they're losing business to the e-commerce guy, right, so I don't think that this will change. I think this will keep on, okay, and that's why the LTL market in my mind will keep on shrinking. So, the only way, okay, that you can keep on building a good business there is you have to adjust yourself, you know, you have to reduce and then the cake or the pie is going to be smaller, but if the pie or cake is smaller, you need less players as you cannot feed as many people when the cake is shrinking, so you need less people at the table. And I think that you'll start to see in 2017, guys are just saying, I quit, I have gone, I am leaving, right.

That's helpful. And it seemed like in an earlier response that if you look at a number of LTL I guess companies come across your desk and I just wondering, what's your – just what the strategy is in terms of potentially look at a tuck-in acquisitions within LTL is addition by subtraction, so you get to take out of a competitor and rationalize the market yourself, are there allies that you need more density in, maybe just a little bit of color there would be helpful? Alain Bédard: Yeah. You're absolutely right, Kevin, its addition by subtraction. I mean this is – we're always the same that if we buy a company that's not making any money, we are not magicians. If we keep on doing what the guy is doing, I would just keep on not making any money. So, we have to change, right? So, what do we have to change is number one, is the quality of revenue. So if the quality of revenue is not good, and it's always you got some good ones, you got some average and you got some bad ones. And that's always the issue with the LTL. Guys its complex to identify the good versus the bad and the ugly, right. So that's what we've been doing, okay, but if you look at what we bought lately in the LTL, we bought some good companies like Vitran, Quik X and Clarke. So, these were not fixer-upper, these were going through some tough time, because of the market et cetera, et cetera, but if you buy a fixer-upper sometimes it, you just shut it down or you just say you know what we'll take the good and we'll just get rid of the rest. Okay.

That's helpful. And just on the e-commerce front, it sounds like this came in, it was a pleasant surprise as you noted, I think in your last call you had suggested that when you look out into 2017, the run rate revenue you saw from this business was roughly C$275 million, is that still the case after a strong Q3 and a pretty optimistic Q4 or do you think you can be punching above that and maybe an update on a margin profile of this business. Alain Bédard: This is something new for us, Kevin. If you go back a year and a half ago e-commerce for us was really not insignificant, but small. So, we don't know, okay, we know that we have a great recipe. We know that we're lean and mean, we know that we're highly competitive in this market. And so, we saw what happened in Q3. We hope that we're going to beat that in Q4, but our experience is limited. And the e-commerce in my mind is a transition mode right now. So, it's always been a next-day guy that's been servicing the e-commerce until about a year ago – a year-and-a-half ago. So, there's some kind of a transition, okay, with the etailer some of the volume now is going to the last mile, some also the volume is going – they're trying to do it themselves, right. So, how much of that will they keep on going their share that they do it themselves or with the – after they look at their costs and compare that with – what it cost them to use us, they say, hey, why we wouldn't we do it ourselves? But those etailers are in a trial and now remove, so they tried something. And if it works good for them, if it doesn't work then the – they'll call back the carrier, right. So, it's hard to say, we believe that we have a good shot, we have a fantastic product that we can offer these guys and – but it's still early. I mean, we have only one year really have experienced. And like I was saying to Jason, I mean, now these guys are asking us an employee model, it's good because us in Canada, we have the experience of the employee model. We do it already, but we're not doing it in the U.S., we just started a month ago. So, how big is that going to be for us in the year? It's still very difficult to say.

That's helpful. I'll leave it there. Thank you very much. Alain Bédard: Okay. Thank you, Kevin.

Your next question comes from the line of Walter Spracklin of RBC. Please go ahead.

Thanks very much. Good morning, Alain. Alain Bédard: Hey, good morning, Walter.

So yeah, I wanted to come back to kind of the outlook side of things because really looking you'd manage that, it's nothing has really changed. We're still in this kind of sluggish environment but... Alain Bédard: Right.

...a signs of optimism in certain parts of your business as you go into 2017 particularly around e-commerce so on. So when I look at how you frame your expectations for next year, I know historically you've always kind of looked at a zero growth basis and then... Alain Bédard: Yeah.

...and then seen what you can grow on the last year, relative to some of your internal initiatives. Alain Bédard: Yes.

How do you frame, how do you look at 2017 now that you see e-commerce coming on and as well as some of your internal and continued internal initiatives. How should we look at and what would you point us towards in terms of EBITDA guidance for 2017? Alain Bédard: Walter I think that if business stays the same, right, with what we know today and we're just in the middle of reviewing budget right now, but my guess would be that we have to improve and we will improve globally TFI, okay by about C$20 million, okay. Most of that in my mind has to come from P&C improvements, okay, and our truckload. U.S. domestic truckload and even to a certain degree our Canadian truckload. Now, the Canadian truckload, there is a little bit of an issue there because don't forget we're buying trucks in U.S. dollars, right. So, the trucks that we're – that we're buying today, we're buying them at a C$1.30. The replacing trucks that we used to buy at a C$1. Right, if you go back in time four years ago. So we have an increasing task right now on truck and trailers on the Canadian side. U.S. has got nothing to do with that because the U.S. is U.S., right. So, there is a little bit of cost pressure here with about 20% of our trucks fleet in our truckload, and about – let's say a 10% of our trailer fleet because the trailer last longer than trucks.

Got it. Alain Bédard: So, this is an issue that will be – not just us, everybody in Canada faces the same situation, the spare parts and all that. So, when I say a 20%, okay, you're going to keep in mind that the U.S. dollar is going to penalize me on CapEx and CapEx on the truckload not so much because we lease trucks, but it will affect my lease payment, okay. So, that being said, that's why, I'm saying and – and like usual, I never talk about pricing improvement, okay and we don't think about the volume, we just think about, how can we do better next year with this kind of environment. And – and, yeah, hopefully, if we can improve the pricing, okay, because the market helps us doing that, fine, but it's not in our model, so to answer your question, I believe that a C$20 million improvement, okay with this year's results, so let's say we closed the year at C$435 million that's going to bringing us to about the C$450 million to C$460 million, with this little price on the equipment, that's going to affect me. If you're not buying any trucks, like if you have a 30% of your fleet, that's far because you are operating in Western Canada, okay, and they manage so bad, so it's not going to be affecting my Western Canadian operation, but it will be affecting my Eastern Canadian operation.

Right. And how -- you mentioned that the higher U.S. dollar purchase of – of your rolling stock, how does that figure into your next year's CapEx plan, I know you're guiding us this year at around C$80 million net CapEx. Alain Bédard: Yeah.

What should that number look like next year? Alain Bédard: Well, you have to think about on the truck and trailer side of it, it's going to cost me between C$10 million and C$20 million.

Yeah. Alain Bédard: On the CapEx side.

Yeah. Yeah. That make sense. And so, when you look at all that and put it all together can you give us some indication with cash taxes, the CapEx program as you just mentioned, I mean your interest is pretty much baked in your cash interest. What are we looking at in terms of free cash flow conversion, generally you're mentioning a run rate of upwards of C$300 million... Alain Bédard: Yeah.

... from operations and then maybe some more... Alain Bédard: Yeah. Yeah.

...line sale, how would you position your free cash flow expectations for next year? Alain Bédard: I think that, if you consider everything in there, Walter, we'll probably be at the same level, next year as we're doing this year.

Got it. Alain Bédard: Okay. Now don't forget that also every dollar that we improve in our U.S. operation that's been a disaster, Truckload I'm talking about this year, which we believe will improve next year. Don't forget that C$1 will come back at C$1.30 for us.

So, your EBITDA improvement will be offset I guess by the U.S. dollar impact of higher .... Alain Bédard: Yeah.

... obviously a higher CapEx spend, interest relatively the same. Alain Bédard: Yeah.

Tax rate should be the same roughly? Alain Bédard: Yeah. Yeah.

Okay. All right. Okay. That's all for me. Thanks very much, Alain. Really appreciate it. Alain Bédard: Okay. Thank you, Walter.

Your next question comes from the line of Turan Quettawala of Scotiabank. Please go ahead.

Hey, good morning, Alain. Alain Bédard: Good morning, Turan.

Listen, I just had one question quickly here on the sustainability of the margins at P&C. It's obviously great to see that 10% number there. I just wanted to get a sense, I know you kind of talked about a few puts and takes, but as we think about, I know the quarterly variations are there because you're making some adjustments on the supply side there in your business, but if you think about 2017, is it fair to think of 10%, of sort of being a sustainable margin going forward or does it go higher from here? Can you just give us some color on that? Alain Bédard: Well, we're always been very conservative Turan, and I've been saying for years, okay, that we have to get back to a double-digit EBIT which we're now at – okay.

Yeah. Alain Bédard: And if you go back in time before the acquisition of DHL Canada and Dynamex, we were a 12% to 14% EBIT guy. I don't think that because of the last mile business and their market condition, that we could be a 14% guy within the next year or two. But with our cost initiatives, okay, our efficiency initiatives and all the right things that we're doing, I believe that is going to be a 10% plus. So can we be at 11%? I think so, okay. Can we be 14% today? I would tell you, no, okay. It's too difficult, okay, to predict because from a 10% to go to an 11% in next year, I think it's doable, okay. I think it's doable, I think the e-commerce is going to help us in Canada because, okay, the market is just not growing, although, although, I have to say that our team at Canpar have done a fantastic job, okay, because these guys are growing organically at Canpar, okay. A little bit of ICS too. But Loomis is not growing right now and TFIS is not growing because one other nice niche, the entertainment is slowing down every year because of the technology. But all in all, I think that was a little bit of organic growth in Canada. In our Dynamex Canadian operation as I said, we're cleaning up the mess there. We're letting go some customers as I said in Q2. So the Canadian revenue of Dynamex will go down and it will be replaced by e-commerce. We feel pretty good that in the Toronto market, for example, okay, we'll probably be delivering about 5,000 parcels to 6,000 parcels day, that's what our customer is telling us.

Okay. Alain Bédard: Those guys, they have the knowhow, they have the knowledge, but we haven't seen it so far. But we're just at the end of October, and they just launched their new product offering in September, right...

Yeah. Yes. Alain Bédard: They were at 2,500. So, that's why I feel – going back to Mona's question, I feel pretty good about our Q4. 2017, I think that we'll be at 10-plus and it's still early for me to say it because I haven't seen my guys and their plans for 2017. So I don't want to be too much ahead of the ball, but we don't want to go back to the single-digit EBIT, that's for sure.

For sure. Perfect. Thank you. And then I guess, so if I think about maybe 10% to 11% kind of some margin expansion there at P&C and in your comments, I guess to the real question about C$20 million increase in EBIT, you're sort of leaving a little bit on the table there with LTL and Truckload or do you think those will sort of be flattish or when all said and done in 2017? Alain Bédard: I think LTL, it's going to be tough to keep on improving in a shitty market, but if there is some players that just fold their tent and just say good bye, I am out, okay, that's going to help. That's going to help.

Okay. Alain Bédard: If – if Murray is right about Alberta because Alberta has always been the best market we have for LTL. If he's right, that's going to help me, okay. Because right now, it's the shift. So LTL, if Western Canada improves, that's definitely going to help us. And if some players on the East Coast, okay, Ontario, Quebec, I'm talking about, they started to say, hey, we're going, we're back, we're closing shops, okay, so that's going to help do.

Perfect. Thank you very much. That's all I had. Alain Bédard: Okay, Turan. Take care.

Your next question comes from the line of David Tyerman of Cormark Securities. Please go ahead.

Yeah. Good morning, Alain. Alain Bédard: Good morning, David.

A few clarifications just to start. You mentioned you had an exceptional cost in Q3, I didn't catch what you said that was? Alain Bédard: In Q3, it was our insurance claim, okay. When you read, David, our MD&A, you will see in there that our insurance claim, okay, in Q3 has been really difficult for us which is exceptional, right.

Okay. Okay. That's perfect. And then, also on the e-commerce, you mentioned C$5 million or less than C$5 million for next year, is that per month you're referring to? Like I think you said the employment was related to the employee model. You said the employee model is C$1 million... Alain Bédard: Okay. No, the employee model right now, okay, we're trailing at C$1 million revenue a month.

Yes. Alain Bédard: Okay. That's what we're doing today.

Yes. Alain Bédard: And we just started, right. And we believe, okay, that the employee model, okay, will grow into next year. I don't think I've said C$5 million, David. But we – I don't know exactly how much because I didn't review really the plan for next year. This is going to be done next week with my guys. But for sure, okay, growing the e-commerce for us in the U.S. I think that the target is going to be about $50 million for the year.

Okay. And then... Alain Bédard: And then we have – we have some very good customer, as a matter of fact one of them, okay, which is a great company, okay. We're exclusive with them. So we just open up for them in San José. We just open up two weeks ago Long Island for them. So we feel very good about the U.S. market and the Canadian side, we feel good as well, okay. But it's so – we're so behind, okay, in terms of coverage in Canada versus the U.S. but we're just servicing two markets right now. Montreal, we should – we should be in there probably within the next six months to 12 months, but it really is only two markets. And now, the Canadian market could be what six markets maybe. You've got Vancouver, Calgary, Edmonton maybe.

Yeah. Got it. Alain Bédard: And then you got the big Toronto, the Toronto we're already at 2,500 a day.

Right. Alain Bédard: Right. Don't forget, Toronto is the third largest city in North America.

Yeah. Alain Bédard: Right. So, I mean, it's not going to be LA, it's not going to be New York, but it's going to be good.

Okay. So just to clarify the $50 million and is that in all business like both employee and... Alain Bédard: Yeah, yeah, yeah.

Okay. And that's in Canadian dollars or U.S. dollars? There is a big difference on that. Alain Bédard: No, that's U.S. That's U.S.

Okay. Thank you. Alain Bédard: Well, you get me confused sometimes because I got to think before I answer.

Yeah, that will fair enough. And then on Q4, I think you said there was going to be some severance, is that in P&C that you're referring to... Alain Bédard: P&C, P&C. Yeah.

Okay. Okay, but it sounds like the benefits of e-commerce and whatever else you're doing could be larger than the [indiscernible]. Alain Bédard: Oh yeah, oh yeah, but don't forget this is short-term pain for long-term gain.

Yeah. Alain Bédard: And I think the guys were starting to see the numbers, because this is not the improvement that you see in Q3, it's not just about the e-commerce, okay. It's about our Canpar operation has done a great job in Q3, our ICS as you know keys to be one of our diamond. So it's not just the e-commerce, but and this is all the for instance in Q2 yeah, I think it's in Q2 or Q3 I'm not too sure. But we had to let go about 40 people okay, because of a move that we made in Ontario, right. So it costs us, but down the road, it's efficiency of our network, okay. And we're investing in technology, we're investing in conveyors and tubing and shortening of all of that to capture better quality of revenue too.

Right, now understand. And then the P&C kind of you said you have C$40 million to C$50 million of bad business there, how long...? Alain Bédard: That's dynamics say that's dynamics [indiscernible].

How long do you think it will take to switch that out and get better business? Alain Bédard: That's going to – we'll have a dip in the revenue for sure David. We'll have a dip in the revenue, okay in 2017 with dynamics Canada, no question about that. And what's the potential with e-commerce in Canada, okay it's in my mind for sure today it's not C$40 million. Okay. So, we'll have a dip in revenue, okay, but the guys are working hard to replace that with quality. So, for instance we should do way better in Vancouver. Vancouver, it's a growing city like Toronto.

Right. Alain Bédard: And we're just scratching the surface because we were stuck in Prince George. Well, why are you losing your time in Prince George.

Right. Alain Bédard: I mean, invest your time and effort in Vancouver. Prince George is a nice town, but it's not grow that fast.

Yeah, I understand. Okay and then on LTL you've made some pretty good of margin improvements throughout the year and Q3 was the best yet. Is it possible to continue making margin improvements or is it pretty... Alain Bédard: No. [indiscernible]. No, you see David, If Murray is right, and Alberta is coming back and I hope he is right. That's going to help my LTL, because my best market has always been Western Canada...

Right. Alain Bédard: ...because now going through shift, because of the situation there. Now, that's number one, number two on the East part of Canada, the problem is the market itself. It's not the economy, over there is the economy. Here is the market, there's too many players. There's too many dogs chasing the same bone, right. So, that's a different problem versus the West.

Right. Alain Bédard: So, Murray he doesn't have that problem, because he is not here, right. And the problem he has is market and market, I hope he is right market improves hope. He is win, it's his win, it's my win. Here in the east, there's too much capacity. We need players to disappear or adjust because the LTM market, and I'm repeating myself will shrink because of the e-commerce.

Right. Alain Bédard: Simple fact.

So could your margins actually go down next year because of... Alain Bédard: No, I don't think so. The only thing that will may go down David is revenue.

Okay. Alain Bédard: Okay. So, you – I haven't seen all of the plans of my guys, but I think that probably our revenue will go down 5%, and the goal is to protect the bottom line and improvement.

Okay. So, that implies margin expansion and... Alain Bédard: Yeah.

... in percentage? Okay. Alain Bédard: A little bit.

Yeah. Okay. Understood. And last question, sort of a broader long term question. Do you have any thoughts on platooning in... Alain Bédard: Yeah. That's a good question because three years ago nobody talked anything about that. I was at a conference, where was that in Dallas, I think, yeah. And, I was with some of the guys there, in – I think it is something that we will see. It's a safety issue David. So right now what we're doing, us and others, okay, we're implementing in the truck to great drivers, assistant technology, like lane change and collision avoidance and all that. So, that's step one. Okay. Because in the U.S. if you don't – if you do not safe and you have money, if you're not saving, you're a poor guy. Nothing is going to happen to you.

Right. Alain Bédard: Right, but if you are not safe and you got money, or if you don't have all the odds to you. Okay with the equipment, so that's the first step. The second step, I think it makes a lot of sense for trucks to move in a group, and – and where all these time to see, Uber and Pittsburg et cetera, et cetera. So, I think it's coming, all I guess this is going to take I don't know, but the biggest thing in my mind is safety, because a driverless truck in my mind, when it's fully secure will be safer than a human being, because they don't make mistake.

Right. Alain Bédard: Okay.

So it sounds like [multiple speaker] stay tuned. Alain Bédard: They don't fell asleep at the wheel, because they had a tough day or whatever.

Yeah. Okay. Very good. Thank you very much, Alain. Alain Bédard: It's a pleasure, David.

With that, Alain Bédard, there are no further questions at this time. Please continue. Alain Bédard: Okay. So, thank you for joining us this morning, and I look forward to speaking with you again following the release of our year-end results. Thank you all and have a great day. Bye