TFI International Inc. (TFII) Q4 2016 Earnings Report, Transcript and Summary

Welcome to TFI International fourth quarter 2016 results conference call. At this time, all participants are in a listen-only mode. [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'd like to remind everyone that this conference call is being recorded on Thursday, February 16th, 2017. I will now turn the conference over to Alain Bedard, Chairman, President and CEO. Please go ahead.

Well, thank you, Operator. Good afternoon, ladies and gentlemen and thank you for joining us. As you know, we released our 2016 fourth quarter results press release earlier today. And let me begin by going over the highlights of the year and the fourth quarter. In 2016, the Company executed on two important strategic objectives to substantially increase our presence in the U.S. and to gain scale in the U.S. truckload. We achieved both of these by acquiring North America truckload operation of XPO Logistics in Q4. These activities which we rebranded as CFI, bolstered our position as one of the leaders in the U.S. truckload market and expanded our geography footprint into Mexico. Our initiatives have remained shareholder value. In 2016, we sold our Waste Division for CAD800 million, realizing a CAD559 million pretax gain. 2016 saw TFI share price appreciate significantly. We raised our quarterly dividend by 12% and we made the best use of our free cash flow throughout the year by repurchasing approximately 7% of our share and also reimbursing debt. Total revenue before fuel surcharge from continued operation in 2016 reached CAD3.7 billion compared to CAD3.6 billion in the prior year. Adjusted net income from continuing operation was CAD195 million or CAD2.04 per diluted shares, up from CAD186 million or CAD1.82 per diluted shares realized last year. Free cash flow from continuing operation was CAD288 million in 2016 or CAD3.08 per share. With this robust free cash flow, we repurchased 6.5 million common shares for a total consideration of CAD151 million and issued dividend payment totally CAD64 million. I'll now turn to the fourth quarter results. I'm pleased to report improvement year over year in most of TFI's business segment. In Q4 revenue before fuel surcharge from continuing operation, rose 10% to CAD1.4 billion. The increase comes largely as result of businesses acquisition, primarily CFI which was completed at the end of October. The increase was partially offset by lower volume in our regional LTL and existing U.S. truckload operations. Operating income from continuing operation was CAD72.1 million, up from CAD66.5 million last year. As a percentage of revenue before fuel surcharge, operating income was 7% of income versus 7.1% a year ago, as gain in Package and Courier were offset by decrease in truckload. Adjusted net income from continuing operation was CAD52.2 million or CAD0.56 per diluted shares, up 22% from CAD42.9 million or CAD0.43 per diluted shares in Q4 of 2015. Free cash flow from continuing operation amounted to CAD98 million or CAD1.07 a share. I'll now review the results for each business segment. In Q4 this year, our P&C revenue before fuel surcharge grew 3% to CAD350 million. The main contributor was the overall growth in volume from e-commerce business, offset by determination of lower margin business in other areas of the division. Driven by volume growth and efficiency gain, operating income and P&C increased by 26% or CAD7 million over Q4 2015 and totaled CAD33.5 million. In the LTL segment, fourth quarter revenue before fuel surcharge decreased 6% to CAD177 million. The decline was mainly due to lower volume in regional eastern and western Canada. We made every effort to adjust supply to demand and to be well positioned to capitalize on the return to normal market condition, particularly in the western region where a rebound in oil prices will have a positive impact. Notwithstanding initial positive signs, we do not anticipate significant short term improvement in price or volume. Our focus on cost control and operating improvement resulted in a 40% increase in operating income to CAD15.1 million. In the Truckload segment, revenue before fuel surcharge increased by 24% to CAD458 million, driven by acquisition, especially CFI. Excluding acquisition, revenue declined by 8% because of ongoing challenge faced by specialized division serving the Canadian commodity industry, as well as pressure on volume and rates in the domestic U.S. truckload market. On the upside, the specialized truckload segment is starting to see a slight uptick in activity in the oil and gas. Operating income in Truckload reached CAD28.4 million, down slightly from last year, reflecting challenging market conditions. In the Logistics segment, revenue Q4 was up 11% to CAD66 million, Operating income for the quarter increased by 35% to CAD7.1 million, while the operating margin grew by 180 basis point year over year to 10.8. I'll now turn to the outlook. After a number of years in which the North American economy experienced some headwinds, there's reason now for cautious optimism, with consumer spending generally healthy and the unemployment relatively low. Economy fundamentals should begin to improve gradually. That said, certain challenges still exist which will likely limit short term organic growth. As a result, rationalizing assets, controlling costs and seeking all possible efficiency improvement are the keys to driving operating income growth. Maintaining a disciplined acquisition strategy will also allow the Company to make gains in the [indiscernible] and North American transportation and logistics market. Asset-light operation that complement our existing strength and broaden our geography footprint are prime targets, such as the transaction we completed since the beginning of Q4, including World Courier Ground, Hyphen and National Fast Freight. Operational consolidation and optimizing assets utilization will remain priority in the P&C and LTL segment. In P&C, growing e-commerce activity should continue to drive our performance and LTL and Truckload closely aligning supply to demand is our primary focus. In truckload, the Company is working to leverage its density in the U.S. and Mexican cross-border activities. And we see good potential for boosting our presence in the logistics sector. As always, we're dedicated to building greater shareholder value. We will continue to reinvest our free cash flow after dividends where we see the highest risk adjusted return which could include share repurchase, debt reimbursement or acquisition. So I would now like to open up the call for your questions. So, Operator?

[Operator Instructions]. Your first question comes from the line of Damir Gunja with TD Securities. Please go ahead.

Just looking at consensus for 2017, stands around CAD620 million for EBITDA. Just wanted to gauge your comfort level with that range and maybe your updated view on that and free cash flow.

Yes. That's a pretty good question. I mean, a lot that it depends how good the truckload is going to do in the U.S. We feel pretty good truckload in U.S. will definitely improve in the latter part of the year, let's say Q3 and Q4. I was just attending a conference in Florida this week and talking to a lot of truckers, everybody believes that. But it's still going to be a very difficult Q1 and Q2 in the U.S. I mean, if you look at the results in 2016, in the U.S., you got great companies like Hartland and Knight and those guys are down 20%, 30%, 40% year over year in 2016. So we believe that, I mean, if you look at our numbers, us, I mean, yes, if you look at TFI for 2016, you say, Alain, you're flat. Yes, true, we're flat, because we're behind about CAD25 million, CAD28 million in truckload. But we compensate that with our P&C and a little bit through our LTL. So going back to your question of 2017, I feel good that it's going to be a little bit more than CAD600 million, based on, let's say 1.30, 1.32. It could go up to CAD610 million, CAD620 million. It all depends of what the U.S. truckload market is going to do, because don't forget, I mean, we have today about $850 million U.S. in revenue. So an improvement of 5% on that, I mean, that means a lot of money. And it will happen. It's just we don't know when. We don't know when. A lot of guys talk about ELDs and this and that. But we'll have to see. But in terms of free cash, we're going to be around the CAD300 million mark. The exceptional thing this year for us, there's two things. First, we had to dish out CAD65 million to our government in Canada which was a tax payable with the sale of the Waste. So this was done in Q1 of this year. And number two is, we also have an additional CapEx that we'll need to do at the CFI, because XPO got really the CapEx. So we have a little bit of catch-up to do. Those are two exceptional things. But even with that, we believe that in CAD, we should be in the neighborhood of CAD275 million to CAD300 million, even taking into account all these exceptional things.

Your next question comes from the line of Mona Nazir with Laurentian Bank. Please go ahead.

So I just wanted to talk firstly and you gave some good guidance on EBITDA right now. On the last call, just overall you spoke to about a 5% contraction on the top line in 2017. Subsequent to that, you purchased XPO and also your outlook commentary had changed from kind of fragile market conditions last quarter to cautious optimism. Is there going to be any change to this organic contraction guidance?

No. What we believe is this, I mean, the LTL market in Canada, excluding the NFF acquisition, will keep on shrinking. No doubt about that. I mean, it shrank a bit this year. We shrank again. We will shrink again next year, excluding the NFF acquisition and also the Cavalier acquisition. I mean, the market has been affected by e-commerce. So LTL, no cleanup about that, will shrink. On the bright side, though, on the P&C side, we believe that we're going to see some organic growth. There again, excluding the cleanup that we had to do with Dynamex. I mean, Dynamex Canada, we had to clean up the house. We had some very low margin business there. So in Q4, we did a major cleanup. The guy that used to run the company has been replaced by a new leader which we feel very good about him and his new team. So if you exclude that, on the revenue side with Canpar, Loomis and ICS and TFIS, Dynamex U.S. and World Courier that we just bought that now is becoming Tforce Critical in the U.S., those guys will grow. I was looking at my month of January 2017 versus 2016. We definitely have a growth, if I exclude Dynamex Canada, where, I mean, these guys will definitely not be growing because we cleaned so much [indiscernible] in their low margin accounts. So excluding those guys, the business will keep on growing. Truckload, I mean, we think that the situation in Alberta is starting to slowly correct itself. Again, I'm very encouraged by what I've seen in January. Bob McGonigal and his team, they have done a fantastic job. So in Alberta our truckload, will do better. And if you look at our truckload, our specialty truckload in the east, in Canada in the east, it's done pretty good and it should improve a bit. The van side in Canada, not so much. I mean, it's probably going to be stable. There again, where we're going to see a little bit of weaknesses is the first six months, I think, in the U.S. truckload market. It's still soft. It's still a buyer's market. It's still an issue with price. But already, I mean a lot of the shippers are starting to get nervous, because if Mr. Trump's economy starts to pick up and if he's able to grow by 3% the GDP of the U.S., for sure, I mean, that will put pressure on rates, that will put pressure on truckers and that will be a changing of environment on the U.S. truckload market, seeing this market really, really bad for the last, I would say since the summer of 2015. So all and all, going back to Damir's question, we think that 2017's going to be much better than 2016 in all of our sector. The only question mark we have is truckload in the U.S., because we don't know. We're not sure. But everything that we read points to the direction we should see some major improvement by the end of 2017 and into 2018. And in terms of organic growth, on the U.S. side, truckload side, I mean, for sure, I mean, there will be some new business coming in. Already we're having -- the CFI name is a great name. We've got customers asking us, but we don't want to commit yet because the rates are still a little bit depressed. And so we're getting ready.

Okay. Perfect. That was great. My second question is just in regard to the U.S. and we have new leadership there from your last call timing. You've spoken about value extraction on the truckload side via a new entity or spin-off. I'm just wondering if President Trump and the potential change to U.S. policies could alter your strategy there and the timing of that. And then secondly, do you expect any impact to your Mexican operation?

Well, on the Mexican thing there, I mean, we've been talking to a lot of customers and everybody thinks that, I mean, politics is one thing, businesses is a different thing. So we don't expect, in talking to all the truckers are involved in Mexico and everybody else, we don't -- we haven't seen. We don't know. We don't control laws and regulations and all that. But on the business side, I mean, it doesn't make any sense. So we'll see. So in terms for us, I mean TFI, for sure will keep on growing through M&A. I mean, 2017's going to be a busy year for us. And one thing is for sure is that most of the growth will come from the U.S. So I'm working on a few things there that will probably be public in the next 6 to 12 months. But for sure, I mean, we believe that you buy on bad news and you sell on good news. We've done that many times. And there's lots of bad news right now in the U.S. There's lots of unknown. There's lots of instability for now. I mean, so that maybe is the right time to make a move. So we feel good about our team. If you look at our P&C numbers, I mean, they are great. But 2017 will be even better. Our LTL in Q4, finally we're starting to show that even with less revenue, we can do better. The only handicap that we have, if you look at us, is our U.S. base truckload. But even that, we're doing better than the average in the U.S. If you look at all the Q4's number that were coming out, out of the U.S. truckload guys, I mean, they were down big time. Well, they were not down versus consensus, because consensus was adjusted. But versus last year, they were down big time. So if you look at TFI, whatever we gain on the P&C, sorry to say we lost it on the truckload. But this is a macro thing. And that will change. That will correct itself down the road.

Lots of great color again. And just lastly I wanted to quickly ask and this has come up a bit in client discussions. But I'm just wondering if you could comment on the quality of XPO's assets that you purchased. They've been stated as high quality. I'm just wondering if you could characterize exactly what that is and just how things have been going so far.

Well, CFI is a diamond of a name, you don't want to use that. I mean, it's a great company and it was bought by Conway about 10 years ago. And the team that was running the company is still there. And I'm very proud. And as a matter of fact, I'm in Joplin right now at CFI head office. That's where we had our Board meeting today. So we're really proud. And I showed the board members, I mean, the quality of the people that we have here and the quality of the operation. But, I mean, we're no magician. I mean, if everybody's down 30%, I mean, you're down 15%, you're doing a hell of a job. And this is all macro. So I feel very, very good about the people that we have here. Now, also, bringing back the CFI name is helping us because it was a quality name. So that's why we brought that back. In terms of the asset, the trucks, I mean and the trailer, I mean, we have a little bit of catch-up to do on the truck side, not on the trailer. Trailer we're doing well. As a matter of fact, we have too many trailers and we just sold about 350 of them in Q1 so far. But on the truck side, yes, we have a little bit of catch-up because they did some buying in Q1 of last year, but then they stopped, because they were selling the company, I guess. So that's why I was talking about a CAD20 million catch-up. Now, the other thing also that we're doing within CFI is that we're also increasing the number of owner ops. So, so far, since we bought the company, number of owner ops have increased by 10% and this is just in three months. So CFI will be, within 18 months, CFI will be 35% light like all our truckload company in Canada. So we have a nice logistics company in Mexico that's called CFI Logistica and we also, just in the midst of -- as a matter of fact, we did our first shipment today for one of our great customer in our CFI Logistics company, because don't forget, I mean, within CFI, when they were part of Conway or part of XPO, all the overflow had to go through their own logistics division. Now that CFI's by itself, we have to build this within CFI. So that's what we're doing now. We just started a leader that has done that four times so far and we're going to be building that. So probably within the next 12 to 18 months, CFI will be 35% light like most of our Canadian truckload operation.

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

I wanted to focus a little bit, you made some commentary that you're starting to see a pickup in your specialty heavyweight division.

Yes.

Can you talk a little bit about growth plans for that division this year and compare and contrast that to maybe what you plan to do with the dry van fleet?

Yes. Well, for sure, Jason. I mean, our Alberta-based energy business is growing. I mean, I was looking at my numbers of January on our pipe yard, everything that relates to servicing wells. I mean, the number of rigs have increased big time in Alberta over the last month or two. So we feel very, very good. And most of this operation that we have in Alberta is all asset-light. So it's all independent contractor that supports the business. We're starting to see some also improvement in the Odessa Permian basin there in Texas. So we're starting to see some action there. So on the specialty truckload that we have in the U.S. which is E.L. Farmer and the Tforce dedicated business that we have, we're going to do very, very well in 2017. On the van side, this is the big question mark. When is the market going to improve? As you know, I mean, in the U.S., the truckload guys had a terrible 2016. Everybody believes that, I mean, it's still going to be rough for the first six months. But then, I mean, the wind is going to start to change and that's why we feel good. Now for us, I mean our P&C will support our growth in earnings in 2017, both U.S. and Canada. Our LTL too, I mean, we're going to do better in LTL. And our specialty truckload, if price of commodity keeps on improving, even northern Quebec and northern Ontario will do better. So I feel very good. And the only big question mark that we have is our U.S. domestic. How fast can that improve? Now, building and asset-light brokerage operation within CFI, that's going to do great thing for us. And we have the team to do it. It's just that we just started. We're just starting to build that.

It sounds like on your LTL operations it's more of continued cost reductions on your end. The market still seems a bit soft.

Yes.

What's it going to take to turn the market, because this market's been soft for a few years now.

Yes. Well, it takes -- because the market is shrinking, Jason. I mean, there's no other way than to consolidate. So this is why we bought NFF. I mean, NFF was owned by a private equity out of Chicago and they were not making any money. So they changed team. They did this. They did that. And still, they didn't make any money. So I was waiting, waiting. And now, finally, we're able to get a deal before the end of last year. So that's one example of one player that now is under the umbrella of TFI. And then slowly, I mean, we'll be improving the members. But at least there's one guy that decided to leave the market, abandon the market. There was another one in Ontario that after 75 years decided to shut down, close their door, sell the equipment. So that's the only way that slowly these regular type of LTL operation will help us. Now, it's different than a Cavalier. Cavalier, those guys are smart. They've built a fantastic business over time and that's a different story. That's not a fixer-upper. That's a great company that's joining the family and we're going to work with these guys to do a little bit better. But that's different. I mean, these are like our special LTL company and we have four of them. We have four of them and we're very, very happy with the results. But the overall Canadian LTL market, it's still going to be an uphill battle. It's still going to be a fight. But even with less revenue, we're doing better.

I know. Definitely in the fourth quarter, too, you put up some decent margins. Now, getting back to a comment you made earlier that you guys like to buy low and sell high. So it sounds like in terms of on the acquisition trails that buying low, at least in the bad times, LTL might be attractive if you can find any more people willing to consolidate, as well as the truckload side, since you're at least forecasting six more months of bad news?

Absolutely. I mean we're in discussions with a lot of people. And it's just a matter of finding the right fit, the right culture. It's like another CFI. I mean, it's the people. We're not really looking to much at fixer upper guys. I mean fixer-upper in Canada, we can do that, because we have a deep bench. Fixer-upper in the U.S., it's still difficult for us because, I mean, yes, we have a great crew at CFI and at TCA. But it's still difficult for us to get involved into a fixer-upper - of small size, maybe. But big size, no. But you know what? Why would you buy a fixer-upper when you could by something better at the equivalent prices? So this is why we're looking at all kinds of stuff, Jason. And we got to be patient. If you want to rush, you're going to make mistake. We're slow. I mean, don't forget, we got the Canadian pace, Jason. So we're not fast. We're slow.

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

Maybe just a couple of housekeeping items to start off with. You mentioned the increased investment for trucks at CFI. Are you able to maybe give us an idea of what the total company CapEx will be in 2017?

150 net.

150 net, okay. And on the quarter, the corporate expenses were, I guess a little higher. I know there's some accident cost in there that maybe will continue to be the case. But there are also, I guess the costs related to the CFI acquisition. Was that fairly material?

Yes, that was quite important. But over and above that, Cameron, we had to settle a situation, an accident that took place in 2011. And it really was a disastrous accident for us. And that cost me CAD2.2 million in the quarter. And this is affecting not the branch or the Company, but really the head office, because it it's over a certain amount, then us at head office, we take the hit. So that's CAD2.2 million that really is -- how would you call that, an exceptional thing there?

Yes. And on the CFI-related acquisition expenses, was that fairly material?

Yes, that's fairly important because of the size of the deal. And don't forget it took us a long time. But on the positive side, I mean, on our side, there was no investment banker involved at all. But it's the accountant. It's the bar report. It's the audited statements. It's this and that. So I mean, you don't do a deal like that with CAD100,000 of fees.

Yes. Okay.

Unless you're a trucker. I mean, us, I mean, we don't charge a lot.

Right. Maybe just lastly for me, you had the discussion about buying low and selling high. The e-commerce, U.S. e-commerce business, you've sort of mused about maybe selling that if the right price came along. Is that something you're still maybe thinking about?

Yes, absolutely. I mean, I got a call from an ex-Prime Minister the other day and says, hey, Alain, those guys are interested in talking to you. I said, sure. I mean, we're not for sale. But if somebody comes in and say, hey, Alain, I mean, we love the business that you guys have and like my track, for instance. I mean, we run a very limited process and the guys at GFL, Patrick says, Alain, I mean, you have a gold mine. I want to buy that. The market doesn't recognize that, but we do, so. And we couldn't grow it. That's the problem that I face also in the U.S., because if you look at Golden State Overnight that was bought by GLS, I mean, how can I compete with those guys? They pay 10 times EBITDA and they paid 25 times cash flow. I mean, how can I compete with those guys? So for sure, if one day somebody, although we're not for sale, but somebody comes in and say, hey, Alain, we love your Dynamex, whatever business you have, the last mile business that you have in the U.S. and that generates about $40 million of cash. And you know what? We're not going to give you 25 times cash, but we'll give you 20, well, maybe I'll start thinking about it.

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

This is [indiscernible] filling in for Benoit. I was just wondering, first, you ended Q4 with net debt to EBITDA of 2.8 times. I was just wondering, given your appetite to do M&A and your leverage ratio on free cash flow expectations for 2017, whether you would also consider using your strong free cash flow forecast or free cash flow generation for other opportunities such as the share buyback, there's an increase at current level.

Well, you know we've done that in the past. A, we've done that in the past. We bought six million, a little bit more than six million shares. And this goes back to we sold the waste and there was lots of noise, stupid guys saying stupid things about TFI and our stock went from 26 bucks when we sold the waste, down to 20. And we bought a ton of shares at this price. So, I mean, if the price is right, sure, we're back. I mean, I'm just checking. And if guys call me and say, Alain, I've got a million shares and I don't have a lot of confidence, well, yes, sure we'll look at it. So we have a price in mind. We know that -- for instance, I'll give you an example. We've been talking to a lot of guys in the U.S. and they say, I don't know what's wrong with you. I mean, if we look up every truckers in the U.S., I mean, most of them trade today between 17, 18 times EPS, 20, 22, 24. What's the problem with you guys? Why are you guys rated at 10, 12, 15? What do you want me to say? I don't know. This is the market. So in their mind, they see our stock cheap. So I don't know if they're right or wrong. But for sure, I mean, we always keep an eye. That's why in my text, that's why I'm saying I keep an eye. And for sure, we could buy, we have the option to buy up to six million shares and we may decide, you know what, we'll do the M&A in early 2018 or late 2017 and in the meantime, stock goes down to 30 bucks, 32, I don't know, because people are afraid or they're afraid of Mexico, whatever. I mean, we could by six million shares. That's going to cost me what, CAD200 million, less than that? I could do that.

No, definitely. Very good color, Alain. And also, I was just wondering -- just want to go back on the previous question. The e-commerce revenue increased 38%, I think in Q4.

Yes.

Which is very impressive. I was wondering if you could provide more granularity on your expectations for this business in 2017, especially given your strong relationship with big players? And how should we think about revenue growth overall in P&C as well in 2017, given your expectations for e-commerce?

Well, you know what, guys, I mean, if you sued Dynamex Canada which is a special situation 2016 versus 2017. But excluding that, we believe we were strong feeling that P&C will grow globally by about 5%, 3%, 4%, 5%. Now, I was looking at my numbers of January. If I look at Dynamex U.S. in January, I mean, these guys did very, very well, okay. But there again, I mean, we're dealing with some difficult customers. I mean, guys change their mind. So we're never sure. So we're dancing the dance. But one thing that we know is that e-commerce for sure is going to grow, number one. Number two, the last mile way of servicing customer in high density area is the most efficient way. Well, like the big e-tailer could do it themself or could do it with third-party? So, I mean, we going to keep on growing with the sector, but we have to keep on growing with profit. We can't grow with 2%, like we used to do in Canada with some shitty accounts. So, I mean, I don't want to give numbers. But, I mean, the market is going to be growing. The Canadian e-commerce is going to be growing. I mean, you've got Canada [indiscernible] doing a great job. Can we help those guys? Can we help [indiscernible]? Can we help UPS? Can we help the customers? So this is a lot of good stuff that we could do.

No, definitely. Definitely, Alain. And just maybe a last one from me. On the tax rate, given the recent acquisitions including the XPO truckload, just wondering if we should still use a 27.5% tax rate going forward.

I think so. And now that's one thing, though, that we don't know what Mr. Trump is going to do about the tax. So for sure, if he lowers tax rates of corporation, for sure, that's going to be a benefit to us, but we don't know, but with CFI for sure. But don't forget that we fund the CFI deal through our Luxembourg operation, so we get to double dip. So we get a little bit of help there. So I'm not really in tune with the tax rate. I mean, Q4, we had very little tax rate. There were some issues there. But I would say, yes, you could use 27%, 28% and if we're under that, I mean, so be it.

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

So just on acquisitions, you're talking about your interest in taking advantage of some of the opportunities with low valuations. When you look at your current leverage, how much room do you think you have? Where will you be comfortable in bringing leverage before you would either slow down acquisitions or have to reload in another way, given your leverage profile?

Yes. Well, like we've always done, I mean, we could run about the 3 to 3.25 mark. And don't forget that if we get to that point, that means that we have to stop either share buyback or, I mean, we have to stop M&A. Our normal rate of free cash flow, even in 2017, is forecasted at about half a turn. So if we're, let's say beginning of the year at 2.8, 2.7, 2.8 and we don't do anything, then we go to about 2.3, 2.35.

That's right.

So if we say, well, yes, but we could do maybe one turn above that, so let's say you go up to 3.25, so that means that you could by up to about CAD600 million as a deal. So, I mean, it's between that, Walter. So for sure we can't do a billion-dollar deal or whatever, you know. We can't do that. But, for instance, I'm looking at one right now that it's a fantastic deal. Our guys are there now doing the due dil. It's a fantastic deal. And that's going to cost me probably like 65 U.S., so let's say 100 Canadian. But, I mean, this is adding a lot of cash to the Company and the payback is quite good. So it all depends on the opportunity. And my job, Walter, has always been the same is to allocate capital where we get the best bang for the buck.

Yes. And is that the upper end of your target range right now of tuck-ins, yes, is 100 million-dollar kind of cost?

Yes.

Okay. What's the end game here? When you look at your strategy over the next three years, how do you want to see TransForce in three years from now? Is it a larger, North American LTL and parcel and truckload logistics player? Do you see it as getting big enough now to kind of break into different units? Where do you see the best strategy for TransForce? And what form will TransForce take in kind of the three- to five-year timeframe?

Yes. So if you ask me the question today, I'll give you what I see today. Today, I see that TFI has got a good operation, a good truckload operation that's been a little bit discounted because of the U.S. truckload market which is a macro thing. But that will change over time. But also, we have a fantastic P&C business that's not valued properly. If GLS buys a company at 28, 25 times cash flow, I mean, look at the cash flow that we generate, us, in our P&C business. I mean, it's the best return on capital we have and it's valued like poorly. It's the same. I have got the same problem. So if you ask me the question, what we're doing now is we're trying to grow that P&C business with small deals. Like we bought Muskoka in Ontario. We bought World Courier. But at the end of the day, in a year or two years, I guess we'll be done by all the different tweaking that we're doing with the Canpar, Loomis thing. And if the market does not recognize the value and I can't grow it because everybody sells their business at 10, 12 times EBITDA, what do you want me to do? I work for the shareholders.

Right.

So I'm not going to keep an asset that's poorly valued and it's just like a diamond. Now, I hope it doesn't happen, but we have to think like that because I work for the shareholders. Now, that being said, what it means is that, let's say in two years we improve our P&C, we've been growing the revenue, our margin, I said two years ago we're going to be better than 10 points EBIT. Well, we're now, if you exclude the depreciation of intangible. And we're going to do better this year. So if people does not -- the investor community does not appreciate the value -- I tell you, Walter, somebody values our division way more than is valued today.

And when you consider good valuation versus poor, are we looking at UPS-type multiples? Are those the comps you refer to when you -- or is TransForce, is its parcel division unique and you have your own kind of view of what valuation should be and can you share it with us?

Walter, this is like the Waste. I mean, I remember when I was selling the Waste. I mean, some guy said, oh, this is worth 500, this is worth 550. This is because Mr. X sold RCI in Montreal for five. It's the same, ba-ba-be-ba. No, no, no, no, no, no. It's not same. We sold it for eight.

Yes.

On the P&C side, we have a diamond. And, yes, I mean, the U.S. company that I just talked about is a tremendous company that would be a good fit. But there's others. There are some in Europe that have a lot of cash like your Royal Mail and they don't know what to do. They want to come to the North American market and this could be hell of an entry for them.

Somebody over there probably knows Canada pretty well, too, at Royal Mail.

That's right. Absolutely. You got those guys in Belgium that wanted to buy the Dutch. The deal didn't go through. They sit on $2 billion of cash. So, but we don't want to sell, Walter. Us, what we would like is to get the proper valuation, because we have a fantastic team running those division. So this is the last resort, because if we have the right valuation and people are probably laughing at me, but if we have the right valuation, then we can grow to a little bit better size deal than we do now. But without proper valuation, I'm at a disadvantage. So I can't really grow because I've got a lot of guys calling me and saying you're stupid, you're buying at 10 times, you're worth 6.

I'll ask the last question, Alain. I know it's kind of a personnel one. But you've been a big part of this organization for some time. Can you talk a little bit about your kind of tenure and what you're objective is? And little longer term, talk about your, perhaps, succession planning? Is that something you're thinking about now or is that something we don't need to worry about for another few years here?

No, I don't think you need to worry about that. I mean, we have a solid team running TFI. I mean and, as a matter of fact, this is a concern of our Board and we did a study and we identified nine great executives with the capacity of doing more. But unless something happens to me, I'm having lots of fun. I mean, we went through some very difficult years. And now I see the potential of our team. I see the potential of our business. I see the market in the U.S., I understand the market better now. I see a lot of opportunity. So for me, I mean, it's not about money. It's about building something with my team that everybody's going to be proud of, number one, but also it's fun to build if you have the same currency as the other guy. Going back to the P&C, LTL, I can do it, even with the cheap currency that I have today in Canada, because we don't want to do anything in the U.S. But with a cheap currency, I cannot build my P&C. So that would be sad if we would have to do that, let's say in two years. But we don't want to do that. We would like to keep on building. But for myself, I mean, I see a lot of opportunity in the U.S. I mean, don't forget, we're at 4,500 trucks in the van side. But on the specialty truckload, I mean, we're small. I mean, we have a great operation in Texas. But like I said, I mean, I'd like to be doing more on the specialty truckload in the U.S., because we have the expertise with the Con-Trans team, with TFI, the previous team that we have in Quebec, we have expertise on, let's say the flatbed, the dumpers, the tankers. So we have the expertise so we could do better. So that's one sector that, at least there, I have a currency that I could use to do a deal. But on the P&C side, I could do the small deals like done like the one in the U.S., World Courier and the one in Canada. But I cannot do the game-changer type of deal.

Your next question comes from the line of Fadi Chamoun with BMO. Please go ahead.

So a lot of discussions. I just have one follow-up. The EBITDA outlook that you gave for 2017, I'm just trying to understand the different pieces of that. So you got CAD450 million base.

Yes. This year, yes.

What would be the contribution from all of the acquisitions that you've done so far this year? Like what does the base right now and what do you expect that to be in 2017?

So the way to answer that, Fadi, would be this, our CAD600 million to CAD620 million, what we feel is that our existing business, excluding CFI, because CFI is so new. But our existing business, everything except CFI, will improve by about CAD20 mill. So this is my P&C. This is my LTL. This is my truckload, excluding CFI.

Okay.

Now, this also takes into account that the first six months of the year in the U.S. is going to be as bad, probably not worse, but as bad as it was last year.

Okay. And what was the EBITDA of the acquisition that you've made at the times when you made them? Like, I'm just trying to understand the base contribution from these acquisitions.

You mean which one, the small ones that we did in Q4?

Yes.

Oh, CFI? Well, CFI, we said. I mean, it's about 150 in U.S.

Yes and the other ones?

The other ones, like all the ones that we did in Q4 which is NFF, NFF is not zero, it's minus two. So NFF is not positive. It's negative today. Okay. And then you look at the rest which is MDS which is Hyphen which is Cavalier. If you summed that up, minus my friend the NFF, you get to about seven Canadian. Oh, World Courier, let's say 10.

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

Maybe just follow on, on Cameron's earlier question in terms of maybe some of the transient costs you're seeing today as part of the XPO integration.

Yes.

When I look at a truckload business, you saw an increase in your personnel expenses, in your D&A, as you mentioned. Just wondering, as you move to this owner-operator model, how quickly you can reduce those costs or increase your margins to better reflect maybe a profitability that you'd like to see.

Yes. But don't forget, Kevin, CFI, let's say in 2016 their EBITDA as a percent of their revenue was quite good, I mean, in the 18% to 20%. So a truckload like a CFI without -- so he's got 2,500 drivers. So that's why you see more salaries. But, I would say to bring CFI to a 35% light versus 65% heavy, it's going to take is probably something like a year. So and this is going to be done through brokerage. Now, we're going to be able to do, because right now, I mean, we're not doing anything and also increasing the number of owner-ops which we're doing now.

Okay. That's helpful. And then just lastly for me, you mentioned the tuck-in acquisitions you've done. Just wondering how we should think about real estate sales, just given the quantity of transactions you've had? Just does that accelerate in 2017?

Well, there's going to be some savings. Yes, there's going to be some savings there. So I'll give you an example. World Courier in Miami, they're going to be moving in with Dynamics. So there's always going to be some savings. And in terms of World Courier, everything is leased. So there's not going to be any sale. But there's going to be some saving in terms of rent. In terms of him MDS, Muskoka, we didn't buy any real estate, but we're going to be leaving MDS in Toronto from a come -- one of my friend's terminal, into our own. So we're moving from guard the wine into our own in March. So that's going to be three quarters of a million dollar savings. But the rest of MDS terminal, I mean, everything's going to stay the same. Toronto was going to be the big move. If you look at Hyphen, hyphen, we're moving that into the [indiscernible]. So saving there. If you look at NFF, I mean, Toronto NFF, I mean, we're going to be moving Dynamex Toronto into NFF. It's going to be Global [indiscernible] NFF and Dynamex, probably, I don't know, three quarters of a million dollars saving. So, because NFF, they don't own any buildings. So we won't be selling any real estate because of these acquisition, but we're going to be saving a lot of money on rent.

Right. So when you think about CAD10 million, I mean, this is not so much of a cash flow question now, but the CAD10 million you highlighted in terms of kind year one EBITDA contribution from the tuck-ins, does that become kind of CAD20 million or CAD15 million, if you look out kind of two, three years and you execute on some of these initiatives to extract more value? Is there kind of a multiple increase from that CAD10 million?

Well, one thing is for sure, Kevin. I mean, we cannot run CAD80 million of business and lose two.

Right.

We don't do that, us. So it's going to take us a year, it's going to take us 18 months. But in 18 months, this Company's not going to lose two. This is like when we bought DHL Canada, I mean those guys were losing 18 to 20. Today, Loomis is profitable now. We stopped the bleeding. So it's CAD10 million today. Is it going to be CAD20 million a year from now? If not, it's going to be very close, because NFF will improve, Hyphen will save a little bit of money. This guy will save a little bit of money, will improve, et cetera, et cetera. So the 10, I mean that's always the goal, you buy something good and you try to make it better.

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

Quick question on the truckload. If I've done my math correctly, it looks like the acquisition switch, I guess is mostly CFI, had an EBIT margin around 2.5%.

That's right.

So the question I have is, do we have to wait for more volume for this to improve or is there something you can do?

No. Well, first of all, I mean, November, December does not represent the year.

Right.

Because December is a shitty month. I mean, you got two weeks out of four that you lose the revenue, but you still have the truck.

Right.

So that's number one. Number two is this number that you just said, has been affected a lot by the intangible depreciation which we're still not sure how much is this going to be. I mean, this is a kind of a what we think it is. So for sure, I mean, you do M&A, you're stuck with intangibles. So that affects your EPS on the trade.

Okay.

And also, you have a lot of depreciation with no revenue, because these are not the reflection of a normal year. So this is still difficult, still not making a lot of money. But, it's a transition, because don't forget, CFI is like the rebirth of a company, because they've been sold a few times now and the team is now looking at the way we look at things. And you'll see the guys are really, they are really embark in this mission of creating a great CFI like it was 10 years ago. But that's going to take us a little bit of time, because priority number one is to get all the assets that we have, like the trucks, with drivers. Now, what happen over the course of 2016, is that previous owner didn't see it the same way as we do. So we bought the company with a lot of assets without human. So we're building that now and that's why you see a lower profitability numbers in the month of November, December. But like I said, our month of Q1 of CFI and TCA are not going to be great quarters, because, first of all, it's difficult because of the weather. I mean, January has been a terrible month in the U.S. But I mean, we're still building the team and, I mean, when I say the team, the team of drivers I'm talking about. And for sure, we'll be ready when the market starts to pick up again, because we have a fantastic team here.

Okay. Fair enough. That's helpful. Just on the P&C, you mentioned a number of factors, some which would help on the growth and then I guess it's the Dynamex Canada which sounds like it's going to be -- I don't know if it's going to be a drag or just flat net. Do you expect P&C to grow significantly or does the Canada really hold it down?

Well, Canada, in terms of dollar, will hold it down because, I mean, we kicked out about CAD40 million of shitty business in Canada. If you remember, I said that on Q2. We let go the guy that used to run the show, because him, he liked 2%. He kept on saying, I like 10%, but he was accepting 2%.

Right.

So we have a new leadership there. The guys, they understand that 2% is not going to make it. But in the meantime, we're suffering on the top line. But bottom line, I mean, we're not suffering at all, because we just got rid of all the shit and now we have time to focus on adding or get better business.

So would you expect sales to be higher this year or flat or--?

Excluding Dynamex Canada, I mean, because of the year-over-year comparison, everybody else, like if you ask me about Canpar, for sure Canpar's up. If you're asking me about Loomis, revenue-wise, Loomis is up. If you ask me about ICS, ICS is going to be up revenue-wise. CFIS, we'll be up, too and Dynamex U.S. The only one that's going to be down because we kick the -- the low margin account is Dynamex Canada, but not the bottom line.

Right. So should I think of it then, when I'm looking at my model, as revenues flat, margins up for 2017?

Margins up, for sure. Margins up. I said it. I mean, we will improve the margin.

Okay. Okay. And then on LTL on margins, you've done a pretty amazing job of improving margins in a lousy revenue environment. Can you do more, do you think, on the merchant side or--?

Oh, yes. Oh, yes. We're going to do more because we got some very lean and mean guy like J.F. Dodier. We've got Bob McGonigal. We've got Rob O'Reilly and Wayne Gruska. I mean, we got the A team there. And we just hired a new guy that's going to take over Clark, because the guy that done a fantastic job there, Daryl, is retiring. So we just hired that guy this week. That guy, I mean, he's a CPA. He's all fired up. And I'm very happy with what we've done. I mean, our small LTL company in Alberta are doing better now. The economy's starting to improve slowly over there. No, I mean, for sure, LTL, I'm fully convinced that we're going to do better this year.

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

Just a couple of quick ones for me here. First of all, on the e-commerce revenue, you provided a nice breakout there, obviously, with about CAD400 million of revenue per year.

Yes.

Can you talk a little bit about, like obviously the margins on that business are probably fairly good. Can you give us a sense on quantification of those margins?

Yes. Well, the margins are comparable, Turan, with everything that we do. So could it be the last mile or the truckload, because it's always the same thing. I mean, to get more volume and to make less money, I mean, this is not TFI. I mean, we've shown it in everywhere, like Dynamex Canada. I mean, we're not in the business for two points. I mean, guys come to me and they say, hey, we got this great account, lots of future, but you're not going to make money for 10 years. Well, no, it's not for us. We'll leave it to somebody else. So our margins are competitive with the rest of what we do and, but what we're doing at the same time is like this acquisition of World Courier, I mean, we're also looking for niche player. I mean, this is a real niche player and that's why we've changed the name, we had to, from World Courier to Tforce Critical, because this is really critical to patient that we service the patient on time. But by doing that, this is not a commodity. This is a better margin business. So, yes, we have the e-commerce that's growing, but at the same time, we're also growing these niches that we see here and there. Now, Tforce Critical runs or operates in eight market. Well, eight is not a lot. So us, we could do more. So that's one way, we're working with Scott Leveridge and the team there, is now we have a great product and a great solution that, for sure, yes, we're in Miami, but are we in Dallas? Are we in Chicago? Are we in Washington? Are we in New York? Well, I mean, we're only in eight markets. That's small. So we could grow that. So it's not just e-commerce that will be growing in the U.S., it is also all these specialty needs that we're trying to identify.

And just one last question here for me. Could you give a little bit of sense, I think you alluded to it a little bit earlier in terms of the seasonality of the CFI EBITDA, so the $115 million.

Yes, absolutely. I mean, I don't have the answer to that. But what day, I could tell you, though, because this is true for everything in trucking. December is the shit, because you got at least 10 days that you have no revenue. And then January is as bad because you've got the revenue a little bit, but you've got the big weather situation. So those two months are not good months at all. But we have the same problem everywhere. I mean, it could Canpar. It could be everywhere, I mean, wherever you got assets. If it's a brokerage operation, you're not stuck with the asset, so big deal. I mean, you don't have the revenue, but at least you don't have the costs. The fixed cost I'm talking about. So CFI and TCA and all these assets guys, I mean those months are a killer because you don't have any revenue. And you know the guys at CFI told me the last two days are the first days in 2017 where we don't have any issues with any truck with no revenue because they're stuck in the storm and we're mid-February.

Perfect. That's great. Thank you very much. And I guess just one clarification here. I think you mentioned CAD10 million in terms of additional EBITDA from acquisition. Is that right?

The small. The small acquisition, yes.

The small one, and that was all for Q4, correct?

Done in Q4 and the one done in Q1 which is Cavalier.

Okay. Thank you. But is that an annualized number or is it a quarterly number, just confirming that.

No, no, no. That's an annual number.

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

Okay. Well, ladies and gentlemen, thank you for joining us this afternoon. And I would like to invite you to our Annual Meeting of Shareholders to be held on April 26th, in Toronto. And also look forward to speaking with you again following the release of our Q1 numbers. Have a great evening. Thank you.

This concludes today's conference call. You may now disconnect.