TFI International Inc. (TFII) Q1 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the TFI International's First Quarter 2017 Earnings Release 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 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 Thursday, April 27, 2017. I will now turn the conference over to Alain Bedard, Chairman, President and CEO. Please go ahead, sir. Alain Bédard: Well thank you, operator, and good morning, ladies and gentlemen and thank you for joining us today. As you know, we released our 2017 first quarter results press release yesterday afternoon. So let me begin by reviewing the highlights of the quarter. In spite of the difficult conditions we anticipated in the U.S. Truckload market, as well as integration costs related to the CFI acquisition, we achieved significant profitability increases in all other segments. This comes as a direct result of our continuing commitment to efficiency improvements and our focus on business niche that generates the best returns. In Q1, revenue before fuel surcharge from continuing operation rose to $1.06 billion, a 22% increase over last year. The increase comes largely as the result of business acquisition, primarily CFI, which was completed at the end of 2016. Operating income from continuing operations was $28.9 million, down from $40.3 million last year. This decrease mainly stems from a non-cash impairment charge of $13.2 million, related to the decrease in fair value of trade names in the P&C segment that were converted to TForce Final Mile. This rebranding of several same-day last-mile P&C divisions to TForce Final Mile names reflects the growing scope of our P&C activities and our desire to consolidate some of our business units in the division under one trade name. Excluding discharge, adjustment income from continuing operation totaled $42.1 million. Non-recurring costs of $7.5 million were also incurred related to the CFI integration, mainly related to fleet rebranding and renewal programs. As a percentage of revenue before fuel surcharge, adjusted operating income was 4% revenue versus 4.6% a year ago. This decrease reflects lower margin in the U.S. Truckload segment due to the difficult market condition, which were partially offset by higher margins in all other segments, generated by efficiency gains. Adjusted net income from continuing operation totaled $32.7 million or $0.35 per diluted share, up 5% from Q1 of 2016. Free cash flow from continuing operation amounted to $29.5 million or $0.32 a share, an increase of 20% over last year. I will now review the results for each business segment. In Q2 of this year, P&C revenue before fuel surcharge grew 3% to $320 million. The increase is attributable to the World Courier Ground acquisition made in January of 2017. Without acquisition, revenue decreased 3%, mainly reflecting a slight volume decrease in our U.S. operation. E-commerce revenue held relatively steady year-over-year. Operating income decreased by 43% from $16.8 million to $9.7 million in Q1 of this year. The decrease is entirely due to the impairment charge related to the trade name change conversion. Excluding this charge, adjusted operating income increased by 36% to $22.9 million as a result of efficiency improvements. In the LTL segment, Q1 revenue before fuel surcharge grew by 12% to $199 million. The increase is mainly due to business acquisition. Excluding acquisition, revenue declined 1%, mostly reflecting currency fluctuation. Operating income was up 62% to $8.7 million. We had a solid 140-basis-point year-over-year increase in our LTL operating margin, driven by lower operating and fixed costs, as well as efficiency improvements. In the Truckload segment, revenue before fuel surcharge increased by 44% to $487 million. The increase was largely driven by the CFI acquisition. Excluding acquisition, revenue declined by 1%, mainly because of ongoing challenges faced by the U.S. domestic Truckload operation and unfavorable currency fluctuation. On a positive note, the special Truckload segment continues to see slightly more activity and the division in the oil and gas industry have started to stabilize. Operating income in Truckload reached $14.7 million, down from $20.4 million in the same period of last year. This represents an operating margin of 3% compared to 6% last year. The decrease is partly attributable to the transition costs related to the CFI acquisition and the fact that newly acquired business has higher amortization charge that impact operating margins. Excluding acquisition, the operating margin act really improved by 10 basis points over the previous year. Although U.S. market condition remains challenging in regards to rate and volume, this was more than offset by the improvement in our specialized TL divisions in Canada. In the Logistics segment, Q1 revenue reached $67.6 million, a 24% increase over prior year. The increase was driven both by acquisition and internal growth. Operating income for the quarter rose 33% to $5.6 million, while the operating margin grew by 60 basis points year-over-year. So I will now turn to the outlook for the rest of the year. With unemployment rates relatively low and consumer spending healthy, we are reasonably optimistic about the prospect of the North American economy. There is also some renewed investment in the energy sector. We are pleased with the progress of our P&C and LTL segments. Going forward, we will continue to focus on improving efficiencies and achieving superior returns by widening our reach in asset-light activities. Meanwhile, condition remains difficult in the U.S. Truckload market. At this stage, we do not expect any significant improvement before the end of the year. We are hard at work in properly adapting supply to demand, and harnessing all the synergies resulting from the CFI acquisition. We will also remain active in pursuing our selective acquisition strategy in our main markets. As always, we're looking to acquire well-managed companies that complement existing operation and broaden our geographic footprint. Ultimately, TFI International's objective is to create shareholder value by maximizing cash flow. With a solid cash flow, we can confidently invest in high-return activity, reimburse that and still increase the amounts returned to shareholders. So I would now like to open up the call for your questions. So, operator?

Thank you. [Operator Instructions] Your first question comes from the line of Mona Nazir from Laurentian Bank. Please go ahead.

Good morning and thank you for taking my questions. Alain Bédard: Good morning, Mona.

Good morning. So, firstly, I just wanted to talk about the year-over-year growth that you had, revenue is very strong, largely driven by the CFI acquisition. I saw that your legacy business is kind of relatively flat. Just looking at the variance in your topline year-over-year, and then your increase in EBITDA year-over-year, just that margin purely is coming in at around 11%. And I know when you bought CFI the margins were significantly higher at over 20%. I understand that there's seasonality and there was a weak start to the year, but I'm just wondering if you could speak about the integration thus far; how is it progressing. I know you spoke last call of needing to add some drivers and other things, so any color would be great there. Alain Bédard: Well, if you go back to the CFI acquisition, and I've mentioned that I mean when we bought the Company late last year. I mean the market was still not great. And since that time, the market went even worse. When you have best-in-class Truckload operators in the U.S., like the one that came out yesterday with their numbers that are down like crazy, and this Company and others, it's the sixth quarter. Okay, you got, in the U.S. Truckload market, that those guys are down and down and down, and a lot has to do with the quality of the revenue per mile. So if you look at what we've done, us, in Q1, on our U.S. Truckload operation, our TCA that we bought in 2014 and our CFI that we just bought a few months ago, we didn't do too well, for sure. Now, can we blame that on the market and I mean we have many issues, okay so for instance, we don't have enough miles per trucks. We don't have enough revenue per miles. And these are all a reflection of market condition. Now, what can we do? I mean we can't fix the market by ourselves. But one thing that we're working very hard at is to reduce costs. So we've been working with the TCA and the CFI team to consolidate, as much as we can, the terminals that we have. We are working on fuel efficiencies. We're working on all kinds of cost that we could work at it. But until such time that the demand improves, the U.S. Truckload market is going to suffer. So, we thought that the market would start to turn probably in Q2, Q3 of 2017. There was a lot of talk about the ELDs helping with the reducing a little bit the offers, so that there would be a little bit more stability in pricing improvement in the U.S. We'll have to see what happened over there. We have a lot of faith in the U.S. economy. We know that things will start to get moving over there. As a sign of faith that a lot of truckers have in the future is that those guys are buying more trucks now than – they're ordering more trucks now year-over-year than they used to do, let's say, 4, 5, 6 months ago. So everybody thinks that things will get better, but so far, things have gotten worse. If you look at our Q1 this year just at TCA, which we have a great team there, we're worse than last year. We did worse than last year. Now, the beauty of TFI is that it's so diversified that our P&C guys have done a fantastic job in Q1. We've improved everything over there. And our numbers are great, and even with the $3 million in severance we had to pay in Q1, we're still way ahead last year. Our LTL guys have done a fantastic job as well. Our logistics guys are up. Now, even our Truckload guys in Canada are doing well. Our specialty Truckload is ahead of last year. Our regular van operation out of Canada is doing better. But all that good work, well, you don't see it a lot because of CFI and TCA didn't perform like they should have been performing, based on our expectation. So we know what the problem is. I mean the problem is, to a certain degree, the market. And us, what we're going to do in the meantime, is we're going to be working day and night in trying to reduce our costs, like we've done all the time. I've said it many times. LTL market in Canada has been terrible for the last eight, nine years, but we're doing way better in a very terrible market, right? We just bought NFF about 4 months ago, three months ago, and NFF was losing money. Well, NFF's not going to lose money in December. In the last quarter of the year, NFF will make money because we're working at it. And it's the same thing we believe – and I was talking to one of our board members that used to run TCA. TCA will improve their profitability in Q2. That's for sure. Also, we had some issues with weather there's all kinds of things that happened in Q1. But just to say that the best-in-class U.S. guys, its six quarters that they're doing less than the quarter and the year before. So it's a general industry situation that we have. So many guys can say, hey, Alain, what have you done? Why have you bought this company in the U.S.? It's doing so badly. Yes, we did bad in Q1, but long-term, this is going to be a great investment for TFI. So that's where we're at, Mona.

Okay. That was very, very helpful. So just given your comments, do you think at this point – I know we're still early into the year – do you see any, or envision any changes to your kind of soft guidance for EBITDA? Alain Bédard: Well, at the start of the year, our plan, and that's what we said, we're going to do about $600 million in EBITDA. After Q1 and after the mess that we have in our Q1 mostly because of our U.S. Truckload operations, because the rest of our business is on plan or ahead of plan, but because U.S. Truckload, it's becoming such a huge factor within TFI, probably the $600 million now is down 10%, to $550 million or $560 million, right?

And just lastly from me, before I step back in the queue, I just wanted to touch on the e-commerce side. We've seen very, very strong double-digit growth from that segment. I know it was relatively more flattish at this quarter? Is there any specific contract changes there or just like a one quarter blip, or do you still expect strong growth going forward? Alain Bédard: Well, that's a very good question, and you know what, we have one of our largest customers that is really – those guys like to change, okay? So, change for this, change for that. Do this, do that and finally, with this account I mean we've not grown in Q1 this year versus last year. As a matter of fact, we went down. Now, the good thing is that we don't have this customer – just this customer. We have many more customers on the e-commerce. And with the rest of our customers, we're growing. With this customer, we went down, because we lost – because they like to change. They like to switch. They like to try all kinds of stuff, those guys. And we lost LADLE market, which was a huge market for us. So they decided to do things differently. But because we capped – this customer has been capped with us for many, many years, and now I've reduced the cap again, okay? So they were capped at CAD100; now I brought that down to CAD75. So, but in the meantime, we're growing with other players in that e-commerce business.

Thank you so much. Alain Bédard: Pleasure.

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

Good morning, Alain and if we come back on the – in light of the EBITDA guidance for the year, I was just wondering, how should we be thinking about the free cash flow generation, if you're still able to achieve somewhere around the $300 million? Alain Bédard: Well, you know what, Benoit; reducing the EBITDA for sure it's going to reduce our free cash flow. Now that being said, we could also reduce our CapEx within our U.S. Truckload base operation, but so far, we're not going to be doing that. So CapEx in the U.S. Truckload will remain the same. So that means that probably, depending on how good we are at managing cash and collection, because our DSO is improving. And then we still need some improvement -- excuse me -- at CFI, for instance. There's about $10 million of improvement on the collection side, $10 million to $15 million that needs to be done at CFI. Based on all that, so probably we could be down by $20 million to $25 million.

Alain, $220 million to $225 million? Alain Bédard: No, down $20 million to $25 million, so from $300 million to $275 million.

Yes, okay, I see. And should we assume that CapEx to stay around $150 million? Alain Bédard: Yes, right now we are leaving CapEx untouched. Even if the U.S. Truckload operation is not performing according to plan, I want to see Q2. I want to have a better visibility about the future of 2017. But so far, there's no way we're going to affect the CapEx of our U.S.-based operation. Because don't forget, one of the issues we have with CFI right now is that the fleet is too old because the previous owner didn't spend a dime in 2016. Right, so normally, CFI should replace about 400 to 500 trucks. This year, we're going to be replacing 685 trucks to try to catch up with the fact that the job was not done properly in 2016. And this is affecting my costs. Not just the CapEx, but it's also affecting my operating costs. So if you look at, normally, we should run a Truckload operation in the U.S. with a maintenance cost of, let's say, between $0.05 and $0.07 a mile. Right now our guys at CFI are running more than $0.10 a mile. So this is killing me because CFI is a diamond, and normally CFI has always run with all trucks under warranty. Right now CFI is running with about 800 trucks that are not covered by warranty. So this is why my maintenance cost is going through the roof. The reason being is that the guys didn't buy any trucks last year. But we knew about that. We knew about that, and that's why we had to reduce the purchase price of CFI, because of that. But the penalty on the maintenance costs, that is something that will be affecting us less and less every quarter because we're actively replacing those trucks. But for 2017 it's going to kill my bottom line by about $10 million to $12 million if I would have a normal fleet. So that's why for now CapEx stays the same, even with the poor results in Q1.

Okay. And going forward, beyond 2017, should we expect kind of a net CapEx around $150 million and the maintenance costs to come down to a more normalized level in 2018, Alain? Alain Bédard: Oh! Absolutely. We're just starting to get the new trucks right now at CFI because we know, we bought the company in November, and by the time we order the trucks, et cetera, et cetera so we're just starting now. So there was no benefit in Q1 at all because we didn't get any new trucks in Q1. So we're getting the new trucks as of now. So from, let's say, Q2 of 2017, it's an 18-month to 24-month period before we go back to normal. But every quarter we should improve versus the one before.

Okay. And now given the soft start in the year, could you provide an update on the M&A strategy? Where do you, or what do you see right now, and any thoughts about cash deployment opportunity share buyback in light of your financial leverage, Alain? Alain Bédard: Well, it's always the same story. Depending on the price of our stock, we will be active or not. So that's number one. Number two, is for sure we have lots of good things on the go, lots of small tuck-ins. We just bought a good company in Cornwall, Ontario, a small – I mean, this is really small. It's Villeneuve. But it's a nice tuck-in into the rest of our Laidlaw and Kingsway operation. So small tuck-ins will keep on going we have another one that will take effect probably late or mid-May in Canada. A small – there again, but important to us. Major stuff, I don't think – I don't see anything before maybe Q3 or Q4 of this year. So we'll have to see. But in the meantime, us, we're really, really busy with fixing and working hard at reducing our cost, not just in Truckload, but everywhere. If you look at our results in P&C in Q1, they're fantastic. And the guys are doing a fantastic job there. And you will see, we said double-digit EBIT in our P&C; we're going to be there for the year. Our LTL keeps on improving. The guys have done a fantastic job. Western Canada, that's been highly depressed for us, is starting to improve a bit. Our intermodal business, we have a new pact with CN that for sure is going to be good for us in terms of growing with them. You want to be piggy-backed on a winner. You don't want to be piggy-backed on what you think is a winner. So we're very happy with our intermodal, LTL business and Truckload also, intermodal. So that's going to do well in 2017 for us. And there again, we just announced internally that [indiscernible] will be now a new EVP of TFI, because Rob O'Reilly, after 20 years with the company, is retiring in the summer. So we have a deep bench of talent there. So we're very happy with that. Our logistic is doing well. Part of CFI, we added CFI Logistica. That's doing well. That's an area where we could grow. And we have a lot of projects that we're working on. And so depending, like you said, Benoit, depending on the price of stock, we'll address the situation. If people don't see value in TFI, I see a lot of value in TFI, but people they do whatever they want.

And last one for me, you just re-branded your U.S. last mile. So could you provide more color about the size of your U.S. last mile right now, and what is the strategy behind the re-branding, Alain? Alain Bédard: Well, the strategy is very simple. It's that we bought Dynamex in 2011, and Dynamex, at the time, was a 2% bottom line company. So although when we bought it, we put some value to the name, but in actual fact this name, to me was worth nothing. So after five years of running the company, we had to change this image of being – and as I said on the call about six months ago, we shed a lot of business in Canada because Dynamex' perception was, oh, that's a low-baller. That's a cheap guy. That's a 2% guy. I hate 2%. So we said, forget about Dynamex. And now we bought World Courier. We bought this. We bought that. So let's use one good name that reflects our value. So the guys decided to go with TForce Last Mile. And we're using that name both in Canada and in the U.S. And this image of Dynamex is the past. So we looked at the trademark, or whatever you want to call it, and we said that this is worth nothing. So let's erase that. And we did that in Q1.

Okay, thank you very much for the time, Alain. Alain Bédard: Pleasure, Benoit.

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

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

So I got your guidance on that EBITDA, but just for a lot of moving parts with acquisitions, and I want to drill down a little bit on that, but if we were to look at overall top-line expectation for this year, where are we running on a revenue basis on the top line? Alain Bédard: Okay, so on the revenue basis; let's say the dollar because you have to understand, Walter, that we get a lot of USD. So if you think about the plan that we had, us, beginning of the year, based on the USD that we had budgeted then, we were talking. And also, fuel is also an issue because fuel is a little bit higher than we thought that it would be. But our plan at the time was about $4.5 billion. So if you ask me the question, what is it now with a different FX, with a different fuel situation, and also the fact that our revenue in the U.S. in our Truckload has been affected, so probably all in all – I didn't check that, Walter, but I would say it's probably a wash?

Okay. All right. So still at $4.5 billion, just lower – just your margins are going to be affected, essentially. Alain Bédard: On the Truckload side in the U.S. Because you know, Walter, our Canadian boys in the Truckload sectors are doing a fantastic job with our domestic business. We're starting to see some movement again in northern Quebec and in northern Ontario, a little bit of movement there on the mining side. So this is going to help us. So the Truckload situation in Canada is improving slowly and specialty Truckload as well. A little bit also on the energy side, both Canada and the U.S. Where we're really hurting badly is the U.S. domestic part of our business. And as I said to Mona, if you look at the top guys, the best guys in the U.S., look at what the guys are coming up with. That tells you how bad it is.

And none of the consolidation there – it's still a fairly fragmented market. It's probably not going to solve anything until there's a lot more consolidation, I guess. Alain Bédard: No. Or, Walter because I think consolidation will take about 50 years, and I guess we won't be there. But in the meantime, what I think is going to happen and is going to help is autonomous trucks. It's still difficult for people to understand what this is going to do to our industry. Truckload, I'm talking about. It's still very difficult to understand because it's still not clear. But one thing is clear though, is that it's coming and it will have a definite effect. And it will now change the equation, not between shipper and trucker, but at least between the big truckers and the small guys.

Right. If I look at your acquisition, though, you purchased the Truckload business for revenue of $700 million, and I know the run rate here, with acquisitions, you pointed to around $153 million in a quarter. So is not the revenue being affected as well? You mentioned it'd be a wash, but so effectively the lower Truckload revenue is offset by other areas? Alain Bédard: Yes, absolutely. Our U.S. operation in terms of volumes for both TCA and CFI are down year-over-year, absolutely.

But you're getting offsets… Alain Bédard: Like I said, Walter, we have less revenue per mile per truck, which is a killer, and the quality of revenue is also lower. So you've got the double whammy there, where you have an asset that is with the driver is doing less miles, and our revenue per mile then is less, right?

Right. Okay, and then moving over now, drilling down a bit, I think you gave us good guidance for double digit on the parcel, double-digit margin with steady, no real change in your topline in parcel or Package and Courier. LTL, you had indicated that it would be kind of, X acquisition will be lower in 2017. I guess that hasn't changed. Alain Bédard: Topline.

On the topline? Alain Bédard: Yes. Topline.

EBITDA margin, are you forecasting double-digit on that again this year or? Alain Bédard: No. Topline, if you look at our existing business, topline, we're down a bit much less than the year before. So it's going to probably be, like, down one flat, okay. Finally, on the LTL, because we used to go down 3%, 4%, 5%, right. And the reason being is that we're growing slowly in the west, back again, so that's helping us. In terms of the profitability, okay, there, in that revenue, you've got NFF. That's got – doesn't make any money today. As a matter of fact, loses money today. That's going to change over time. But the rest of our operation will keep on improving. So this is why we feel pretty good that our 2017 numbers will definitely improve versus 2016. If you look at our CF operation, if you look at our Kingsway operation, both regional carriers, one in the east and one out west, they were badly affected because of the recession in Alberta, and also because too much competition here in the east. So those over-the-road guys, Overland are going to be affected. But our intermodal business is going to do way better. First of all, because we have a better deal with our friends at CN. We are now working closer with them, number one. Number two is our guys are working very hard to again be more efficient in terms of real estate, in terms of purchase transportation and all of that. So our intermodal guys will keep on improving and doing better. Our regional guys like Kingsway and CF are still working at getting better. The over-the-road guys, which is Overland, that is where it's going to be more difficult because it's going to be more like a war over there. Because we're highly dependent there on the U.S. traffic. This is the shipments between Canada and the U.S. and vice versa, and there, we don't see that growing. As a matter of fact, we're probably going to go down there in terms of volume because we had a switch, we had a change in partner. We announced that we are going away from Estes into the Saia group, a company there. And that may mean that we, for a period of time, we may lose a little bit of volume on that. But we're going to be working hard on the cost. So globally, our LTL, if you sum that up, our intermodal is going to do way better; our small carrier, niche carrier like Cavalier, Tri BAR, Concord and all these guys, the small guys within the family, where the total revenue is about $150 million, those guys will do way better; and the regional guys like Kingsway and CF will do better. Guys are working hard on that. So the only cloud that we have, to a certain degree, is Overland. And that's why we made that change with Rob O'Reilly's departure. Rick is going to get involved with Wayne Gruszka, and like we say, we are at war at Overland on cost.

Okay. How much cash taxes do you expect to pay this year, and your overall effective tax rate? Do you have that on hand there, or? Alain Bédard: Not really, Walter, but what I could tell you is that cash tax in Q1 was, because it was large, because of the Matrec thing there, right. We had to pay on the profit of that Matrec transaction. But me, in my mind, the number I'll use is always 25% to 26%. Not knowing what's going to happen in the U.S.

25% to 26% effective tax rate, and then a smaller amount of that, that would be in cash? Alain Bédard: Yes. But if ever Mr. Trump gets his bill, or whatever, his plan, through in the U.S., okay. Well, you can say, Alain, you don't make a lot of money with your U.S. Truckload. You're right. I'm not going to make a lot of money this year on the U.S. Truckload. But our last mile business is still doing well, and very well. So that may have also a small effect there. If he have the plan to go to 15% or 20%, if that goes through, that will help us not so much in 2017, but in 2018 and 2019, going forward.

Great. Okay. Thank you very much. Alain Bédard: Pleasure.

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

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

Just want to clarify on the free cash flow expectations, I guess the sort of $275 million, roughly, for the year. Are you excluding from that number the cash tax hit that you've taken in Q1 on the Matrec? Alain Bédard: Yes, absolutely, Cameron. This has been treated as a discontinued operation thing there.

Okay, good. On the Truckload, you've talked to some of the costs you've got there on the CFI acquisition. I know there's some significant re-branding expenses, I guess, going on as well. When should we expect that to be pretty much completed? My understanding is that maybe by mid-year, those costs will go away. Alain Bédard: I would say it's a year thing there, Cameron. Not on the truck. Truck is easy. Truck is not expensive. A trailer is the most of the problem. The big problem we have with trucks is that there's so much replacement, and then you've got to move those trucks back and forth because you're replacing them. We're also installing new technology on the new trucks. So trucks is going to be an ongoing thing. They're not really the re-branding, but the replacing of the trucks, which is a little bit more than normal because of the fact that there was no money spent on the trucks in 2016. On the trailer, that takes a bit more time. Don't forget, it's a 7,000, in terms of numbers, so it's huge. And so far, we're probably, I would say, 40% to 45% done, since the time we bought the company till now. We're trying to speed that up. In my mind, trailers should be done by the end of the year. Now is it going to be done by the end of Q3? Don't know yet. But by the end of the year, I think that we should be all done with that.

Okay. Are you able to sum up the total expectations for costs related to CFI re-branding, sort of the excess maintenance costs? Is there a number that you could maybe provide that your expectation for 2017 that probably, at least mostly, goes away starting in 2018? Alain Bédard: Well, I said it, on the maintenance cost of the truck, right now we're at about $0.12 a mile, which is completely unacceptable. This is not normal. So over time, from Q2, we should start to see that going down, but that's going to take 18 months to two years to get that back to a more normal, like a $0.05 to $0.07 a mile. So that's going to be a long process because I'm giving you the example. We're buying 685 trucks so far. That's the plan for this year. But today we've got about 800 out of warranty. So even with the ones that we're buying this year, we're still not replacing all of the out-of-warranty trucks. And most of these trucks out of warranty are not out of warranty because of miles, they're out of warranty because of time. It's four years. And also, these guys – us, we buy extended warranty at TFI. So we buy a five-year deal. Those trucks were not bought then with a five-year deal on the warranty. So this is why it's going to penalize me over the next 18 months; that's for sure. But from probably $1 million a month today, it's going to slowly go down. So if you look at 2017, the effect is going to be between $10 million and $12 million that maintenance cost. Probably closer to $10 million. And then gets to $18 million normally, probably for the year should be around $4 million to $6 million. And that's why, even with the poor results so far in Q1, some of the guys would say, hey, stop the CapEx. Well, I can't do that. Because we didn't buy CFI for two months or two years. Long-term, CFI is going to be a fantastic investment. That's what I believe. Short-term, I look stupid. A lot of people that are selling our stock today say, oh, that guy's crazy. He just bought that company, paid too much. The market is to [indiscernible] It's not going to be bad, it's not going to be good. It's all going to be bad, et cetera, et cetera. Okay, but we'll see in a few years.

Right, okay. Maybe just this final one from me. I'm wondering if you can provide a little bit more detail on the deal you've got with CN on the intermodal LTL. Is there an expectation that maybe you'll get, now that you're sort of working with them collectively, that you maybe get a little bit better price from them? And is there an expectation that you'll see volumes improve over the long-term as a result of this deal? Alain Bédard: Well, you see, if you go back, Cameron to five years ago, we had no relationship at all with CN. We didn't deal with them because we were not involved in intermodal at all. So we started being involved when we bought Quik X, and then we bought Clarke, and we bought Vitran. And then lately, we bought NFF. And now this is important to us. So this is why our guys sat down with the guys over there at CN and said, guys, we value the relationship. We've got to work closer. So this is why yesterday in Toronto there was again a meeting between the two teams to see, what can we do more together? And try to build up on that relationship. So, and not just in Canada, but also our guys are talking on the U.S. side as well. So the deal – what we are saying, the two groups, the two companies, what we're saying is that, guys, let's do more together. Let's be more efficient. Let's try to capture more of this market in the future. We made a decision, us that we're going to favor one over the other, because we deal with both. But at one point, you have to make a decision. And us, we said, okay. But we are working with these guys, but we have also to make sure that they are working with us, right. So it's not just about cost. It's about getting things done better, more efficiently. And that's how TFI's been built, on being more efficient. Do more with less. And that's what we're trying to do with this rail company. And for sure, you'll see, Cameron, over the next two or three years like NFF, for instance. Who would buy NFF? NFF loses money. A completely disorganized model. So we are working with them, with our group, and we'll fix NFF. It's going to be fixed. But we need the rail support. We need our people to support, like the people at NFF to support where we're heading. But we're going to fix that. And the CFI thing also, and TCA, we can't fix the market, no. But we could do better. This miles per truck can change. That's something that we can improve, and we will improve. The revenue per mile, maybe there's something that we could do that will improve that, even with a market like we're going through right now. Because when you have the best in class coming out with every quarter doing worse, you say, [indiscernible]. This is really a very difficult market. But a very difficult market doesn't last; we all know that. So it's cyclical business. So we are in a very difficult market today. We don't know when this is going to turn. We thought that it would start to turn late in 2017, and people now are starting to think maybe it's going to turn in 2018. But in the meantime, us, we're going to be busy working and improving our operation. And when things get better, like in 2013, 2014 and 2012 in the U.S., we'll be back on track.

Yes. Understood. That's all I have. Thanks very much. Alain Bédard: Thank you, Cameron.

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

Hey, Alain. Thanks for taking my question here. Can I ask you about your commentary around the U.S. trucking market? Obviously it's soft, and it's clear, based on your commentary, but looking through the year-to-date numbers, does it feel like it's bottoming out here or sequentially maybe getting better off the lows from earlier this year, or is your expectation that it continues to grind lower through the remainder of the year given your lack of visibility? Alain Bédard: Well, like I said Kevin, is that we thought things would start to turn around, let's say in Q3 and Q4. Right now what we're saying is that we don't believe that the market will improve in 2017 like we thought it would. But us, we could do better than what we've done in Q1 on our side of the border – on our side of the equation. Okay and this is why we will be investing more time and effort working with our management team there to improve what we can improve us. Okay, like the miles per truck. And with the new trucks coming in at CFI and TCA reduced at that cost of maintenance and improve the asset utilization. Those are things that we didn't do as well as we should have in Q1, and we're going to be working on improving that. But the market per se there's a volume growth in terms of pricing power, so that pricing gets back to a more normal pricing environment. We thought that this would improve in 2017, late. Right now we said, forget about that I mean maybe it's a 2018 thing now.

I guess there's been a lot of expectations around the ELD regulations potentially tightening up the market a little bit. It seems like you're suggesting that maybe you're not seeing that in your discussions or is it maybe just taking a little bit longer for this to become a tailwind? Alain Bédard: Yes.

If you could provide some color there? Alain Bédard: That's the unknown. Hey, Kevin we don't really know how this is going to affect the industry. So everybody thought that okay, it's going to create some kind of a shortage, maybe 2%, 3%, 4%. We don't know. I mean nobody really knows. We don't know how fast this U.S. economy is going to grow. Mr. Trump wants to grow it by 3%. It's probably not going to be 3% in 2017. It could be 3% in 2018. We have lots of confidence seeing in what's going to be happening over the course of the next few years in the U.S. So this is why – I mean we have short-term pain with our investment in our Truckload operation in the U.S., but to me, this is going to be long-term gain. Now if you ask me the question, is it going to be Q3 or Q4? I don't know. One thing I could tell you though is that because of what we know and what we feel when we talk to our guys and talk to the other guys, the industry in the U.S. feels that things will get better. Why, because they're ordering more trucks versus the quarter last year. So everybody feels that things should get better. So are we at the bottom of the barrel? Probably, because don't forget: Q1 is winter. It's not the best quarter. And we did poorly in our U.S. Truckload, but we did very well in other sectors.

Right, that makes sense. Maybe just two points of clarification: In your MD&A you highlight that you incurred almost $8 million or $7.5 million of non-recurring transition costs. Alain Bédard: Right.

Is that the maintenance stuff, or should I be thinking of…? Alain Bédard: No, no. This is a little bit of that maintenance costs and a little bit of the rebranding and the moving because you've got to move all this equipment, which is not normal. You move equipment normally when you buy the new stuff, but when they're buying new stuff, it comes in branded already the right way. When you have to rebrand, then you have to move this equipment all around and this is going to last until the end of the year.

Right, and sorry, I know Cameron asked this question earlier: In total, if I take that $7.5 million, I know it will decline as the year progresses, but an aggregate for this year, is roughly $15 million, $20 million kind of a good number? Alain Bédard: Absolutely, yes.

Okay, that's helpful. And then lastly, not to put you on the spot here, but I think last year you had provided a bit of a bogey in terms of how you thought about buybacks, in terms of what price really was attractive for you. Is there a price in your mind now that works? I won't throw one out there, but is there one that you think, at this level, definitely prioritizing free cash flow towards the buyback, or maybe not at this juncture? Alain Bédard: You know what, Kevin we don't control the price of the stock. But what we control us is our cash. And as I said earlier, I don't want to say a number, but what I can tell you is, I know what TFI is worth. And I know that, yes, we did poorly in one sector of our business, and we did very well in others. So if people think that TFI is worth $25 a share, for sure at $25 I'm going to buy as much as I can. And in our plan, what I could tell you, though, is that our NCIB is up to September, and in our plan right now, we have a buyback of probably a little bit more than 2 million shares that we would like to do before the end of Q3.

Before the end of Q3, that is very helpful. Thank you very much, Alain. Alain Bédard: Okay.

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

Yes, good morning, Alain. Alain Bédard: Good morning, David.

The first question I had, I just wanted to clarify on the CapEx. So it sounds like you've actually got several years of relatively high truck purchases for CFI. And so is the $200 million really a fairly good number for both this year and next year, do you think? Alain Bédard: Well, you see if the fleet of CFI stays the same, which is right now about 2,400 trucks that the company owns, and about 500 and something owner-op 550. So a total fleet of about 3,000 trucks on the road, if the fleet stays the same, which I'm not sure that the actual number of trucks, will stay at 2,400. I think it's probably going to go down to 2,200. And the owner-op fleet will go from 550 to closer to 700. But let's say the fleet stays the same, for the sake of the discussion, and you're buying – and the truck's life is five years normally, with the ELDs and because we are already compliant us with ELDs. It's not something new. So you do a little bit less trucks per mile, et cetera, et cetera. So you've got to replace those trucks after five years. So you've got 2,500 trucks. Okay, five years, 500 trucks a year, between 400 to 500. So right now we're buying 680, 685. So we are recapturing the shortfall that was not done last year. So if you're adding about 150 to 200 trucks more every year and you've got a shortfall of about 500 of trucks that were not purchased last year, so it takes you normally two years to do that, right. So probably, if things stay the same, 2017, we buy 685, we will have to buy at least 685 in 2018.

Yes, got it. Alain Bédard: Okay, but then again, David like I said, when we bought the company, the discussion we had with XPO is that we have to reduce the price because of that.

Okay. No, I get this, I just – so I should count on another year of $200 million… Alain Bédard: Oh yes, absolutely.

Okay. No, I'm not… Alain Bédard: But on the trailer side, there's nothing there at CFI on the trailer side. As a matter of fact, we have too many trailers. So you'll see us right now in the plan of 2017, CFI is not buying any trailers. Why, because the fleet is fine, and then we have too many.

Right. Alain Bédard: And TCA is normal, TCA, we're buying just less of 300 trucks. So TCA is normal. I mean this is just normal.

Okay. That's helpful. And then on the operating margins at P&C and LTL, they've had pretty impressive improvements for over a year now. With the numbers that you were thinking of for this year, do you think you're at the point where it will get harder to make improvements, or is there still significant margin expansion potential beyond 2017 numbers? Alain Bédard: Well, you see David, if you look at our P&C in Q1, we had to let go about 50, a little bit more than 50 people. So you don't get the benefit the next day, right?

Right. Alain Bédard: So we're not done. We're not done. So you'll see more of these kinds of investments that will be done over the course of 2018. 2017 were probably done, but we have more to come in 2018 and 2019 under Brian Kohut's – Brian and his team has done a fantastic job there. So we have more to come. So when you look at our combination, and don't forget that we got rid of a lot of it in our last mile business in Canada, so we're still suffering from that, because all that went out in Q4 of last year. So on the top line, we're suffering. On the bottom line, its way better as a percent of revenue. So I mean P&C feels very good. Those guys will definitely improve at least by 100 basis points year-over-year and probably more. On the LTL side, the inter-modal guys will do a fantastic job, and we're going to be growing that business and they're also working closer with the rail company that we're using. It's going to help us. It's going to help them, because we have better communication now. And the regional guys in the east are doing a fantastic job on the cost. Out west, revenue is starting to pick up. Quality of revenue is improving, so regional LTL, both east and west, will definitely improve. The only cloud that we have over our heads is our national, our diamond of Overland, because we had to do a switch of partner. We probably will lose some business there. So like we said through the new EVP that's responsible, for us, Overland, we're at war with cost there. We're going to have to make huge cost suppression there. But this is going to be the big focus of our LTL team. And our diamond, the small LTL companies that we have, the niche guys like the Tri BAR and the Cavalier and the Concord and the Westfreight guys. These guys will keep on growing, and for sure, that's going to be a big positive for the LTL.

Okay. Last question for me: The P&C commerce was flat. As you said, you had a client change situation there. Alain Bédard: Yes.

So it sounds like that would affect all of this year, going forward. So the P&C e-commerce growth might be low for the full-year, but do you see it growing from that level based on…? Alain Bédard: Well, it's growing with other customers. And this customer that changes his mind all the time, we are reducing our exposure to this customer, because I don't like guys that change their mind every quarter because you can't build a business with instability like that. But we have to service this customer, and we like the customer. We don't like the instability, but we'll keep on working with those guys. We were flat in Q1. I think that over the course of the next nine months we'll still see some growth, even with these guys, because we lose this, we lose that, but then we gain this and that. But the sum of the two, we're still behind. But we're also growing with other customers. So we were flat in Q1, we took a bit hit in California with those guys, and like you said, it will affect us all year, true. But we're also gaining other stuff with this customer, and we're also cultivating other customers.

Okay. That's very helpful. Thanks very much, Alain. Alain Bédard: Pleasure, David.

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

Thank you very much. Good morning, Alain. Alain Bédard: Good morning, Turan.

I wanted to ask you firstly on the CFI business. So as we think about sort of the year here, you've taken the guidance down, obviously, by about $50 million on EBITDA, and it seems most of that is because of CFI, right? But you mentioned that you sort of already had the sense when you bought the company with regard to the maintenance expenses, and you did the rebranding sort of beginning – starting in the beginning of the year as well. So I'm just trying to understand what changes – is it just the market's a lot weaker, between sort of January and now, for this to be the – basically about $50 million worse than what you thought? Alain Bédard: Well, first of all, it's not just CFI. TCA is not performing as well as last year. So in the $50 million there that we say that we're going to be dropping from our bottom line, it's not just CFI. But CFI is the main issue that we have there. So if you look at what we had forecasted and the reality, we were far from the forecast. Number one, in the quality of the revenue, we've seen a huge drop in the quality of revenue. We had a contract with one LTL company that ends at the end of April. Now that contract, when we bought the company, we knew that we had that contract and we knew the size of the deal. But there's no cap on the total revenue of that contract. So we were loaded with terrible, terrible business from the day that we purchased until the end of April. Already, this customer that loaded us with terrible, 120 OR freight. He knows that he's out. So for instance, we kept on servicing North Pacific for those guys. I mean, CFI is not a North Pacific Coast carrier, okay.

Yes. Alain Bédard: So we said good-bye. So the quality – it's not just that. This is a business that was loaded on the CFI team in the fall of 2016, over and above on that contract. So there was a lot of issues in Q1 with quality of revenue from this customer and others, because the market is terrible in the U.S. right now. It's a shipper's market, everybody knows that. That's number one plus, this guy that really killed us with business that's 120, 125 OR, which doesn't fit the company. But it's like we were kind of forced to take it on.

Okay. Alain Bédard: And then you've got our TCA guys that we are replacing some of the key players over there because we're not happy with the results, because some of it is the market, but also, some of it is us. We didn't do a good job at our Truckload operation in Q1. So this is why we're addressing the situation. We're going to be making some changes there. But in the meantime, the rest of our business did pretty good.

Yes, okay. And then on, are you making any management changes at CFI, or not right now? Alain Bédard: No, I'm not saying a company in particular. We're saying that we will be making some changes. For instance, TCA has got a new person in charge of revenue, sales. That person just started 3 months ago, 3 or 4 months ago and because now, it's very, very important that we have a guy with high energy. When you're at war, and this is – I said we're at war at Overland on cost, but we're also at war with our U.S. Truckload guys on the cost. I mean we can't afford to wait. We can't come up with another disastrous quarter like Q1 in our U.S. Truckload. We can't do that.

Okay. That's helpful. Thank you. And just on the CFI, I think, can you give us a sense of how much EBITDA you think CFI will generate this year, and total for the full-year? Alain Bédard: Well, that's a good question, and when we bought the company, we said that this is a company that normally will generate about US$100 million to US$115 million, right.

Yes. Alain Bédard: Today, CFI will probably be closer to a US$85 million to US$90 million, so down big time. Now some of that is explained by one-time costs and this and that, and poor trucks, yes. But CFI, the way it is today, run properly, run efficiently, et cetera, et cetera, with the proper fleet, the proper customers and all that, is a company that should do between US$100 million to US$125 million in EBITDA, but we're not there at all.

Okay, fair enough. Okay and then I guess the other question that I was wondering about was with the market. You mentioned in your comments that there's guys in the U.S. that are adding capacity on the trucking side, and I guess the rails are also looking at, potentially, the market getting a little bit tighter and pricing going up to sort of try to pick up some share as well on the rail side. So I'm just wondering, do you think that there's a chance here that maybe the market doesn't get better as quickly, or maybe even doesn't get better at all, because of ELD? Just because of, everyone's kind of waiting for it, and everyone's adding capacity in anticipation of it, and that kind of basically ends up being a wash? Alain Bédard: Listen, already, because of oil, we're starting to see, in Texas, the market really tighten up. Labor, we're talking about.

Okay. Alain Bédard: Because don't forget, with the disastrous price of oil that affected Alberta like there's no tomorrow. I mean look at the Alberta-based trucker there, right. It's terrible what happened there. Okay, yes. So it's terrible. Now with that, all these guys in Texas, they all lost their job. The same as what happened in Alberta. So those guys were back in the Truckload world. They have a family. They have to work, right. So now what we're starting to see in Texas is that in the one market, Odessa, in all this kind of basin there, I mean it's tough to get drivers now. So these guys are going back because these jobs, there are – you make more money, working there than working for a Truckload guy at $0.40 a mile, right.

Yes. Alain Bédard: So there's some action there. They're starting to show us that the U.S. market will start to improve slowly. Now guys are adding trucks, I mean they're ordering, right now, more trucks than a year ago, because everybody feels confident. Are they adding trucks to their fleet? That I don't know. Is that are all those ordered to replace trucks like we are doing, us, at CFI, maybe. But everybody is confident, a lot of talks six months ago about ELDs, maybe a little bit less talks right now. So to me, this is what I'm saying, 2017 I don't think the market will help us. That's why we had a working – we’re at war with our own costs. This is things that we could do ourselves. But everything that goes bad, that's cyclical, will get better. So we don't know when, but one thing is for sure, is that when we bought CFI, as we thought things would get better in the latter part of 2017. I think we made a mistake there. It's probably going to be more like 2018. But in the meantime, we have lots to do in our costs, because don't forget, the new company, you've got to learn. You've got to learn everything. So and also, we've got to work closer between the TCA and CFI. And so we're really busy right now. We don't have a lot of faith on the market improvements in the U.S. Truckload, but we have lots of faith in the U.S. economy that will definitely grow and improve, and that will have an effect. And already, we're starting to see Texas. Like I said, our business in Texas is improving. Our energy-based business in Texas is improving. Our energy-based business in Alberta is improving. It's probably not going to be like it was 10 years ago, but it's much better now than it was a year-ago.

Fair enough. That's great, Alain. Thank you very much for your time with all this. Alain Bédard: Pleasure. End of Q&A

Mr. Bedard, there are no further questions at this time. Please continue. Alain Bédard: Well, ladies and gentlemen, thank you for joining us this morning. And I look forward to speaking with you again following our Q2 release. Thank you and have a great day. Bye.

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