TFI International Inc. (TFII) Q2 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's Second 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 Friday, July 28, 2017. I will now turn the conference over to Alain Bédard, Chairman, President and CEO. Please go ahead. Alain Bédard: Well, thank you, operator and good morning ladies and gentlemen. I am pleased that you are able to join us today. As you know we released our 2017 second quarter results press release yesterday afternoon after the market closed. I would like to begin by briefly going over some of the highlights of the quarter. The company's initiatives to improve efficiency, reduce costs and generate higher returns are in most areas having the intended impact. Before fuel surcharge, our Q2 revenue from continuing operations grew 23% to $1.12 billion, reflecting the contribution of recent business acquisitions. The company realized significant gains in operating margin and profitability in all of its business segments with the exception of truckload where conditions in the U.S. market are still very challenging. This had a negative impact on our TL volumes and rates. TFI had an operating loss of $47.2 million because of the $129.8 million goodwill impairment charge related to the U.S. truckload operations. Without this charge, adjusted operating income increased by 12%. Again, because of this charge, the net loss from continuing operation as $75 million or $0.82 per diluted shares compared to a net income of $44.3 million or $0.47 per diluted share a year ago. Adjusted net income from continuing operations reached $63.7 million or $0.68 per share, up 16% compared to Q1 of 2016. I will now provide you with more details about each business segment. In Q2 of this year, P&C, or package and courier, revenue before fuel surcharge increased by 3% to $324.4 million. The increase is essentially attributable to business acquisition. With acquisition our revenue fell by 3% largely because of volume decrease mainly coming from our U.S. and Canadian same day operations. Operating income in our package and courier increased by 10% to $34.2 million. This is largely due to business acquisition and the consolidation of routes and terminals in our Canadian next day business, partially offset by lower volume in the U.S. and Canada same day business. Year-over-year the operating margin increased by 70 basis points. In TFI LTL segment, second quarter revenue before fuel surcharge rose by 10% to $206.5 million, mainly due to acquisition. Excluding acquisition, revenue fell by 4%, essentially because of lower volumes. Operating income increased by $9.5 million or 65% to $24.2 million and the operating margin as a percentage of revenue before fuel surcharge reached $11.7 million up from [$7.8 million] [ph] last year. Improvements were mainly related to an $8.2 million gain on the sales of a property and efficiency gains from existing operations. Truckload segment revenue increased by 45% to $516 million, largely attributable to the acquisition of CFI. All together, business acquisition contributed to $160 million to the revenue increase. Revenue would have been stable otherwise. The Canadian truckload operations segment continued to generate improved returns but the U.S. TL segment is still dealing with major challenges. There is persistent weakness in the U.S. market, which is having a negative impact on volume, pricing and our cost per mile. This has bumped us to record a goodwill impairment charge of $129.8 million. Excluding the charge, adjusted operating income for TL activity stood at $23.5 million or 4.6% of revenue before fuel surcharge versus $31.5 million last year or 8.9% of revenue. Adjusted operating income also includes a non-recurring transition and rebranding cost of $6.8 million a CFI in the second quarter of 2017. In the logistics segment, revenue in Q2 rose by 37% to $80 million, an increase driven both by acquisition and internal growth. Operating income for the quarter also increased 37% to $7.4 million, thanks to higher volume and internal growth from existing operations. I will now provide a view on how we see the rest of the year unfolding. The economic context in North America is generally favorable with low unemployment rates and solid consumer spending. Even so conditions remain difficult in the U.S. TL market and are not expected to significantly improve before sometimes in 2018. To address this, we are executing on plans to improve both the quality of our freight revenue and cost reductions. In our other divisions, we remain proactive in executing our various efficiency and growth strategies. CFI International's diversified and decentralized business model allows us to respond quickly to any changes in the market we serve. Moreover, the ongoing adoption of an asset light business model is designed to provide better return on capital and solid cash flow. We will continue this year to prioritize cash flow usage in repurchasing our shares and reimbursing our debt. Our ultimate objective is unchanged. TFI International is focused on maximizing the generation of cash flow and creating lasting value for our shareholders. I will now open the call to your questions. So, operator?

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

Just a couple for me. So I just wanted to speak about the goodwill impairment. What made you or what led you to take the test midyear. And of the $130 million write-off, how much of that is attributable to CFI? Alain Bédard: Okay. Well, that a pretty good question. I mean we have been very proactive. The CFI acquisition was done very -- just lately, just a few months ago. And looking at the situation, normally you do that once a year. This impairment kind of test that you have to do. And when I was looking at both the TCA operation and the CFI operation, and looking at the value of the investment, how much we have invested in these companies and the actual returns that we have today. I mean I came to the conclusion that we have to take this impairment of $100 million, which translates into $130 million Canadian. Right. So for sure, some guys will say, hey Alain, you were fast on the trigger. You would have waited for another six months, do that at the end of the year. This acquisition was really done just a few months ago. You are living in a very difficult market that everybody says in the U.S. that this market will start to improve. But, I said you know what, as we are very conservative in mentality, I will say, well, let's stick to charge now and it's a non-cash issues and it reflects the value of the company today, right. So, now this is a charge that cover both CFI and TCA. Because the situation, the best in class in the U.S., if you look at their Q2 numbers, I mean you have got the best in class at minus 15. You've got some guys at minus 60 quarter-over-quarter. So it tells you how bad this market has been for the last, I would say, 18 months. And don't forget, our approach is we always buy on bad news. So when we bought CFI there was lots of bad news at the time. And now, the bad news just became worse, okay. But one day the wind will turn and the market will get better, okay. We know that. But looking at the situation, I mean news are worse now than they were six months ago when we bought CFI. The market, the pricing pressure, the volumes, the costs are creeping up because of medical cost and because of salary increases and the rates are not reflecting that. So I said to my guys, I mean, let's do it now. Let's not wait. Let's put that behind us and that's what we've done.

Okay. Thank you. And just secondly for me. Last quarter, you had lowered your 2017 EBITDA guidance. Now we're seeing the goodwill impairment, but results are better than expected. Where does that leave us for the balance of the year? Are you still comfortable with your guidance, which would mean that the back half could be weaker, or where does that sit right now? Alain Bédard: No. Like I said, Mona, we're very conservative. So what Greg and I have been saying is consistent to what we see today. Hopefully, we beat the forecast that we have said. But for now, I mean, everything stays the same. I mean, for sure, if you look at what we're doing, our P&C keeps on improving even with the loss of revenue in our last mile, both on the Canadian and U.S. side. We've lost some revenue on the Canadian side because we kicked out some accounts that were not performing to the level that we wanted them to perform. On the U.S. side, we lost some markets from an ecommerce player that just had the mentality of bringing that into his own network. So that affected us. But even that, with the small acquisition we've made in the U.S. and in Canada, we're still performing well and we believe that if you look at the severance that we have, taken in Q1 and some in Q2, already this year we're up to, very close to being $6 million in severance. All these costs that we're taking now will improve our results from on the P&C, LTL [indiscernible] the company late last year, that’s not going too well. And now, with the new management team, we were able to bring out a reversal. So we believe that the back half of P&C and LTL will definitely do better. On the truckload side, it's really unknown. [indiscernible] went well even with the activity that’s now going through the roof, but it's the U.S. that's a big, big, big question mark for us. So this is why we're staying conservative. We think that the worst is behind us over there. We have a plan. We have one of our board member that used to run a truckload operations, Scott Arves, that was really helping our team there to be refocused on what needs to be done. So he's helping us on that and the team there. So we think that things will get better, but we are conservative. So that's why we're not changing anything in the way we see the total 2017.

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

So I want to talk a little bit more about the truckload side. So if you first can give us a breakdown of set of performance on the Canadian side versus the performance on the U.S. side. And secondly, I'm just contrasting a little bit your sort of view of the truckload with some of the comments we've heard from the U.S. carriers. That seemed to be a little bit more constructive with sort of spot rates have been sort of an upswing in the past few months and people seem a little bit more optimistic than you have, just trying [indiscernible] Alain Bédard: Yes. Well, you're right, Fadi. I mean, if you listen to the U.S. guys, I mean, most of them are very optimistic about the second half of the year. It's true that spot rates have improved and this is why if you look at the big brokerage operation in the U.S., they got squeezed, okay, because spot's going up and they're stuck with contract rates with customers. So, yes, the spot market is going up. So this is a prelude to the rest of the business that will start to change. So I agree with that. But us, we're conservative, Fadi. I mean, we're not dreaming that, hey, I hope the guys are right, right. But me, I'm not saying that. I'm saying that we have the market, okay, but we have also a cost issue, right. So for instance, when we bought CFI we knew that, okay. That there was about 800 trucks that were out of warranty because the previous owner didn't spend a dime on the CapEx. But that's going to take me 18 months to change that. So right now, I'm being penalized by about $1 million a month because I don't have the fleet that I have to have. So that's not the market. That's us. So that's why if you look at my CapEx, and I've said that, CapEx for CFI in 2017 and '18 will be more than normal because they were none done in '16. So that is one thing that's affecting me, that's not affecting the other guys. The other good companies that we all know. So this is why us, we're more conservative. Now to answer your question about the split between Canada and the U.S. For sure, our Canadian operations are running perfectly. I mean, we're not running a 90 OR in Canada. We're running a below 90 OR in Canada. So that tells you how bad the U.S. is. But the U.S. will change one day. It's just a matter of when. So if you listen to the U.S. guy, they are more optimistic than me probably because they know the market better than me. But me, I'm conservative, because don't forget we just bought CFI 6 months ago and now I'm taking a charge of USD100 because we're conservative.

Okay. And when you look at the Canadian side in terms of the demand environment, it sounds like things may be also stabilizing to potentially also improving. We've heard that from a number of other carriers in Canada. Would you sort of endorse that kind of view for the Canadian truckload and LTL outlook? Alain Bédard: The Canadian truckload is doing well right now. And for sure we're starting to get a little bit busier. Now don't forget, our Specialty truckload in Northern Québec and Northern Ontario and in Alberta has been affected by oil and by mining that's been depressed for the last two years. Oil is starting to improve a bit, okay, and mining is also starting to improve a bit. So maybe down the road, I don't want to be too optimistic, but what I could tell you though is that at least our Canadian operation today runs a below 90 OR. So our guys in Canada on the truckload side are doing a fantastic job of controlling costs and efficiency and equipment, and driving the miles on the equipment and bringing the cost down and improving. And also we had some small tuck-in acquisition that we did during the course of the last 12 months that are paying off. We just bought a company, the largest cement hauler in Québec that, I mean the guys are busy like crazy, and we'll see how good this will turn out to be. But to me, it's really going to be great for us. So, yes, on the Canadian TL, we don't have the same nightmare as we have on the U.S. side.

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

Just looking at, you provided good clarity on the process around the goodwill write-down, but when you think out strategically does this change your appetite for acquisitions in the U.S. tail market? Or do you feel that we're at the bottom now given some of the commentary you're hearing and you're more comfortable kind of waiting in that space if you need to make another acquisition? Alain Bédard: You see right now, Kevin, we're busy buying back our own stock. We're doing some small deals in the U.S. or in Canada. So there's nothing going to be done for TFI this year. Anything major, it's completely out of the question. Our stock is depressed, so that's why we're buying back. And I've got a program in place. We've renewed the NCIB. That's going to be public pretty soon. So we're really busy buying back our stock and we'll keep on doing that as much as we can. Now that being said, also we have some issues that we have to fix. Some are cost. So we're investing in our fleet. We're also investing in all kinds of, for instance at CFI we're also investing in technology, communication technology that these guys had was probably 8, 9 years old. So we're placing that. At the same time, we're replacing trucks. And also, we are making some leadership changes with the support of Scott, like I said earlier. I mean, both at TCA and CFI. So for example, the VP of ops of TCA is a brand new guy that just came in a few weeks or months ago. We have a new guy that's going to be brought on as of Monday to support the team there in Joplin on the CFI side. We also have a new executive that takes over the sales team there. So at the same time that we are investing in assets, we're also investing in people. Because to a certain degree, the previous owner of CFI approach was to get rid of a lot of people. But you need good people to run a trucking company. So we are like reinvesting in people there at the same time. We like the team that we have there but the team was a little trimmed down like a guy with an axe, you know what I mean. So we are busy doing that right now. Then come 2018, I think we'll be in a position to really look at what's going on. I believe that the TL business in the U.S. will be a fantastic business down the road because of the autonomous trucks. Now, autonomous trucks you'll tell me, well Alain, we don't know when this is going to come on. Nobody knows. Is it 5 years that we'll start the transition, I don't know. But I'd like to be there for that transition because to me, this is going to mean a lot of savings in terms of the labor cost. And in the U.S., labor cost is through the roof because unemployment is low. Medical costs are just going through the roof for a trucking company. So if you limit the usage of a driver, this is going to be a huge benefit for the guys that can afford to buy this new technology, okay. So this is why right now, no, we can't do anything but we're getting ready for 2018. And if we find the right fit, we'll definitely be there. But in the meantime, we're buying back something that we know, which is TFI's share.

That's very helpful. And you are right, you are very active in the second quarter there. When I think of the puts and takes in terms of the margin profile of TL in the back half of the year, it sounds like Canada's doing better. It sounds like you have a number of non-recurring costs that hit you in the first half related to CFI. Should we expect more of that in the back half of the year? And excluding that and the asset sales, can margins be higher year-over-year in the back half? Or is that still too challenging? Alain Bédard: It's still too early to say. My team there is positive on that. But like I said earlier, we build our business as being very conservative. We don't sell dream, we sell cash flow. I mean we generate cash. So I don't want to say to an investor or to anybody that things will get rosier in the second part. We'll see. It's still very early. But one thing I could tell everybody is that the guys in the U.S. are working day and night, very, very hard to improve. These are proud people. They want to be successful. The market is a headwind for them right now. But the market will probably be a tailwind sometimes later in 2018. But in the meantime, the guys are working hard on the cost. But you know, your maintenance cost per mile on a truck that's out of warranty, what can you do. I mean, if the owner doesn't spend the CapEx, the guy is going to have to maintain the equipment So what we did is we came in with a very aggressive CapEx program, but that takes time. The first new trucks came into CFI was really in April of this year. So so far, we've replaced about 275 trucks, I think, close to 300. But we still have another 300 to be replaced between now and the end of the year and then we have to continue into 2018 to bring the average age of the fleet to an acceptable level. So the guys are working on the maintenance costs and all this re-branding, that's going to be done and over with because the agreement we had with the seller is that all Conway equipment decals has to be taken, if I remember, within three years. But I said to the guys, no, no, let's not drag this thing for three years. Let's do it now. So that's what we're doing. I mean, I don't have the exact date but it's not going to take us three years to re-decal all the trailers. And you're talking about, what, like 7,000 trailers, right.

Okay. So should we think about first half of the year, you've incurred about $15 million of non-recurring costs. Maybe that's the run rate through the back half of the year and then, things look a little bit better in '18 onwards. Alain Bédard: Well, in '18 that will disappear.

Right. Yes, it'll disappear. Okay, that's helpful. Alain Bédard: Yes. It's going to be behind us.

Okay. And just last one for me, just specifically on the ecommerce part of your business. It looks like you saw declining revenue within P&C but a pretty good growth rate out of TL. Can you speak to the dynamics there, what's driving kind of that discrepancy between your two divisions? Alain Bédard: Yes. You see, the P&C on the Canadian market ecommerce, I mean there we are growing, okay. Because our largest customer, as of now, they have not found a way to get rid of us. Their philosophy is really to do as much as they can on their own. The Canadian market is a different story. It's a big market with very little density and our next-day business that we have in Canada with our Canada partner, Loomis, is also involved in ecommerce. So we have a major customer and we have about three or four secondary customers that were growing with them. The Canadian last-mile business was affected in terms of growth because we kicked out about $40 million. If you remember my Q3 call last year, I think it was Q3, is we said to those customers, sorry, 2% bottom line, 1% bottom line, give it to the other guy. I mean we're busy. I mean, we can't, sorry, call somebody else. And on the U.S. side, that's a different story. Our ecommerce, large account there, decided to take away some market away from us that we were providing them a fantastic service on the same day. Now they said, guys, we'll give you some other markets but with a different recipe, okay. And I'm sorry to say that we did our best, we tried our best in Q1 and in Q2, but I ended up with those two or three markets with a different recipe that we're not used to that recipe. But the customer asked us to do it with this kind of recipe. We tried it and it was a total failure for us. I think I'm going to lose $1 million in Q1 and in Q2 with this failed recipe or trying to serve this customer that took away a lot of business from me with the recipe that used to work for us. So we had to say to this customer again, I'm sorry sir, but you'll have to find somebody else. And this is why on the ecommerce side, on the U.S. side, with this large e-commerce failure, we're down to maybe $20 million, $25 million of business. But we're growing with others, okay. So it's a transition. It's a transition to be -- and I said to my guys, this customer, we need a cap. Which we did. And so right now, the last mile is down to very little. So this is why we're cultivating other customers on the ecommerce side and those guys are growing slowly.

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

Just a clarification on your, I guess, your outlook for the year. You sort of mentioned that you're still comfortable with the kind of EBITDA guidance that you'd given last quarter. Can you talk a bit about the free cash flow? Is there any change there? Are you still comfortable with the number you gave last quarter? Alain Bédard: Yes, yes. Free cash flow should be in line, Cameron.

Okay. And just a question on the U.S. TL. You've talked about how some of the larger players in the U.S. have seen spot rates going up. And I guess maybe the question is, is I'm guessing the vast majority of what you're doing in TL in the U.S. is contracted, so maybe the spot doesn't impact you. But when do you think that we would start, assuming that spot rates lead to higher contracted rates, when do you actually think you would start to see some positive pricing from contract rate increases? Alain Bédard: Well, you see for us, Cameron, that's a very good question. But for us, what we're doing now is if you remember in the last call I said we have a customer, okay, that's killing us with 120 OR and probably even more. So right now what we're doing is we're replacing that customer that was about $50 million revenue. We thought it would be $30 million but in reality it was $50 million. We're replacing that customer as we go with better rates even in this difficult market and also a fair fuel surcharge. Because the other caveat with this guy was the rate was terrible, but the fuel surcharge was bad, right. So this is what's going on right now. And we're probably just below the, I would say, probably below the $20 million mark as we speak for 12 months of revenue with this customer right now. Now that being said, okay, your question goes to, okay, what do you think it takes -- what's the lead time for contract to reflect this improvement, okay. I would say it will come probably sometimes in the fall of '18 because don't forget we have this ELD requirement that's coming on. So probably the new contract rate that will start to be negotiated, let's say in the late fall of '17, that's when you're going to start seeing some changes, I think. And this is based on the comments that I'm getting from my guys that are talking to customers. But that takes time. So you can't change everybody at the same time but at least, this is a start of improving the quality of revenue per mile because at the same time that we're doing all of that, we got huge cost pressure. Like I said earlier, the base salary of the driver, the medical cost of the driver, the accidents, okay. If you're involved in an accident right now a lot of these juries or judge, whatever, in the U.S. are just crazy in terms of settlement. So we have huge cost pressure and we're stuck with a shitty market, contract market, that for the last, what, since the summer of '15, two years now, that we've been living through. So I would say, contract prices will probably start to improve sometimes late in '17 and going forward into '18. But for us, it's even more than that. It's because we had a customer that was costing us an arm and a leg to service. And slowly we're shedding that business and replacing that with new business with rates that are more fair and a fair fuel surcharge. So that is going on now but we started that just two, three months ago, that process.

Okay. That's very good color. Maybe just final thing from me, just on the logistics business. It seemed like there was a pretty big jump in revenue. I'm just wondering what kind of happened there in Q2? Alain Bédard: Well, if you look at the business that we have in our logistics, first of all, there was two acquisitions. We bought late last year a small logistics company out of Toronto, okay, which is performing really well. And also we had the CFI acquisition where we have a small logistics on the Mexican side there that's doing well. And over and above that, our Canadian-based guys like CK Logistics, for instance, they have a major win, with a contract up north in shipping trucks into Australia as an example. And also, the rest of our business. So we are growing slowly. Now this was a, don't forget a lot of the logistic sometimes is a big contract. So like this contract to Australia was a few million dollars. But the profit, which is the most important thing to us. I mean we're not a logistic, like some in the U.S., running with 2% bottom line and buying a company and issuing tons of stock and all that. Our focus is really to grow slowly with some M&A, yes, if it makes sense. But really the focus is the bottom line. We're not going to do like the 2%, the 4%. No, no, no, Us is we are niche, mostly niche and we grow slowly, but with higher returns.

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

It's Matt Frankel on for Jason this morning. A couple of questions for you. One, what is the age of the CFI tractor fleet. I knew you said -- Alain Bédard: When we bought the company, the CFI tractor fleet was just a little above three years old. But the biggest issue was not just the age, it was the fact that more than 30% of the fleet was out of warranty.

Got it. All right. Thank you. Has there been any change in turnover rates with drivers as you have changed the business mix or get rid of some of the unprofitable business that has an impact on the lanes in the network. And I'm curious if that has had an impact on driver turnover at all. Alain Bédard: Absolutely. That's a very good question. Yes, we did. We had a very high turnover rate because you have a driver, you give him a shitty truck, an old truck. And the guy doesn't have the mile because we are hauling for a customer something that doesn't fit our network, okay. So the driver, they need miles, those guys. Because they have a family. So if you have those guys sitting there's no revenue for them, so they just quit. So it was an army of issues because of some of these lanes that we got from this customer that didn't fit our network. Plus you have also an old truck. So, yes, you're right. We had a huge turnover in Q1 and in Q2. Now, we've got more stability because we're replacing, okay, this customer with other customers that fit the network. So now our miles per truck or our revenue per truck is going in the right direction. And now, we're seeing less of a turnover because those guys are making a better salary and they don't sit as much. The other thing also, I mean, if you get rid of people like fleet managers, for instance, and the driver calls and he has to wait 15 minutes on the line to talk to someone, versus one of the best TL in the U.S., you have to wait 15 seconds. I mean, we're talking people here. So this is why like I was saying, we had to reinvest into people because we want to run CFI long-term. We're not there for six months or year and half, right.

Understood. Thanks for all that color. I appreciate it. Also curious what your thoughts are around the Canadian housing market. We've heard some rumblings that it's been overheated and I'm just curious, what do you think and what the implications are for the business. Alain Bédard: Yes, well, you're right. I mean there's lots of discussion about that and this is why the federal government put in some regulation in terms of financing and all that. But even that it's still really, really hot, mostly in Ontario, Toronto and in Vancouver. Although Vancouver now has started to cool off a bit because of these rules that they put in place with the non-Canadian buyers and all that. For us, really, don't seem to be too big of an issue yet. I mean don't forget, with this low dollar, the low Canadian dollar, even if now it's close to USD0.80, we have a lot of shipments into the U.S. with building material, because the U.S. is doing well in terms of the construction. So we're moving a lot of stuff from mostly Ontario and Quebec into the U.S. And I think that all these building materials guys are seeing that. Yes, lumber has been affected to a certain degree but we don't do a lot of lumber ourselves because of these tariffs that were put in place by the U.S. government there. But us, we don't do a lot of -- we do more like the, what do you call that, the drywall, okay. The stuff for the roofing material and all that.

Understood, thank you. And one final question as you brought that up in your last point is, the Canadian economic outlook just broadly. If you could talk to that and also obviously, discussions surrounding that, if you have any more updated opinions on potential changes and what that could mean for the business. Thanks, again. Alain Bédard: Yes. Well, I think that the Canadian economy, I mean the guy that is running Canada right now has promised to do a lot on the infrastructure. So this is going to definitely help the Canadian economy. Canada could do more on that. But the problem is that it takes a long time before you say you're going to do something and before you just start the project. So far, we haven't seen anything, but we're supposed to see something coming in terms of activity some time in 2018. Also, hopefully, the mining sector starts to come back and maybe a little bit of oil, that's definitely going to help the Canadian economy. In terms of NAFTA, it's very difficult. I mean, we don't know what's going to happen there. I think the good thing is that the negotiations are starting now. And I think that everybody wants to have a quick resolution or whatever it's going to be. And this is going to be great because right now, you probably have some investments that are just waiting on the sidelines because unknown is never good for investment. So right now, we have a situation where we have some unknown. So for sure, you got guys sitting on the fence and waiting to see what's going to happen and this is why it's so important that they start now and it becomes resolved as soon as possible. And then we'll know.

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

Just to come back on the EBITDA guidance of $550 million to $560 million. I was wondering if you could provide more color on what you assume for the year in terms of gain from disposal because so far in the year you have recorded about $12 million gain. So just wondering what do you assume in order to meet your $550 million-$560 million? Alain Bédard: Well, this was a transaction that we had in Q2 where we had a sales and leaseback in one of our terminal in Vancouver. But if you exclude that, the rest of the equipment that we're selling right now is going to be minimal like we always have. Because on the U.S. side the value of trucks, because of this slow market, is not positive, it's negative. I mean, you'll see that most of the U.S. truckers are now selling equipment at a loss. So to answer your question, Q3 and Q4 will probably be like maybe $5 million to $10 million in our model. It could be different. I mean, if something -- we are working on a few different projects, but so far what we could say is that $5 million-$8 million should be the norm for Q3 and Q4.

Okay. $5 million and $10 million in total, right? Alain Bédard: Total, total, yes.

Okay, which is included already in your kind of outlook. Okay. Perfect. That's great. And same thing if we do a similar view on the free cash flow, you were guiding for $275 million-$280 million. You were able to have almost $78 million to $80 million of proceeds from disposal. So just wondering, what would you assume in the back half of the year in terms of disposal when we look at your free cash flow expectation, Alain? Alain Bédard: Yes. It's going to be less because, like I said, there was two property. One in Vancouver and one in Edmonton. One was a sales and leaseback and the other one was just the pure sale of a site, a Contrans site that we were not using. On the back half of the year, when we talk about free cash flow, big transactions are never in the free cash flow. Like stock buyback is never really in the free cash flow plan. But what I could tell you though is that, in our plan if everything works like we think, our debt to EBITDA should be probably just -- because right now we're just about 3 -- what I could tell you is in our plan our debt to EBITDA will probably go down to under 2.8, something like that.

At the end of the year? Alain Bédard: At the end of the year, yes.

Okay. Perfect. And we've seen some important real estate announcement over the last few days. I was just wondering if you have any real estate for sale that could probably provide a boost on your financial position, Alain? Alain Bédard: Well, I've said it many times. I mean, one of the diamond of TFI is its real estate. So I mean, yes, we have something on the goal right now. It's public, I mean, we had a few properties that's been on the market and we'll see what happens. That may turn into something interesting. But right now we don't have anything that is sure. What we can say is that we did the Vancouver thing in Q2 with a cap rate that is just a little, a hair above the 5 points.

Okay. That is very interesting. And could you quantify what could be the opportunity in terms of real estate, Alain? Alain Bédard: Well, I've said it many times, within TFI we always play with $100 million. And every time that we keep on improving our efficiency, although this was a sales and leaseback, the big one in Vancouver, but we're always talking about $100 million. So if cap rates stays in between the 5 and 6, I mean for sure we're looking at every ways because we're not a REIT, we are not a real estate company. So if we couldn't find somebody that wants to take on one site or two sites at a reasonable cap rate, we use this cash either to invest and buyback our own stock or buy something on the market, let's say, in 2018. We'll definitely look at it.

Okay. Okay. Perfect. And when we look at CapEx, obviously, you talk about CFI, more trucks to be acquired. What should be kind of the growth CapEx and net CapEx forecast for the year, Alain? Alain Bédard: Well, for 2017 what we said is that we have to do about $20 million to $25 million more than normal into CFI. Not TCA, but into CFI. And probably in 2018, because we won't be 100% done, is it going to be $10 million to $15 million over and above the normal one in '18? Could be. It's still too early to say.

Okay. So when you look in terms of gross CapEx, what should we be expecting for this year, Alain? Bottom line? Alain Bédard: The growth CapEx, I mean, it's always zero for us because we've got very, very little organic growth. So if you look at our P&C, even with the small growth we have there, I mean our operation is so asset light that we don't need basically any growth CapEx to cover the small growth that we have there. I mean, our P&C capital intensity is less than 2% of revenue.

Sorry, I was talking more about the gross CapEx, sorry. Alain Bédard: Sorry, I thought it's growth, it's gross. Okay, gross CapEx, okay. Are you talking for this year or next year?

Both. Alain Bédard: Okay. So you're talking gross between $150 million, depending on the USD, because don't forget USD is down now. So you're talking about gross CapEx of CAD 150 million to CAD 175 million for both years.

Okay. Perfect. And maybe last one for me, when we look at the value creation you've been talking in the past that if the value is not there I am kind of willing to make some divestiture like you've done with waste management. So do you see an opportunity right now to monetize some assets given the value of your stock? Alain Bédard: We are always working on that. My job is to create value for our shareholder, Benoit. So for sure. I mean, we could come up with some surprises. I've said it many times, I mean, people valued our waste at $500 million. We sold it for $800 million. So if you look at what we're doing in our LTL, we are improving that business. Yes, in Q2 we had a gain on the sale of that building, okay. That if you exclude that gain, I mean it doesn't show a huge improvement. But don't forget, we bought a company in December that was losing $5 million to $10 million a year, right. So this is not positive. But we're turning that thing around. We have also some leadership change. We have one of our EVP, Rob, after a great career with us has retired. We just hired some new guy that's going to help us in our LTL intermodal division because I see a lot of potential there. So you'll see us improving every quarter in our LTL. The same thing that I said that P&C will improve and hit the double digit EBIT, which is now being done. You'll see our LTL getting much closer to an eight and a ten, excluding gain on asset, on property sales. Now what's the value of that? Well, if you look at TFI's valuation, it's terrible. That's why I'm buying. And if our stock stays in that $25-$26 range or $27-$28, I mean that's what we're going to be busy doing. But in the meantime, my guys, our team, are doing a fantastic job of getting cost down and efficiency up, both P&C and LTL, Canadian TL. And even the U.S. guys are working day and night to correct this situation. And you will see, I mean, '18 will be a different year than '17, I'm telling you that.

Okay. Okay. And maybe just the last one for me. On the EBITDA, given you really had a tough start of the year with CFI and you're working very hard on cost reduction initiatives. I know it's probably a bit early, but what type of EBITDA would you be thinking for next year, Alain? Alain Bédard: Well, I think that next year if things are done properly, there's lots of costs that will disappear. The onetime cost will disappear, that's for sure, like the branding and all that. Because don't forget, if you have to replace more trucks than the normal, you've got all kinds of costs to move the equipment around, and that will go away. If you are doing more with less and this is what needs to be done, so when I say that is do more miles with each driver because you got a better planning that's been done, then you bring the revenue up. And at the same time, if market is now a little bit of a tailwind instead of being a huge headwind, so what are we talking about. We said it earlier in the year that TFI should be a $600 million company and we're not going to do that this year. Could we do $600 million next year? Maybe. I mean, it's still early. But for sure, we should do better next year than what we're doing now.

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

So I'd just like to kind of summarize everything I've heard to make sure I have it right with regard to what you're saying on guidance, on EBITDA and free cash flow for this and into next year. And what I heard you, and this is including gains, I know you always give it including gains on sale, $550 million to $560 million, you keep that for 2017. And then, notionally it should be better next year, possible $600 million, but we'll have to see how the market, yes. On the free cash flow, what is your guidance for free cash flow for this year for the full year 2017 now? Alain Bédard: Okay. Now this year was a special year on the free cash flow because, don't forget, we had a big tax bill because of the sales of Matrec. So we paid, if I remember, in Q1, about $50 million to $60 million of cash that relates to the sale of Matrec, which is an unusual item, right. So if you exclude that from the operation normal, and if you also exclude about CAD 25 million of excess CapEx for CFI, if you exclude those two unusual items, I would say the operation should generate about $275 million of free cash.

Got it. Okay. And next year, is there anything left on CGI that you would expect? Or any unusual items that you see down the road for 2018 that would affect your free cash flow? Alain Bédard: The only thing that I can see is, again, another maybe $10 million to $20 million of CapEx, unusual CapEx, to catch up the fact that in 2016 there was no real investment in the fleet.

Okay. And then the change in free cash flow then from 2017 to 2018, excluding that $10 million to $20 million, should be just the difference in your EBITDA? You were saying that the CapEx should be around the same in both years, right? Alain Bédard: Yes. About the same, yes. Sustaining CapEx should be about the same. The only, maybe positive for us Walter, is the fact that this year we're buying trucks with a $0.75 dollar. And if we're buying trucks next year with an $0.80 dollar, I mean, that is like 5% cheaper. So the truck that -- it could be a little bit of an improvement. Same thing for the trailer, because everything is priced in USD.

Right. And that goes in my next question. Could you give an updated sensitivity on changes in CAD? I know because your operation looks a lot different now today than it did when the CAD moved quite a bit a couple of years ago. Can you give us a new update on how you see your sensitivity to whatever metric you want to provide on the moving Canadian dollar? Alain Bédard: Yes. Well, you see when the U.S. dollar was really, really strong, the problem that I was facing is my U.S. based operation, my U.S. TL were not producing any cash, right. Because I've got to invest more than these guys are producing. Now that we're starting to turn the thing around, the valuation of the USD versus Canadian dollar has depreciated to about $0.80. So if you look at that and the fact that it all depends, Walter, at which speed can we improve this and the market, because don't forget, it's two things. The market is one, we don't control the market. But what we can control is the quality of the business that we haul. We're working on that, and the cost that we have, and we're working on that. But that is not a three week turnaround. It's going to be more like a 6 to 18 months turnaround. So if you're talking about fleet costs, it's going to take us until the end, probably the end of mid-'18 to the end of '18 to correct that. If you're talking about the quality of the freight, it's going to take us all of '17 to correct that. If you're talking costs, the driver costs and the efficiency of our driver, it's going to take us all of '17 to correct that. If you're talking about investment in people, it's going to take all of '17 to correct that. So that being said, if our U.S. operation starts to generate, now you're talking big, big dollars, if it's the case. Because right now we are running probably USD50 million behind the plan.

Okay. If I were to look at, switching gears now to going forward and how you're looking at the overall business and the endgame, so to speak. If I were to take some of the recent moves that you've done and kind of draw a conclusion, you tell me if this conclusion is off base. You've had an acquisition experience that you had to take a write-down on and it's probably created a little bit of uncertainty when you go to your next deal with regards to an acquisition. So I see now that you've moved a little bit away from that and focusing on buying back, like you said, where there is more certainty and that's your own stock. Does that mean that now you're focusing a little less going forward on M&A and perhaps, a little bit more on what TransForce is and the opportunity there? And if that's the case, could you talk a bit about any changes you've had or your mindset with regards to spin out divestiture, U.S. lifting or potentially U.S. IP, all of those things. Where are you thinking on those items? Alain Bédard: Well you see, Walter, the CFI acquisition was -- we've acquired a great company. But the timing, you buy on bad news, and I've always said that. And I think Truckload right now is bad news. So I think that buying CFI was not a mistake. I mean, you'll see that time will prove that this was a good investment. But the timing and also the fact that the market kept on being worse than worse since we've acquired the company. So that was not really in the plan. We thought that the market would stay stable and probably improve sometime in 2017, which is probably not going to happen, really. The other fact, also, is we knew about the fact that the previous owner did not invest in the fleet, so we were able to adjust the price based on the CapEx, which is okay. But the fact of the maintenance cost that's just going through the roof, we never anticipated to be as bad. Because when we bought the company, the maintenance cost per mile was about $0.08 a mile and now we're playing with $0.12 to $0.13 a mile. Now that is coming down now because we're replacing the equipment. But CFI is a company that was built on the fact that you don't run a fleet with unwarranted trucks. You don't because they don't have the maintenance facility to do work on trucks that are out of warranty. CFI was a diamond. So they don't run a shitty fleet. And us, when we bought the company, we knew about the CapEx but we didn't think about the fact that CFI was not a company that was able to live with an old fleet, right. An above three year old fleet. So this affected us. But you know, to change our approach to the U.S. market, I see down the road that once we've fixed our own problem with TCA and CFI, which is going to happen during the course of this year '17, I mean, Scott Arves is helping us big time, and the team there is really now focused on what needs to be done. And our plan for M&A in the U.S. is on hold for now, major stuff, yes. Because I see an opportunity that's an easy one. I mean, I'm buying back a stock with more than 10% return, which is mine. So you buy something that you don't know that you -- yes, you do your due dil and all that, but there's always a risk. When I'm buying TFI, I know the company inside out. I know what I'm buying. So to me, I said, okay, put the M&A on hold for now, except for small stuff in Canada or maybe in the U.S., but let's buyback our own stock and let's fix the issue we have. We can't fix the market. I think the market would fix by itself. We have our own issues. Let's fix that. And this is going to be done in the last six months of this year and it's been ongoing for the previous three months, and then we'll be back at it again sometime in '18 when the right investment shows up. In the meantime, we'll keep on doing what we're doing in the rest of our business. So to answer your question about listing in the U.S., it's not going to be a '17 event. It could be something that we're going to be looking at in '18, but not in '17. I mean, we've got too many issues. And I want to buyback my stock. I've said it publicly, I want to bring the number of shares down to about 85. And right now, we're just under 90. So we still have to buy another 4 million or 5 million shares.

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

I just have one question. A lot of my stuff has been already asked and answered here. But can you give us, I know you've talked about Scott kind of making some changes at CFI. Can you talk a little bit about how many changes have you made in the management side at CFI? Have you completely changed the management team? Like what's going on there in terms of that change. And then if I understand correctly, like I heard about some changes in management, obviously the CapEx angle, the rebranding angle. What else is there at CFI that needs to be done before this turnaround is really complete? Alain Bédard: Well, first of all, Tim, the President. I mean, we're happy with Tim, the way he's turning out this thing there. So what we're doing there at CFI is we're adding, as of Monday, an operational guy that's got lots of experience, that's going to help him. Because don't forget, Tim, is an ex-Con-way guy with LTL expertise. He used to run the Con-way operation on the East Coast and the Canadian East. So he is a solid trucker with lots of experience in LTL, but TL for him was something new. So this is why having Scott, with Scott's 20 some years of experience with Schneider and all that, is helping Tim. But Tim is really on-site. And then we're adding this new guy there that's going to be joining the family on Monday to support the operation. Same thing on the revenue side, on the sales side. We did the same thing at TCA, so we brought in a few months ago a more experienced operator that joined the team in, what June, something like that. So these are the top executives. The middle management at both companies has not been real major change there. On the sales side, for sure, we're making a lot of change there on the sales side, both CFI and TCA. We have always focused on freight that fits the network. I'm sorry to say, but Montana, I like Montana a lot, but for us we don't want to be in Montana. We don't want to be in Idaho. We don't want to be in Oregon or Washington State. I mean, our focus is East of Mississippi. So when we take business for a customer that we have to haul team into Portland, Oregon, I mean, it's not us. So this is what Scott and the team there are correcting. And this is mostly CFI, it's got nothing to do with TCA. TCA, the quality of revenue, the quality of the customers in most of our business is fine. Now don't forget, these are market prices today that are depressed. But at least we don't have such a quality issue of revenue at TCA versus CFI. CFI, like I said earlier, we have a customer that used to be very important for us in terms of size of revenue, but also very important in terms of the loss that they were creating us because the fuel surcharges is underpriced and the rates were terrible, and the fit to our network was even more terrible than the price.

Okay. Thank you. That's helpful. And I guess in terms of -- you think by the end of this year or early next year, you'll sort of have tackled most of this? Alain Bédard: Absolutely. I mean, the quality of the freight, the issue of the quality of the freight will definitely be corrected before the end of the year. The market, we can't correct. And the terms of the cost, the fact that we want our drivers to do more miles, and they will be happy because they will make more money. That is a relationship between the quality of the freight that you have. If the freight that you have fits the network, then the drivers don't have to sit. And when you have drivers that sit because you have poor quality of freight that don't fit the network, then you have turnover drivers. And then you have to spend money to hire other drivers. It's a nightmare. So you need a freight that fits your network.

Okay. And I guess maybe one more on the package and courier side of the business. So over the last few, I guess, quarters, we've talked about the biggest customers you've got here. There's been a lot of change with that, right, like different markets. It kind of keeps moving around. If I was to sort of step back and say when you've made these acquisitions in P&C in the U.S., what were your expectations with regard to maybe these big customer or overall ecommerce and how have they progressed? Has it been better than expected, about in line? Or has it been worse than expected? Alain Bédard: Well, when we started with this business in 2011, '12, I mean ecommerce was not really a play and it was just starting. It was just starting in 2013. And this customer has always been talking to us, we were talking to them. But they are like a carrier that don't make money. So we always have an issue with that because this customer doesn't make any money. So they have a huge share of the market, but they don't make money. And they want a trucker that will be the same as them. And we always pushed back and say we can't deliver products just to practice. We're not in the business of practicing delivery. We're in the business of making money. Yes, but us, we don't make money. Okay, fine, but that's not us. So we have a lot of pushback with those guys until, finally they said, okay, we'll deal with you guys and we'll pay you the rate that you need to make money. But then they said, you know what, you guys have done such a fantastic job for us that now we'll take it over. Nice. Okay. So this is exactly what happened. So we had some good years like '16 was a good year for us with this customer, but that was basically the only good year we had with them. A little bit of '15 and '16. And then '17 is a disastrous year with them. But in the same period, I mean we are replacing them slowly with other players. And we believe that another large player will come to the U.S. market soon. And that may change the market because right now, there's only one huge player and that player likes to control everything themselves. Okay, fine. So now that we understand the game we'll just say, you know what guys, why would we invest time and energy for six months to a year. I mean, no. So that's where we are.

So, I guess, if I were to summarize that like your experience maybe has been a little bit worse than what you were thinking when you made these acquisitions. They are reasonable... Alain Bédard: No. No. The acquisition was not made based on ecommerce. The acquisition was made based on last mile. And then what happened, I mean, no, no, I could sell this company, Turan, tomorrow. At least I would do about four times my money that I invested. So at the end of the day, all of this will show that this is going to be a better deal than even what we did with the waste.

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

My first question, actually, they're both similar. On the LTL, you said the back half will be better. You also mentioned that the margin, at some point, would be getting closer to 80%, excluding the property sales. So on the margin, any idea what sort of timeframe we should be thinking about? Alain Bédard: Well, there's a few things in there. First of all, the acquisition that was done in December, which was a money loser and it represents about 10% of our revenue. So that will slowly disappear. That will take us about 12 months. We bought the company late December. So by the end of this year, 2017, we should be very close to be on par. So that's going to help us to a certain degree. The other thing also is that we have a new management because of retirement on our intermodal business and we're turning every rock to cut costs and be more efficient. So that is going to be there, again helping us. The other thing also, is that Alberta that has been a disastrous market for us for the last two years. Don't forget, Alberta used to be a diamond mine for us. It used to be the best market we have. And because we're competing in Alberta with a smart competitor, which is Mullen. So we like to compete with guys that are smart because they understand that we have to make money. So now Alberta is coming back. Slowly, a little bit, so that helps our LTL. So this is why we have faith into this market. Also, if you look at the regional market that we have in Ontario, Quebec, there we're making a lot of improvement in terms of our cost basis. So this is why this tells me that over time, now if you ask me how long this is going to take you to get to an 8 point, okay. I would say between 12 months to 18 months. Like I said three years ago on our P&C, I said, guys, we're at 6, 7 point, we'll be over 10. It's just a matter of time. It's going to take us a year, two years. Now, we're there. And I still see some improvement on our P&C. Our P&C will improve probably by 100 to 200 basis points over the next 12 months to 18 months. So P&C is going to move closer to a 12, LTL is going to move closer to an 8, maybe an 8.5. We're working on all kinds of different things, but the problem with LTL is the market is shrinking. As you can see, every quarter I've got no organic growth. Well, I've got negative organic growth. And this is the market that is slowly getting eroded, so we have to consolidate even more in the LTL. So that's why we bought NFF, and we're always open if there's something else that becomes available on the Canadian LTL side.

Okay. So it sounds like these factors you described are the reasons why you think the back half will be better and eventually, over 12 to 18 months, it gets to the 8%, 8.5% kind of level? Alain Bédard: Yes.

Okay. And then on the P&C, you talked about 100 to 200 basis points improvement over 12 to 18 months, and better in the second half of this year, it sounds like that's kind of the same thing. What would be the main drivers there? Alain Bédard: Well, the main driver, if you look at, we severed a lot of people in our P&C business. So the last change was made in the Eastern part of Ontario and we still have a lot of work to do in Alberta and in BC. Don't forget, we are always limited with the leases. So you'll see us moving along in Alberta sometimes in 2018, and we are also moving some operation in the summer of '18 in BC. So all these moves that we're making are making our next day operation way more efficient. At the same time, our last mile on the Canadian side is under new management. As you remember, we let go the previous President of our last mile, last fall. Kel is doing, with Louis Gagnon, a fantastic job of shedding cost in that system, and you'll definitely see some improvement in Q4 of this year to the bottom line. And Scott in the U.S. with his team, although they got slap in the face with this disastrous lost of business with our etrailer there. I mean, our gross margin is very close to be on target of what we want but because he lost so much business, we have an issue with our overhead there. So it's going to take us some six to nine months to correct that. Because when you're stuck with lease, you can't get rid of lease overnight, and this is the lesson that we've learned with this guy, this customer, is that we can invest. We can. Because over a day, you just lose the business and then you're stuck with all the investment that you've made to service them. So we've learned, we were always careful. That's why we kept this customer, but that's affecting us. It's affecting us now, but it will not affect us in 2018 because all that will be behind us. So that's why I feel good that our P&C guys will be hedging closer to the 12, and you'll see our LTL guys doing better over the course of the 12 to 18 months. And like I said on the call, our Canadian TL are running at some 90 OR right now. Even with what we're going through now in the mining world that's very, very slow. The oil in Alberta that is still not note worth where it was. And I don't think it's ever going to come back to where it was, but still it will improve.

Okay. So in both areas, from the factors you described are sure very helpful, it sounds like the biggest improvements are really going to happen in 2018 and really not get fully in place until the backend of 2018. Is that a fair way of thinking of it, not so much this year? Alain Bédard: Yes. Yes.

Mr. Alain Bédard, there are no further question 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 press release for our Q3 results. Thank you and have a great day. Bye.

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