TFI International Inc. (TFII) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to TFI International First Quarter 2018 Results Conference Call. [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 Wednesday, April 25, 2018. I will now turn the conference over to Alain Bédard, Chairman, President and CEO. Please go ahead. Alain Bédard: Well, thank you, operator. And thank you, everyone, for joining us today on today’s call. So we just completed our Annual Meeting and we’re pleased to be sharing with you our first quarter 2018 results, which were posted earlier this afternoon, if you still need a copy, please visit the Investor Relations section of our website. Well, this year is off to a strong start. Most importantly, we’re delivering on our main initiatives which are to create shareholder value, unlock it for our investors and return excess capital to you, our shareholders, whenever possible. In order to accomplish these objectives, as we’ve consistently stated, we focus on operating efficiencies, we pursue an asset-light business model, we maintain a strong balance sheet as a source of strength. And when appropriate we seek accretive bolt-on acquisition always in a very disciplined manner. The results of these efforts are clear in our first quarter, our operating income jumped 56% on a 230 basis point increase in margin. Our adjusted net income per share on a diluted basis was up 60% to $0.56. And our free cash flow was up a very healthy 78%, to $52 million. On a per share basis it was up an even stronger 84% to $0.59. It’s especially gratifying that the increased income and stronger cash flows were generated on a relatively flat revenue basis owing to our preference of profitable growth rather than growth for growth sake. As we believe that this sets us up for even stronger profitability going forward. From a capital allocation standpoint, we returned $54 million to our shareholders during the quarter, especially that include $19 million of dividends, and $36 million of share buyback. We also reduced debt by $4 million, and our long-term debt-to-equity ratio stood at 1.05 at the end of March, slightly below the level at the beginning of the year. Again, we believe that having a solid balance sheet is a source of strength, allowing us the flexibility to engage in strategic pursuits that we determine will generate strong returns. Taking a look at our performance by segment, I’m pleased to say that earnings increased significantly across all 4 of our operating segments, with our Truckload segment showing the sharpest improvement, as I’ll get into in a moment. I should first mention that Logistics is a strategic division for us. And in order to better reflect the nature of our opportunity, we have combined Logistics with the Last Mile operation of our P&C segment and have renamed this segment Logistics and Last Mile. We tailor increasingly the Last Mile delivery solution as a strategic to their business. And e-commerce continues to increase as a share of overall retail sales. We believe TFI is very well positioned to serve this growing market and this new segment, which is now our second largest by revenue, is designed to better clarify for investors our ongoing progress. To facilitate our new analysis we recast our historical financials accordingly. Starting with P&C, we improved efficiency by consolidated rules and term loans while continuing to focus on business mix, as a result our operating income grew 32%, to $20.6 million even as revenue before fuel surcharge slightly declined to 104 – $142 million. This reflects a 370 basis point expansion in our operating margin to 14.5%. Again, these package and courier results now exclude Last Mile operation, who have been combined with our Logistics segment. Turning to LTL, a consistent story. We terminated low margin, domestic Canadian shipments and saw a decrease in revenue as a result. Revenue before fuel surcharge was $203 million, and that was down from $224 million in the prior year first quarter. And yet, we produced even higher operating income of $9.5 million, that was up 5% last year on a margin that expanded 70 basis points to 4.7%. Moving along to Truckload’s strong pricing and increased asset utilization, along with acquisitions during the past year allowed us to grow revenue just slightly to $490 million before fuel surcharge despite unfavorable currency fluctuations. More importantly, our Truckload operation were much more profitable with operating income nearly doubling to $29 million on a margin that also doubled to 5.9%. Over the past year, Canadian TL operation have remained strong, and most recently, U.S. TL operation are showing very clear sign of improvement. We’ve placed significant emphasis on U.S. operation in the past year and we’re pleased to see the improvement now on the way. Lastly, I’ll cover our new Logistics and Last Mile segment, which again combines our original Logistics segment with the Last Mile portion of our P&C business. On a pro forma basis, this newly named segment generated revenue of $236 million, down from $245 million in the first quarter of prior year. But once again profitably expanded nicely, with operating income up $15 million versus $12.3 million a year earlier and our margin grew 130 basis point to 6.3%. Well, let’s talk about the current environment and why we’re cautiously optimistic about the way the year is unfolding. The North American economy is expanding, and as a result volume has been on the rise, the transportation industry is somewhat capacity-constrained and this has shipping rate on the rise. Even U.S. TL, which was the slowest market to recover for us, now shows signs of improvement due to these forces. In addition e-commerce, as I mentioned, is growing as a percentage of retail sales is very demanding from a Last Mile standpoint, and this works to TFI’s advantage, which we think you’ll see more clearly with our new segmentation. Overall, given this improving environment, we plan to stay focused on operating efficiencies, asset personalization and controlling our cost in an effort to drive our profitability higher. Our overreaching emphasis is on creating a business model that is asset-light, which not only improves profitability but forces us to think about innovative and value-added solution for our customers. A quick word on consolidation of the transportation industry and our involvement in that process. As you know we’ve run a disciplined and successful acquisition strategy for many years. We remain on the lookout for accretive bolt-on acquisition in the interest of expanding our geography footprint, gaining access to broader service offering and bringing on board seasoned management. However, anything we pursue would be of a tuck-in nature and always with a focus of being disciplined with our shareholders capital. I’ll close by repeating that at TFI International, our main priority is to create and unlock shareholder value and return excess cash flow to our shareholders whenever possible, and we believe the year is off to a promising start. So thank you for joining us today on the call. And now we’d like to open the lines for questions. So operator?

[Operator Instructions] Your first question comes from Jason Seidl with Cowen.

Thank you operator and good afternoon everyone. Alain, just a couple of quick questions from me and I’ll turn it over to some of the other analysts. But looking at your Less-Than-Truckload division, it looks like the yields obviously were somewhat curtailed by a big gain in weight per shipment. What are you guys signing pricing – excuse me, signing contracts for right now? What’s the average pricing gain that you’re seeing in the LTL business? Alain Bédard: Well, Jason, in Canada the LTL business is not very price strong. I mean, there’s no strong pricing in Canada. So right now it’s very competitive, mostly on the eastern part of Canada like Ontario, Québec market. So our position right now is, we’re trying to get a 2% to a 3% to a 4% fair price from – increase from customer to be closer to a fair price than a price that is not really to our advantage right now. Now one thing also that we have to look at is that we’re trying to eliminate all those small shipments that don’t fit the network and that don’t make any sense. So when you have a shipment, let’s say Toronto-Montréal for $50, nobody can make money with a shipment like that. So we’re just eliminating those guys. So this is why you see a drop in revenue, okay? And don’t forget, this is Q1, this is a difficult quarter for all transportation company, you’ve got the weather, you’ve got this, you’ve got that, you’ve got the cold. So you’ll see us improving in 2%, 3%, 4% for the rest of the year, in every sector, TL, LTL, P&C. But then again, going back to your initial question, pricing power in LTL in Canada, it’s not the same as U.S. U.S., these guys have, they’ve got a lot of pricing power because it’s less and less of a fragmented industry like it is in Canada. Although, we have a huge leadership position. We believe that over the course of the next 12 to 18 months, the skinny margin that we have right now will get better by probably at least 150 to 200 basis point. But this is mostly on the back of efficiency gain being more productive, et cetera, et cetera, in cost reduction than pricing power with customers.

Thank you for that. That makes sense. Looks like the weight per shipment then was just a conscious effort on your part to get rid of some of the smaller shipments. Alain Bédard: Absolutely, yes.

Okay. And that 2% to 4%, just from a historical perspective, that actually seems a little bit better than it has been in the past few years. Alain Bédard: Yes, absolutely, it’s getting better because intermodal, we have a very important share of the market. My – our problem is this – is that it’s difficult for us to talk to customer about getting a little bit more money when our line of providers going some very difficult issues right now. And like us, the weather has been terrible for them in Q1. So – but that being put aside, we believe that on the intermodal, there’s better possibility because there’s a big discount in our rates versus what it should be, okay? Over-the-road it’s a little bit more difficult, costs are going up because don’t forget that we pay our guys better every year and we increase the salary, so if we don’t get more money from the customer, the only place where we can get it is from being more efficient, having more density. And this is what we’re working at all the time.

And what about your cost from the railroads, because the railroads are now saying that their capacity constraints, some of them are especially coming out of the West, are your costs going to be going up from the railroads? And how long is your current contract? Alain Bédard: Jason, our cost go – they go up every year with the rail. Those guys, they’re not stupid. They know that they have to get some price improvement every year, and we’re not an exception. So we pay our line of provider – rail line of provider more every year for its service. We have a great relationship with them. We just signed a long-term deal with them. The exact expiry date, Jason, I don’t know. But I know it’s a long-term – yes, it’s a long-term deal.

Okay. I want to switch really quickly to the U.S. Truckload for a second. A couple of questions, your decline in owner operators in a year-over-year basis, was that planned? Or this is just loss in the market place for you guys? Alain Bédard: No it was not planned. No, our plan is not to drop on owner-op. As a matter of fact, our plan, if you would see the spread, okay, between TCA, as a matter fact, we gained owner-op at TCA. But we lost more, okay, at CFI. No, this is not planned, this is just market condition, okay. So some of the guys have been reacting to the pricing environment maybe faster than us in the sense that if you say to the owner-op, well, I’m going to pay you $1 a mile for instance, but I’m taking care of insurance, I’m taking care of your place, I’m doing this, I’m doing that. Sometimes the guy understands what you’re saying, but then the other guy says, no, I’m going to give you $1.25, okay? But then, oh, $1 versus $1.25 so I should go to this guy. But net, maybe the guy is going to end up with $0.98, okay? So talking with Greg and Paul and Greg Rumble, we’re going to probably change our approach. So it’s easier for these guys to understand that we have a great deal for them. But no, it’s not planned. Our plan is to increase it, not to reduce it.

Yes. That’s what I thought. Last quick question. U.S. pricing, what are you guys signing your contracts at now? And the 98.3%, it’s a really nice jump on a year-over-year basis, but I don’t think you guys are probably satisfied with that in the terms of the long term, where do you think that OR could go to? Alain Bédard: No, no, no, I mean, for sure you’re absolutely right, Jason. It’s a great improvement versus where we were, all right? But in terms of getting – our goal is – like I said, 3 months ago, is we have to be on a yearly basis for 2018 in that 95%, 96% OR, we’re 98% now. So we have still a lot of work to do. But Paul and Greg and Greg Rumble are very, very committed to attaining this goal with their team. And now like I said earlier, we just turned the corner in our U.S. TL. So a lot of guys in Canada said, oh, they made a mistake, he’s crazy, what is he doing? No, no, no,. Give us some time and you’ll see, I mean CFI, TCA are not going to be second-class Truckload guys in the U.S., no way. And if you look at our OR in our Canadian van division, I mean, we went from 94% to 90% in a very difficult winter. So we know what to do, we now have the team in the U.S. that is committed, okay, to get in the results. So I’m very happy.

And your contract pricing, what are you guys signing at now in the U.S.? Alain Bédard: Well you see, we’ve improved in the quarter about 6%, 7%, I think that now we’re playing more in the double-digit numbers like the 8%, 9%, 10%, 12% and this is where it’s got to go.

.: Alain Bédard: Thank you Jason, have good day.

Thank you. Alain Bédard: Thank you

Your next question comes from the line of Cameron Doerksen with National Bank Financial. Your line is open.

Yes, thanks. Good afternoon. Just wanted to follow-up on the – these two questions on the U.S. Truckload and the pricing environment. I mean I know you’ve got, I guess, a fair number of contract that are, sort of, renewing right around the current time frame. But I’m just, sort of, maybe if you can describe like what percentage of your revenue in Q1 would’ve actually had the pricing – contract pricing improvements? And how does that kind of play out through the rest of the year? Alain Bédard: Well, if you look at let’s say our TCA operation. I mean, our top customers are all going to be renewed in the June, July time slot. So this is why if you guys would have to split between TCA and CFI, you will see that CFI is improved way more, okay, than TCA so far in the pricing environment, okay? Why? Because TCA has got a lot of renewals that are due late Q2 and into Q3. If you think about CFI, that’s a little bit of different story. They’ve been staged a little bit better over the course of the year. So we had some in Q1, we’ll have some in Q2, we’ll have some in Q3 and in Q4, all right. So this is why globally, you should see Q3 as a huge improvement on the pricing side of it. But don’t forget, our motto is the tiger is always the last one to survive. So at the same time that we’re getting a fair price from the customer, our guys are working day and night to reduce cost, be more efficient on the maintenance, on the fuel, on the asset utilization. Because don’t forget, we shed a lot of trucks in the U.S., 600 trucks, why? Because 400 out of the 600, when we bought the company, were not being used, they were just parked at the fence, waiting for something to happen. Well so this is a global movement to the road of a 90% OR, we don’t want to be the second-class citizen in U.S., we want to be the first-class guys.

No, absolutely. Sort of maybe the same question on maybe the Canadian TL side, the conventional TL, you’ve disclosed some more information there on the operating ratio and you had a pretty nice improvement year-over-year in Q1. What, sort of, drove that in the Canadian operations? Alain Bédard: The Canadian operation is really a better efficiency, better utilization of our equipment, a little bit negative on the cost side because of – if you read a few of the U.S. guys, some of the guys talk about a $0.03 per mile penalty, we can’t quantify that but there is some effect. And also fairer price from the customer, absolutely. I mean, our price improvement in Canada is about 8% in the quarter-versus-quarter.

Okay. That’s good. And maybe just final question... Alain Bédard: But at the same time – excuse me, Cameron, but at the same time, okay, we’ve increased the salary of our guys, we’re so proud of paying our guys and being able to pass on better salary condition to our guys.

Yes and that was sort of my follow-up, last question was just on driver cost. I mean, maybe you can just describe what you’re seeing kind of year-over-year with driver cost both in the U.S. and Canada? And I’m hearing also that there’s I guess more shortages of drivers in the Canadian side of the business as well? Alain Bédard: Well the Canadian side has always been a little bit better in the terms of the shortage, we don’t have as much shortage. But we do now because, the freight is there, the volume is growing, so – but we have nice stability in Canada, we don’t have turnover. So yes, if you look at our mileage, our mileage is down, okay, this quarter versus last year in Canada. Because yes, we have a little bit less trucks. And – but we were more efficient with the equipment. And yes, we have a little bit of a shortage in Canada, but we pay our guys better, we get a little bit more money from the customer, which is what needs to be done to be able to sustain a business. On the U.S. side, it’s a little bit of a different story. We’ve adjusted ourselves to what we can do, us as a corporation. And for sure, we have to increase salary of our guys early in the year. There may be another adjustment down the road. Okay, we’ll have to see what the market is doing. But all in all, the most important thing for us is if you look at our results of Q1 in Canada, I mean they were fantastic. And we believe we’re going to have a very strong 2018 in Canada, both special TTL and van. On the U.S., side we will keep on improving every quarter, okay, two, three and four on the road towards a 90% OR. I just saw results of a U.S. guy with something like an 80% something OR, sub-85% OR. So it can be done, all right? So – but it’s not just on the quality of revenue, it’s done on the quality of revenue and match the right freight with the network and the cost.

Okay, that’s very good, thank you very much. Alain Bédard: Thank you. Thank you Cameron.

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

Hi, everyone. Good evening. Alain Bédard: Hi Benoit. How you doing?

Yes, very good. Thank you. Just for Canada, sorry, but obviously you were able to make a very strong performance with the 98% OR, which – where Q1 is typically a difficult quarter. So what does it imply in terms of OR in Canada for the full year, Alain? Alain Bédard:

Wow. And if you look at the U.S. TL, you mentioned, 95%, 96% this year. But longer term, where would you like to see the OR for U.S. TL, Alain? Alain Bédard: Well the first-class TL guy in the U.S. has to be around 90%, okay? So when we bought TCA, this was a first-class operation when we bought it. Then the market started to turn, there was a change in leadership because Mr. Alex [ph] left. But 90% to 92% OR, you are part of a first-class group. 95%, you are doing okay, but you’re not first-class. And us, our leadership team in the U.S, those guys want to be first-class, they don’t want to be second-class.

And do you think being first-class is something achievable, let’s say, maybe not 2018, but 2019? Alain Bédard: No. Absolutely, no, no, 2018 is going to be difficult because look at where we start. But we’re improving every day, we’re getting better every day, we’re correcting a lot of mistakes of the past and et cetera, et cetera. We’re building a family environment, the guys at CFI, we’re bringing those guys their pride, the pride is back, et cetera, et cetera. So it takes time, it doesn’t happen overnight. But I’m convinced that the leadership that we have, both TCA and CFI, they will deliver and they will do the job with their team.

Okay. So probably more 2019 story, 2020? Alain Bédard: Yes, it’s going to be an improvement during the course of 2018, and then we want to keep on improving in 2019.

Good, good. Perfect. And just looking at Last Mile, Alain, could you give us a little bit more visibility around – you achieved 6.3% EBIT margin, so nice improvement versus last year. But where should we see the margin for Logistic and Last Mile, let’s say, this year and 2019, longer term? Alain Bédard: Yes, well you see, in my Logistics, one thing that you’ve got to keep in mind is when I’m at 6% EBIT it’s because also I’ve got 2% just for depreciation of intangible. So if you exclude that, I’m not a 6% guy, I’m an 8% guy, in Q1. This Last Mile and Logistics, within TFI, will be double-digit EBIT, excluding the intangible depreciation. But I’m convinced in 2019. Remember what I said at about our P&C business, that we’re going to be double-digit in the old family, we are, okay? And now we are showing that what are we doing on the next day, it’s crazy, it’s fantastic. Our guys are efficient, our drivers are efficient, our sorters are efficient. I mean, this is the result of a lot of years of work with the Loomis team, with the Canpar team, with all these teams, they have been more efficient. And we see the result now of P&C and you’ll see the Last Mile/Logistics, because don’t forget, a lot of the Logistics company in the U.S. are 2%, 4%, 6%, bottom line. No, no, no, us the combination excluding the intangible, we’re at 8%. And we’re going to be a 10%. It’s going to take us a little bit of time. But I would say that we’ll get to 10% some time in 2019.

Okay, that’s pretty good color, Alain. And could you talk a little bit about EBITDA for the year. I think last time, you were expecting $600 million, you’re obviously on a strong start with Q1. So just to give us an update maybe on the EBITDA for the year? And also maybe in terms of free cash flow, what we should be looking for? Alain Bédard: Well, the EBITDA doesn’t change. The only change that we see is now with the acquisition of Normandin, which is a great Canadian company, we’ll probably be, with Normandin, in the $610 million, $615 million ballpark. So that’s not a problem. On the free cash flow side, it’s a battle, okay, but we don’t have the same kind of CapEx that we had to do last year. If we do the plan, I’m still convinced that we could be flying in the $300 million neighborhood depending on market condition. Now we’re having some discussions, so we may add probably – or maybe – depending on how the market go in the U.S., we may add $10 million of CapEx on the equipment on U.S. side. Nothing on the Canadian side, but on the U.S. side, just to be – now because we’re showing you the average age of our fleet. You see that now in our MD&A. So we want to bring that down even more, so maybe. Depending on how it goes. So I’ll know more after Q2 how good are we after Q2, and then we’ll make a decision on that.

Okay. What should be the annualized contribution of Normandin both on the top line and EBITDA, Alain, per year? Alain Bédard: Well, Normandin is a great company, and they run about 360 trucks. So if you do the math, it’s a little bit more than $75 million in revenue. And it’s a top-star, top-rated company. It’s a hybrid LTL-TL. So a company like that should deliver – they lease trucks, see? So most of their trucks are leased. But so let’s say, on average, they should do probably like $10 million of EBITDA in a year.

Okay. And last question just in terms of CapEx. You mentioned that CapEx obviously should be trending downwards. So any numbers to share for the full year, Alain? Alain Bédard: Yes, we always talk about exactly net of equipment disposal. We’re still thinking about it in the $150 million neighborhood. Q1 is always light for us. Because there’s not enough cash flow in Q1, it’s difficult. We have to fund the working capital because our business is growing in March and in April. But we’re still at the same number. The only difference could be after Q2, when we see how good we’re doing in the U.S., let’s say that we come up after Q2 – or at Q2 with a $94.5 million while on our U.S. side, I’m sure the guy will say "Hey, Alain, let’s add 100 trucks. You’ll be proud of what we’re going to do with those 100 trucks."

I see, I see. Okay, thank you very much. thank you for the time Alain. I conclude up to here. Alain Bédard: Thank you.

Your next question comes from the line of Walter Spracklin with RBC. Your line is open.

This is [indiscernible] for Walter Spracklin. Good, how are you? Alain Bédard: I am good. How about you?

Good, thanks. Just wanted to circle back to the guidance there, given the strong start to the year, are the conditions now such that there’s more upside potential in that guidance as opposed to what we were seeing maybe 10, 12 months ago? I’m just wondering how we should be thinking about that potential? Alain Bédard: Well, let me tell you one thing. Last year, I said $600 million and we didn’t do $600 million. So – and the reason being is that because something happened in our U.S. TL. So we are very conservative. And there, again, our U.S. TL, they’ve been very sick in 2017. Now they’re just getting out of the hospital, okay, and they’re doing well. But I just – I don’t want to be ahead of the game, so we’re conservative. So that’s why we’re saying, $600 million, $610 million, with the acquisition that we just did, fine. After Q2, if we feel better, okay. For sure, we’ll be with pleasure that we’ll – if need be, we’ll adjust the guidance. But I don’t want to be ahead of the game. Let’s be conservative. We’re very focused. We believe that our Canadian TL will do better, okay, over the course of the year. The same with our P&C and our last mile. U.S. TL, we’re convinced. We see the April month so far, we’re on fire. So we’ll see what happens after Q2.

Got you. That’s really helpful. And on the TL side, the conventional TL side, you mentioned the revenues ticked lower. Are those still some of the effects from demarketing some of that prior business? Or is there something at play? And if it is a part of the demarketing business, is there still some of that left to go or is that nearing completion? Alain Bédard: Well, the Canadian TL, we don’t have an issue with pricing and business and all that. On the U.S. side, we’re done. I mean, we had a lot of business that we had to get rid of. About $50 million of the customer that we had that didn’t make any sense. And – but basically, I mean, it’s ongoing. Sometimes customer says "Oh no, you guys are too expensive," then they call us back. Right now, the problem is not the rates. The rates are getting to the level they have to be one step at a time according to the contract and all that. Rate is not an issue. Market rate is not an issue. Right now, the issue that we’re working on is cost, okay. And again, the driver turnover in the U.S., it’s an issue. The driver shortage is an issue. We’re working at that. As we’re saying to our guys – our guys are committed to – lets guys spend more energy and time into keeping the ones we have so that we don’t have to chase for new drivers, so that’s the focus. Safety is a big focus. We had to pay – we settled some claims in Q1 of this year that relates to the past of CFI. That cost us a fortune because they were poorly provisioned. So – but let’s make sure that we’re safe, that – the roads have been terrible in the Northeast with the storm and the ice and this and that, so maintenance also affected us. But that’s behind us.

Got you. Perfect. And just a last quick one here. I believe in the last guidance you were guiding for $150 million in debt reductions for 2018? Is that still what we should be expecting for the year? Alain Bédard: Yes, yes. I mean, like I said we’re going to do about $100 million of M&A. So far, we’re forecasting still that we’re going to buy back – we bought back 1 million shares in Q1. We would like to buy another 2 million or 3 million shares. So if any – if you guys know any shareholders that would like to sell shares, I mean, we’re buyers of TFI shares. We would like to do that. And we’re also working on a major real estate project that – it’s still too early, but we believe that this is going to fetch between $100 million and $200 million on the real estate side. This is not in the books right now. This is not in the asset held for sale. This is something that will probably be there once we go to the market. We believe that this is going to be an event that’s probably going to take place in Q3 or Q4 of 2018. So that would fund the buyback. And that being said, the excess cash flow will be going towards the debt. So our debt sits at around $1.5 billion before the Normandin acquisition. So we should end up the year in $1.4 billion, $1.350 billion. And that puts us in a debt-to-EBITDA in the 2.2 times to 2.3 times, depending on the buyback and on the real estate deal.

It’s great really, really appreciate, thanks much for the time.

Your next question comes from the line of Mona Nazir with Laurentian Bank. Your line is open.

Hi, good afternoon and thank you for taking my questions, can you hear me. Alain Bédard: Yes, hi, Mona.

Hi, I like your analogy comparing that TL to the hospital, it was good. My first question just has to do with your last mile and logistics division, which you just started breaking out separately. We saw continued contraction about 5.8% versus last year. I’m just wondering when is this expected to slow down and the year-over-year comps get easier? And I believe that you mentioned earlier on the call that e-commerce revenue was up in the quarter despite a loss of a customer, is that correct? Alain Bédard: Yes. It is correct. And don’t forget the e-commerce that we lost early in 2017. After Q1 of 2018, this is completely gone. I mean, this is done, this is over. So in the comparison, there’s no more of this e-commerce there for Q2, okay? Also, we have a group of customers in Canada that we used to do air-to-ground with them, and we’ve been working with them to reduce costs. So from air-to-ground, we moved to ground. So that means what? That means that the revenue is less, but also, the expenses is less, okay. So we shed revenue of about $2 million in the quarter for that change. But for the company, for the group of customers that we have, for them, it’s a huge saving, okay. We just extended the contract for another year with those guys. And so it shows us there’s less revenue, but as a matter of fact, we haven’t lost any business. So there’s some situation like that, Mona. But what am I saying is that we have done a fantastic job ourselves being – working on the bottom line. On the last mile and logistics, okay – Q1, logistics side has been difficult because of the tightness of the trucking market. So yes, we lost a little bit of revenue in our logistics division, but not in our last mile. We’re working on a lot of different files. We just started a retailer in Toronto and in the U.S., same retailer on the e-commerce side. So we should see some growth there on e-commerce that will show up in the last mile and logistics. But don’t forget, we also have e-commerce in our P&C business, okay, and in our Truckload.

Okay, thank you. And then secondly, I just wanted to turn to succession planning. Greg is transitioning out of the CFO role. And a few quarters ago, you made some general comments about overall succession planning in the organization. And there have been discussions about whether you may be looking to sell or piece out the business and really the evolution of the leadership team. I’m just wondering what could TFI look like further down the road and if you could offer any additional comments. Alain Bédard: Well, yes, it’s true that Greg – we’ve announced that 6 or 8 months ago, CFO. Greg is retiring in a year from now. Now that being said, I’ve also said that within probably – early in the summer, sometimes in the summer, we’ll announce on the financial side what the plan is going to be in the future. Maybe I’m going to go back as CFO. I like that job. And we’ll find a CEO, okay. We’ll see. But that being said, what’s important is we’ve also added a lot of executives over the course of the last 12 months on our Canadian operation and our U.S. operations. So the two leaders that we have there are brand new, okay. So Paul and Greg, they’ve been with the company for maybe a year or less, but we’ve also added a new leader at Vitran, a young guy, Chris. We’ve also added a new leader at Loomis, which is Jim. We’ve added also a new leader at TST Overland, which is Wayne that took over, okay. So we now have a new leader, Scott, that takes over our – some of our logistics division based both in the Canada and in the U.S. So we are investing in talent, no question about that. Now any plan to sell anything, we don’t have anything to sell right now. We’re having fun with the company we have. We will grow the company through some M&As, small M&A this year. And we’re buying back our stock. We want to buy back another 3 million shares. So I don’t have any plan. I just turned 65, I’m having fun. My boss, Mr. [indiscernible] he retired at 81 – 80. So he said, Alain, you’re still good. Keep on.

Okay, that was very helpful, thanks, I’m going to step back.

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

Hi, Alain. Just going on from the last question. So you just said you would consider going to CFO from CEO. I guess, Alain Bédard: That’s a joke David. Don’t take that – I was just joking, no, no, no. But I like to be a CFO. I’ve done that for many, many years, but no, no, I’m not going to do that, no, no, no.

Okay, fair enough. Second question maybe are just small things – lots of good commentary. The P&C revenue declined 2%. I didn’t see any particular reason explaining why that was in the quarter and kind of what the prognosis is. Alain Bédard: There’s no real reason there, David. We haven’t lost any customer. We don’t have any issues with customer in our P&C other the fact that a lot of our customers are retailers that are suffering from the e-commerce part of it because these are the brick and mortar guys, our customers. We have some of our customers in the technology sphere that have been slow in Q1. I’m talking the Bell and the TELUS and all these guys. They have been a little slow in Q1. But there’s no reason – there’s no cleaning up of customers in our P&C. It’s just – it’s been a little bit slow. And have also a good pipeline on the go. So there’s no concern there on the revenue and the quality of the revenue.

Okay. That sounds good. And then the other question I had was on the Logistics and Last Mile. So there was a comment that you benefited on the margin side from better quality revenue, what exactly does that mean? Alain Bédard: Well, that means that – like I was talking is on the logistics side, it’s been difficult. Q1, it’s been really difficult for our guys. As a matter of fact, out of the 6 different logistics company that we operate, only one had revenue that was up. Clarke North America’s revenue was up. The other ones were all showing a little bit less revenue. It’s difficult with the customer, it’s difficult with the transportation company because everybody is busy right now. So that’s why – now being combined with the last mile, it’s all combined, but it’s our logistics that is down in Q1. It’s not our last mile. Last mile in Canada is down a little bit, and this is just because what we’ve done with a group of customers is we moved these guys from air service to ground. So that means the cost is less, but the revenue is also less.

So I still don’t quite understand when you say you have better quality revenue in that segment this year than last year, what exactly does that – what does that mean? What did you drop that was poor quality and what did you pick up that was good quality? Alain Bédard: Yes. The fact of the matter is, David, our cost has improved. So if you look at our Canadian or U.S. last mile operation, it’s not about the quality of the revenue, it’s about being more efficient, reducing our real estate costs, reducing our PT, the owner-op that we’re paying being more efficient, et cetera, et cetera. It’s got nothing to do, okay – but cleaning up of customers in our last mile, it’s done, it’s over. The only thing we’re doing now is we’re improving our costs, we’re trying to grow the business with new customers and all that. The cleanup – the only cleanup we have in Q1 is the LTL, where we’re saying to our guys Hey, no, no, no. Forget about this guy that gives you a one shipment for $50 and is shipping 150-pound to Calgary out of Toronto. We don’t want that.

Okay. So with the comment – and it’s in the MD&A, you had tire quality revenue, and that’s one of the reasons why you are up in the income – is this referring to you had some of those things you were cleaning up last year you hadn’t finished in Q1? Alain Bédard: Last year. No, no, last year. Yes, last year, sure.

Okay. It’s just the year-over-year.

[Operator Instructions] Your next question comes from the line of Turan Quettawala with Scotiabank. Your line is open.

I guess I wanted to ask a couple of questions on the last mile business as well. I guess, first of all, just a quick clarification just to – on one of the questions earlier. Did you say that lap on the customer that you lost on the e-commerce side that will end in Q2, is that correct? Alain Bédard: Yes, absolutely. So the – because we lost a customer early into 2017, by the time that everything came out of the system, it went all the way slowly every day with less and less until the end of March. So by Q2 of this year, there’s no issue on the comparison. This guy in Q2 of 2017 was completely gone.

Perfect. That’s really helpful. I guess, also, Alain, is it possible to get some color around the margins, what the margins were like on the businesses that you restated from P&C into the new sort of last mile segment? Alain Bédard: Well, if you look at the comparison, I mean what we did, Turan, is very simple, is we took all of our last small business, okay, that we have both and US and Canada and we just move that over. Revenue, cost and everything into now the Logistics and Last Mile segment. So everything is comparable year-over-year, quarter-over-quarter.

No, no, of course, I understand that. I’m just trying to figure out because – I guess if I look at the logistics margin last year that you reported, it was – it seems like the reported margin now for last year is lower. So presumably, that places that you moved over, it’s like less than 5% business? Alain Bédard: Yes, yes, yes. Okay, I understand your question. Yes. It’s true. Our last mile business, okay, last year in 2017 was less profitable than our logistics. If this is your question, yes, you’re right.

Okay, perfect. And I guess just a couple of quick ones here. In terms of UPS, I guess they’ve expanded a bunch of capacity in Canada as well. I guess it’s a good sign the market is strong. Just wondering, from other competitive standpoint, are you seeing anything different at all? Alain Bédard: No, no. I mean, we like to compete with guys like FedEx or UPS because these are very good competitors. So no, not at all, Turan. We’re very happy with the situation here in Canada. We’re going to be growing. You’ll see that our next-day service is going to be growing. We’ve got a little bit – a lot of good stuff on the go. But like you said, okay, the e-commerce is really helping Canada Post, Puro and all the next-day guys on the parcel. It’s affecting the LTL guys, it’s affecting us, it’s affecting our customers. It’s also affecting a little bit our customer on the P&C side for the small shipment that the brick-and-mortar guys are losing to the e-commerce. Us, we’re losing here, we’re losing there, but we’re gaining on the e-commerce side, okay?

Okay. Okay, perfect. That makes sense. I guess, also, we’ve been reading a little about increased fulfillment centers by created – being created by the online retailers, I guess, which are closer to the end customer. Does that change anything from a last mile perspective for your business? Alain Bédard: Absolutely, absolutely. I mean, the more fulfillment center that – for instance, we’re in discussion with an e-commerce guy to open up in Calgary and Edmonton and Montréal. Why? Because they have a fulfillment center now. So we can do the last mile with these guys now. Whereas, if they don’t have any fulfillment center, you cannot do a last mile because you are limited in what areas that you can cover, okay. So if you take the largest e-commerce guy in North America, right now, we’re servicing Toronto, Vancouver and Winnipeg, and we’re in discussion with them with 3 other markets.

Okay, that makes sense. Perfect. And just last question just a clarification again. On the Truckload in the U.S., you’re talking about obviously the owner operators, a little of that commentary, on them being down. You also talked maybe about potential to buy more trucks here. As I think about the next year or so, is this mainly in the U.S., an improved pricing plus an improved efficiency story? Or is there really – do you have capacity to really add revenue here considering that the market is so strong – I mean, up in volume? Alain Bédard: Turan, if we add 100 trucks, it’s not an add-on, it’s a replacement, okay. So we’re not adding capacity, us, okay. Our story in 2018, us, is really based on improving the quality of revenue, which we’re doing now, and improving our cost structure. Now sure, we’re not happy with the fact that we lost owner-ops at CFI. The guys are working on a plan to bring those guys back, but that’s really the plan. We’re not adding any capacity, no way.

Your next question comes from the line of David Ross with Stifel. Your line is now open.

So on the Truckload, just real quick. The 100 trucks, do you need to order those now to get them by the end of the year because we’re seeing the backlog for class A stretching out for nearly 7 months? Alain Bédard: Yes, but our guys were smart, okay? So on the CFI file, they had 600 slot. We said we confirm buy, but keep 100 on the side and we’ll get back to you in the summer if we go ahead with 100.

So you’ve got the ability to fill the whole slot there? Alain Bédard: Yes, yes, we do.

And then on the P&C side, it’s the best margin business. You had good performance in the quarter. Yes, you mentioned something about the next day service, but how do you grow that? How do you get that from $140 million in first quarter revenue to $180 million to $200 million in revenue? Alain Bédard: Well, that’s always been our problem. It’s because us, we’re very picky. I mean, we’re not going to grow with the 2% guy, okay. So this is always – the caveat is what do you do? Do you grow your business? Okay, we have capacity, okay. So we could grow on a quarter, let’s say, from $140 million to $180 million with the capacity we have right now. We’re investing in Calgary, we’re investing in Vancouver to increase this capacity. So down the road, we believe that because of e-commerce, because it’s also helping us on the P&C side, not just on the last mile side, and also because of our internal pipeline. We should start to see some 3%, 4%, 5% growth over the course of the year. Now don’t forget, the lead dog in the Canada is Canada Post and in Puro. Those guys are not looking for the same kind of margins we are. Us, our goal has always been return capital, return on invested capital, very important to us. So this is why we’re going probably a little bit slower because also we still have a lot of improvements to do. If you think about what we’re doing in Vancouver, we’re moving camp in Vancouver in August, a huge, huge improvement in terms of quality of service because now, we’re going to have 2 locations well positioned in Vancouver. By the end of next year, we’re redoing all of Calgary. We’re going to be in Austria in sometimes in June to finalize the equipment, the conveyor that we would like to implement in Calgary. So at the same time that we’re growing slowly the revenue, we’re also reducing and bringing more efficiency in our network.

Excellent. And just last question on the LTL side, do you have a long-term margin target for that segment? I know that there’s a good amount of asset-light operations in there so it’s not going to be as high as an asset-based LTL carrier would be. But what are you looking at to get your return on capital out of that? Alain Bédard: Listen, I mean, there’s no way we won’t be at a 10% EBIT in that division. Our guys are working day and night. We have a brand-new team. Like I was saying, we have a young leader at Vitran. We also have a new leader at Clarke. We have also a new leader at TST. Like I said, we will be at a 10% EBIT with our LTL business, believe me. It will take us some time, 12 to 18 months, but we’ll get there. That’s the goal. We need to be in the double-digit EBIT family. We’ll get there.

Your next question comes from David Tyerman with Cormark Securities.

So I had just one last question, Alain. On the Package and Courier, so the margins are pretty high right now, 14.5%. What is your thought in terms of those margins? Can they go higher or is that really pretty much as good as it gets? Alain Bédard: No, I believe that with all the changes that are still – need to take place, to me, 14% is good, but 16% is better.

Okay. And what would you need to do to get from 14% to 16%? Alain Bédard: Like I was just saying, David, I mean, we’re making some moves in Vancouver, okay. We’re going to be making some moves in Calgary in 2019. We have very antiquated equipment in Alberta, okay. We’re going to be investing $10 million just to upgrade with new conveyors, so there’s a huge payback on that. The density of our routes, we’re working on that. We’ve got better tools. We’re investing on tools to be more efficient. It’s all – we’re in a penny business. So you tweak here, you tweak there, you get better people, better tools, that’s an ongoing. And our leader there, Brian Kohut, he understands my philosophy. He’s been with me since 2001, so he knows what he has to do.

Okay. And is this like a couple of year process to do all that stuff and get to that 16%? Alain Bédard: I think that we’re going to get to 16%, hopefully, early in 2019. The move in Vancouver will definitely help us. Vancouver’s traffic is terrible, like Montréal. So if you are well positioned, this is all going to help our guys.

There are no further questions at this time. I will now turn the call back over to Alain Bédard. Alain Bédard: Well, thank you all for joining the call, and we’ll see you, I guess, in a few months for our Q2. Thanks again. Have a great evening. Thank you, bye.