TFI International Inc. (TFII) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the TFI International Second Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for your questions. [Operator Instructions] Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Thursday, July 26, 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 the call. It’s a pleasure to speak with you today. Within the past hour, we posted our second quarter results. If you still need a copy, please visit the Investor Relations section of our website. Our financial results easily exceeded the expectations during the second quarter and we continue to have a strong year. As always, our main focus at TFI is on creating shareholder value, unlocking it for our investors and returning excess capital to our shareholders. Our methods to accomplish these goals remain unchanged. We focus on operating efficiencies which means innovating to find the value-added solutions to our clients. We pursue an asset-light business model. We maintain a strong balance sheet and we seek accretive, bolt-on acquisition while maintaining a high level of discipline. At TFI that’s all – that’s what we call business as usual regardless of the operating environment. And with that in mind, let’s take a look at our second quarter results. Our total revenue grew 4% to $1.3 billion. Our operating income climbed 64% to $122 million and our adjusted net income per share on a dilutive basis was up 65% to $0.99. Our free cash flow from continuing operation was $97 million during the quarter, which was up a very healthy 108% and on a per share basis, that was a $1.10, which was an increase of 116%. We are pleased to see that our focus on profitable growth not just growth for us, but profitable growth, it is having a favorable impact. Turning to our segment, I would first point out that our Truckload results further improved this quarter, which build upon the progress we made earlier in the year. US truckload is definitely a driver for us now and we view the improvement there as a sustainable trend, either our entire Truckload segment is less than half of our overall business and I am pleased to see that the rest of our segments also performed well with margin improvement across all four. Starting with Package and Courier, we are seeing volume growth and rate improvements. We are improving our efficiencies by consolidated routes and terminals, while continuing to focus on business mix. As a result, our operating income grew 17% to $30.2 million on a revenue growth before fuel surcharge of 4%. This reflects a 220 basis points expansion in our exceptional operating margin to 19.6. Turning to LTL, we saw volume and rate improvements in intermodal and cross border while our domestic business within Canada is focused on more cost rationalization. Revenue before fuel surcharge was up 3% the past year to $239 million benefiting from the acquisition of Normandin at the beginning of the quarter. Operating income was up a very strong 48% to $24 million on a margin that expanded 310 basis point to 10.2%. Within our Truckload segment, the improved pricing and the increased asset utilization drove substantial margin improvement both in the US and Canada. Revenues of $525 million before fuel surcharge were up 1% over the past year. Our operating income was up 130% to $54 million on a margin that’s more than double to 10.4%. We have been focused on our US Truckload operation and are pleased to see the improving results there with an operating ratio of 94, compared to 103 in the second quarter last year. Our Canadian truckload operation delivered strong operating ratios of 86 in specialized and 86.6 in conventional dry van. Finishing our segment discussion in logistics and last mile revenue were $247 million as compared to $255 million in a year ago. Our operating margin jumped from 6% to 8% and we had operating income of $19.8 million versus $15.3 million a year earlier. As you might gather from the discussion of our segments, we are seeing broad based strength across the business. Given the unparalleled of our operation, both our geography and service type, I would suggest that there is no other major North American transportation company better positioned for this environment. From a capital allocation standpoint, we returned $55 million to our shareholders during the quarter including $18.5 million of dividends and $36.5 million of share buybacks. Going forward, we remain active and opportunistic buyers of our stock. We also, during the quarter reduced our debt-to-EBITDA ratio to 2.69, down from 2.91 at the beginning of the year. Before I provide an update to our full year outlook, I’ll provide a few words on the operating environment and our reason for optimism looking ahead. The general freight environment is strong in both the US and Canada and across every segment in which we operate. Volumes continue to rise combined with ongoing capacity restrains. E-commerce, which is demanding from a last mile standpoint is a growing portion of retail sales and this plays to our strength given our extensive logistics and last mile operation. I will wrap up with a guidance update before opening the call for your questions. So our EBITDA guidance for the year which was previously $610 million to $615 million including the Normandin acquisition, rises to a range of $635 million to $645 million. In addition, we are introducing adjusted earnings per share guidance for the first time, as we believe it’s an important measure of TFI’s overall financial success and for many investors the preferred way of valuing our company. We expect adjusted EPS for 2018 to be in the range of $3.21 to $3.29. So, thank you for joining us on the call today and we’ll now open the lines for your questions. Operator?

[Operator Instructions] And your first question comes from the line of Fadi Chamoun from BMO Capital Markets. Your line is open.

Good afternoon, Alain. Alain Bédard: Good afternoon, Fadi.

Congratulations on very strong results. I wanted to kind of get your thoughts on the truckload. So, you made some very good progress into the second quarter, especially in the US, down to, I guess, 94.5. Can you kind of lay out for us what do you think the year will end? And how much of that business rationalization and repricing you would have kind of achieved this year and what’s the opportunity look like optimally going into 2019 as well? Alain Bédard: Yes, so, Fadi, so, if we want to talk about the US TL, 94.5 is really average of TCA and CFI. So, when you do an average as one guidance better than the other guidance, right. So what we’ve seen so far is that, our CFI team has done a fantastic job in terms of cost control and being very efficient, I mean in terms of the maintenance, in terms of fuel economy, et cetera, et cetera. So this is an ongoing process and I was in Dublin last week talking with the management team there where we have now a fantastic team and I am feeling so good about where we are going on the cost improvement, okay, when we keep the eye, our US operation with our fantastic Canadian operation. So on the cost side, I am really, really happy with what’s going on. At CFI, I mean, on the quality of the revenue side, what we are seeing is that, it’s an improvement that’s an ongoing basis. Every month, I mean our average revenue per mile is improving. Now, are we as good as the best US carriers and then the quality of revenue, I don’t think so. We still have a young team. Our market intelligence is probably not as depth as the big, the great US carriers, okay, that we are competing with to a certain degree. But we are going to get there. The other group that we have TCA, it’s a little bit of the opposite. If you exclude a few customers where we have some dog deals. I mean, crazy stupid deals that will take probably another few months to get rid of. The quality of revenue at TCA is probably closer, okay, to what the good truckload guys in the US are today. TCA, we’ve been working with these guys for a long time now. We are working on the cost. So, definitely on the cost side, we still have a lots to do. Their fleet is a little bit older on average than the fleet at the CFI. The revenue per truck – let’s say the asset utilization is not as good, but we have also there a team that is aware of the challenge that they are facing and I’ve got full confidence that these guys will be getting closer to our plan at CFI. Now, on average, having a 94 OR 94.5 OR in Q2 in the US is not, I mean, just carries at 77, okay. So, we still have lots of work to do. But at least a trend is there. Don’t forget Q1. US OR was 98, right. So, we brought that down 350 basis points, right, so, I mean, the guys are really on the right track. Now, if you look at our Canadian truckload, within the same world, I mean, our guys are at 86. That’s where you want to be. In today’s world, you’d got to be holding at an 85 to a 90 OR, but we are going to get there. I am very confident.

The truckload market in Canada seem to have gotten more tight. I guess, it looks like the pricing was pretty strong as well in the Q2. Is that something that you can build on more as you go into the second half? Alain Bédard: Well, pricing in Canada is okay, it’s good, it’s improved. But also don’t forget at the same time is the same phenomenon as we see in the US is where wages per driver has to improve where just the case in Canada and in the US, right. So, on the Canadian side, I see that, we are at market as in Canada, okay. But we are taking advantage of improving the quality of the lanes, improving the asset utilization and all of that. So an 86 OR in Q2, it’s fairly good for a Canadian operation and our Quebec-based carriers are doing better than our Ontario-based carriers. And we are working on something there that needs to be addressed in Ontario. We don’t have as much leadership in Ontario because of our size than we have in Quebec. But there is something that needs to be addressed in Ontario that needs to be corrected to have a level playing field that we are working on with the trucking association, the CTE Canadian Trucking Association and the OTA. There is a situation there that needs to be addressed.

Okay. And my last question, like on the LTL side, I think you mentioned, kind of the intermodal and cross border being good, but domestic LTL, is this still struggling like, what’s the pricing situation there? Alain Bédard: Yes, so, our LTL business was like I said is, transborder and intermodal. We also grow and the pricing is starting to make sense. On the Canadian domestic LTL, okay, there is still some locations, there is still some areas in the country. And this is not Western Canada. This is mostly in the East Ontario, Quebec markets, where there is still way too much capacity. So, in order to resolve that situation, as of June 1, I mean, we’ve combined Kingsway LTL with Overland, okay. Kingsway was a regional player in Ontario, Quebec, whereas Overland is a more national carrier. So we did that to be more efficient, because that market needs to be more – there needs to be more consolidation, okay. So, reduced cost, be more efficient, more flexibility. Now, if you look at globally, for sure, our LTL is improving big time bottom-line, mostly on the back today of our intermodal and transborder. Now, for sure, the over the road Canadian LTL like, for instance, TC like I just talked about, it’s a little bit of a drag on our average profitability, but the team there is aware. We have a plan and for sure, we are going to get back to the double-digit EBIT. If you remember a few quarters ago, I said, guys, we’ll going to be at double-digit EBIT in LTL. Believe me, we are going there.

Great. Thanks a lot. Appreciate the time. Alain Bédard: Okay. Thank you, Fadi.

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

I guess, my first question will be on free cash flow. You gave some good guidance there on the lift on EBITDA. Can you talk a bit about the free cash flow that you are expecting for the year and how that might have changed and whether your CapEx spend for the year has changed at all that would drive that. And with that free cash flow, can you update us on how you want to deploy that between debt repayment, acquisitions and share buyback, as well as dividends? Alain Bédard: Yes, so, good question, Walter. So, what we see as a bump up on the EBITDA is mostly going to be improvement as well on the free cash flow, okay. So, the improved free cash flow or the free cash flows priority, like I said earlier, okay, we were planning on spending about $100 million of M&A. Probably, I said, it’s going to be closer to 150 to maybe 200. So, we are looking at a few files right now that would be some nice tuck-in in Canada. And also, some small tuck-ins also in the US. No big whales on the M&A side for us in 2018. I don’t think so, all right. In terms of share buyback, as I said on the – on that note there is for sure, if we see, so, like for instance today, the day before, I mean we were active in buying back our stock. And we will keep on doing that. And depending on the stock price, I mean, we will be more active or less active, okay. We believe that probably with this kind of guidance for the year, probably our dividend for next year will again be improved, because we think that coming into 2019, we are going to see the same kind of picture as we saw in 2018. The market is really, really tight in the US. Yes, guys are ordering more trucks. But, we still don’t have the trucks that could be driven without the driver. Really, really difficult to find drivers even more now also in Canada and so it’s getting to be very tight. So, we feel very good about where the company is going in 2018 and we believe that this is again going to be a very strong 2019. So we are going to use the cash small on M&A $100 million to $200 million, okay. Our CapEx, we don’t see anything changing there versus the guidance that we said, we said, net of disposal of equipment that are roughly about 150, okay. We don’t see anything changing there.

You hand land and bill land sales at about a $100 million for the year, are you still targeting that? Alain Bédard: No, no. We did about 20, okay, so far, 20, 25. We’ll probably do another 20, okay. But what we’ve done Walter is the sales and leaseback project that we have, we had offers, we were just going to do the deal, but because of the IFRS 16, okay, influence, I said, guys, it’s not clear in my mind where we are going with that hopefully by Q3, okay, we could give some guidance to the market. Because right now, we have some kind of an idea, but we are not sure. So that’s why, because of that I put everything on the sales and leaseback on hold. What we know is that sales and leaseback, US GAAP, okay, next year, that doesn’t change anything. But our friends at IFRS said, oh, no, no, no, no. Sales and leaseback, we will have to change the same as the other leases. So this is why I said, oh, based on that, let’s hold on for now, right.

Okay. I know, you mentioned looking in at 2019 and I think it’s pretty important, I don’t if you really give guidance now for 2019 yet, but you started the year a little slower, you’re really are taking off here in the second quarter, when you annualize that and look at a full year of what you are seeing in the second quarter, kind of going and powering you through in the 2019, 2019 should look pretty good relative to 2018 given the slower start to 2018. Any broad indicators of organic growth rates ex M&A that we can expect either on the top-line and any indication of you talked about continued margin improvement, but any quantification of that margin improvement that you might see going into 2019? Alain Bédard: Well. What I could tell you today, Walter, is that, we’ll give guidance of 2019 after our Q3 numbers. But, what I could tell you is that, for the first time, okay, on our P&C side, if you look at our Q2, our organic is up 4%. So we are starting to see a lot of action there. In terms of the e-commerce, because e-commerce some customers want it next day, some customer wants it the same day. And us the test we have is that we are both – we are in both businesses in Canada. Okay. So, that’s why our P&C is showing some, a little bit of organic growth, 2%, 3%, 4%, 5%. So, I think that this is going to be ongoing into 2019. Our last mile, when you look our last mile logistics, you see, we have, but any, your last mile, your revenue is down, okay. Well, our revenue is down a little bit because of US exchange, okay. But mostly down, in one of our logistics division that’s cornerstone where we lost an agent. Our last mile business in the US and in Canada, the one in Canada is growing. The one in the US is flat because we are still cleaning a little bit of some customers that we were doing warehousing for them. And when I start looking at my nice IFRS 16, I said, hey, I am not a REIT, I can’t afford to service customers today with where we are going with IFRS 16, so, we are going to have to get rid of these customers because storage, you make small margin on that and it’s a huge lease. So this is why we are losing a little bit of revenue because of these customers. But on the other side, because we are flat is because we are gaining on some other customers where it makes more sense for us to be in the future, okay. So, LTL, for sure the transborder thing is going to be growing. The intermodal will be growing. The over the road Canadian business is going to be shrinking a bit, but some of that, probably you’ll start to see some 2%, 3% growth into 2019.

Fair enough. That’s great. I want to, I forgot to add on your free cash flow. Are you still looking for $150 million in debt reduction for the year? Alain Bédard: Yes, well, you see, based on our plan right now, Walter, we should end up the year with a debt-to-EBITDA at 2.3, we are at 2.69 now, right at the end of June. So we believe that we’ll probably be around 2.3 with not anything major in terms of M&A.

Got it. Okay. That’s all my questions. Thanks very much. Alain Bédard: Thank you, Walter.

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

Thanks, good afternoon. Alain Bédard: Good afternoon, Cameron.

Just want to come back to the, I guess, some earlier question on the Truckload segment and maybe just talk a little bit further about what the kind of pricing environment you are seeing there. I mean, we are seeing pretty much across the board contract rates up double-digits plus, and I know you had a lot of business that kind of repriced during Q2. So I am just wondering if you can talk about the – how things – are we mostly through that repricing and how much more is there to come in Q3, Q4 and how does impact margins as we move through the rest of the year? Alain Bédard: I think that, on the US side, we still have lots to do with certain specific customers, Cameron. I mean, I wouldn’t say that if you look at our average revenue per mile today, there is still about 10%, 15% improvement there. But, we have some customers at TCA for instance that don’t make any sense. The OR is still 150 OR with this account, okay. That will be corrected in October. So, there is still some room there or to be at least market level for our US guys, okay. That’s what they are improving. Now, it’s an ongoing process. Because, it’s not just the rate that we are improving, it’s also the lane that fits the network, right. Because there again, if the lane doesn’t fit the network, you could have a good rate at all, but you have no good rate coming back. So, your AR rate could be good, but then, if you look at the loop, it’s a disaster. Okay, so, this is why we have an ongoing process of making sure, like we do in Canada, I mean, in Canada we’ve been doing that for a long time. That’s what we do every day. But in the US, this is the kind of discipline that working with the team there, this is what we are doing. So, still a lot that we can do to improve the asset utilization, the lane, the quality of the lane, in using the loop, but most importantly is, we still have lot of cost to shut. Okay, and it causes us, when you talk to customers, you have to convince the customer, you could lose some business. But cost is your baby. So, this is why I am so optimistic about what we could do in 2018 and 2019, is that we still have a lot of cost improvement measure, okay, that we could do working with our team.

Okay, now, that’s great. Just on the cost, just sort of shifting gears to the P&C, I mean, you’ve gotten a lot of consolidation of routes there and terminal reductions and I guess, some other optimization things. Where are we on that process? I mean, is it mostly done at this point? Alain Bédard: Yes, it’s mostly done, Cameron. I mean, we still have Alberta that we haven’t done anything because of leases. You can’t do anything until your lease expires. Okay, so we have a nice project in Calgary. Our team was in the final mile of deciding on the equipment that we are going to install there. And after that, we still have Edmonton to do. We are going to be moving in Vancouver by the end of 2018, so that’s going to be – so we still have lots to do, okay, in terms of reducing our cost. But, now, our focus is going to be more and more now into growing, okay, the business, because cost being lean and mean and efficient it’s like your base, it’s like when you are building a house is your foundation, okay. And a lot of guys say, yes, well, I don’t know, even that your foundation is not so solid, why don’t you grow the business, no, no, no. We need solid foundation, solid team, solid people, which we have now. When you get out with a quarter at 19% EBIT, I mean, this is exceptional. This tells you that you’ve got the 18 plus, okay. So with that now, our focus on the P&C side is going to be more, okay. Let’s focus now more on trying to grow this business, because we got the 18 solid team, solid foundation.

Okay. And just on that, I know, it’s my last question here related to what you just talk about the P&C growth. I don’t know if this is an opportunity or not, but I mean, we’ve seen in Western Canada Grey Hound announced that they are going to shutdown all their operations there and I think they did a fair amount of package delivery. I just want to get if there is, if there is an opportunity there for you guys to pick up any of that business? Alain Bédard: Absolutely, absolutely, for sure, they are talking to us. They are talking to those customers. They are talking to Canada Post. They are talking to – for sure. I mean, it’s one player that just said, enough is enough. I am gone.

Okay. And were they particularly aggressive player in pricing? Alain Bédard: If it’s not your forte and that was not, sometimes you don’t understand the market, then you don’t know what the price should be and that’s why you have to shut down the business. Okay.

Right. Okay, now that’s great. It’s very helpful. Thanks very much. Alain Bédard: Yes.

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

Good afternoon and congratulations on the quarter. Alain Bédard: Thank you, Mona.

Hi. So, the first question just has to do with margins and OR and you gave good color about macro drivers. But I am just looking back to my notes and at the end of April, when you reported Q1, you were talking about potential margin upside for each division. And at that point, it was anywhere from a 150 to 200 basis points margin improvement, kind of further out. And looking at the Q2, we are seeing a breakthrough above that 200 basis points upper limit for all categories. So I am just wondering if you could discuss this a bit more and if you wanted to perhaps referencing the OR which is holding that sub-90 and what’s really caused the surprise on all the categories? I know you discussed the elements. Alain Bédard: Yes, but, Mona, for us, it’s not a surprise. Don’t forget, we are very conservative and you know, I still remember in 2017 where we gave a guidance and we missed it, okay. We missed it because of our US TL operation did not perform according to plan. And we had all kinds of questions. Our stock has been penalized, et cetera, et cetera. So, this is why when we talked at Q1, we had the first real quarter, okay, on the US TL where we could see some improvement that we were like turning the corner. And, but I had said also at the same time that guys, be careful, our LTL is improving, why? Because our intermodal, okay, which is a – it’s a diamond, okay, it’s a diamond in the rough, okay, where we bought a few companies a few years ago and now, okay, we have a team there that’s very aggressive on cost and that makes all the difference, okay. So, can I say that, guys, be ready, we are going to improve our OR by 200 basis points. This is a real achievement. We did better than that. Yes, we did better than that, because our guys, okay, took advantage on different segments, okay of the market that has improved. But also we were really, really efficient in taking advantage of our improved asset utilization, okay. So, I said it’s, P&C, if you go back to five years ago, I said that, we are going to be double-digit EBIT in our P&C, okay. And we were at 6% when we bought Dynamics and the DHL Canada. Today, we are at 19% on the P&C and on the last mile, if you would exclude the logistics we are double-digit over there. The last mile combination of US Canada. So, we made a lot of red ways. We said, okay, at LTL, we will definitely improve there. Our Canadian TL, we’ve always done a great job there. But this year, it’s a special year. We’ve increased our salary, we had to, but also we took advantage of better pricing in the markets. So, can we sustain that, and that’s why I said, yes, we can sustain that in my mind unless, the market goes crazy, but I don’t see that because I mean, the economy is doing well, both in Canada and in the US. There is a lot of shippers that got big issues trying to ship their products. And if you look at the US, the policy of the country there is to limit immigration, okay. So, a lot of these unqualified workers would be a truck driver to start with. So, I see that we are going to keep improving and this is why we are cautious. We are saying, oh, our EBITDA, about 635 maybe 645, hopefully, we are going to beat that.

That’s very helpful. And just secondly, you mentioned this just now in your remarks, but, just on the cost pressures on tightening capacity, driver shortage, I think, on the last call you had said that you are looking at taking a different perspective to compensation packages and schemes and I am just wondering, given the guidance, is it safe to assume that this has been addressed? Or do you anticipate further increases? Yes, okay. Alain Bédard: No, no, no, no, no, no. Absolutely, this has been addressed and as a matter of fact we just approved a salary revision on our US TL and this is part also of our plan. Don’t forget, I mean, those guys are doing a great job and because of pressure on the market, they were not – we were not able to do anything on the salary side on the US. Now, it’s ongoing. Everybody is doing it and everybody has got some pretty good results, I think, okay. So, now, it’s all in the plan. Same thing in Canada. But there again, we are working closely with our people to make sure that our drivers are efficient, that means that they have the miles. So they have the miles with the rate of pay. So they have a decent salary. Because, you can have a great rate per mile, but if you don’t have any miles, that doesn’t help you.

And just very lastly for me, with the current beat and talking into consideration your current visibility for the back half of the year in 2019, any further thoughts on the US listing or spinning out the truckload again? Alain Bédard: No, no. The US TL is doing a some kind of a spin-off. This is always been – discussion, as always been based on the issue of valuation. If we see something that’s not valued properly, then we need to address it. So, because right now, if you look at TFI’s valuation, it’s a truckload that is not very good. So, we still have a proper valuation. But to do the spin-off right now, it’s not something that I am working on. I am working on different things, okay, for sure, a lot of our revenue now is US-based. We have now, more and more US shareholders that understand that it’s a hell of a discount buying TFI based on although over the last few days it seems like valuation in the US has come down. But still, we are still way below the average. So, let’s see what happens. I mean, now we have more US allies coverage that are able to tell more of the story on the US side about TFI. So, I mean, we are working – we are very focused on delivering those results. We had to – we delivered some great results in Q2 and it looks pretty good for Q3. So that’s mostly our focus for now. And then, if valuation is still an issue, then for sure, we will address it.

Thank you.

Your next question comes from the line of Kevin Chiang from CIBC. Your line is open.

Hey, Alain and thanks for taking my questions here. Congrats on a good quarter. Alain Bédard: Thank you, Kevin.

Maybe I’ll just start off with – I guess, some of the comments you made around driver shortages and I guess it’s something the industry is dealing with. Are you doing anything from a training or retention perspective to try to reduce return, I know you have talked about in the past of increasing your miles driven not just increase per mile. If you could update there that would be helpful Alain Bédard: Yes, yes, absolutely. I mean, if you look at our turnover in Canada, I mean, like it’s very close to zero, truckload I am talking, our truckload driver. If you look at the US LTL, their turnover is very low like 15%, 20%. Where everybody has got a big problem is the US TL. So we are trying to address that with a philosophy that, guys, let’s spend more money in trying to retain the ones we have versus chasing the ones we don’t have and don’t care if one leaves and that creates a high turnover. So, everybody agrees with this philosophy and for sure, having a stable wage for those guys is priority number one for us at the operations level. Customer also that don’t take of drivers, so I am explaining is the guy gets into the yard and he’s got to wait five hours to be loaded. We are addressing those customers now, saying listen Mr. Customer, if you don’t change your behavior, I am going to have a big problem. I am going to lose customers all the time. We have a dedicated customer at TC where people didn’t look at that before. And that guy is the worst churner of drivers. My turnover with this customer is probably 240%. So we say, guys, hey, wake up and smell the coffee. This got to be addressed. We have to sit down with the customer and tell him, listen, it doesn’t work. Okay. So, we are very conscious in working with the team there that, hey this churn caused the fortune. And if you look at a specialty TL, the churn there, the turnover is about what the company that we looked at is 30%, 40%, okay. But there again, if you have a plan and you hire always the guy at $10 an hour, you are going to have a big problem of turnover. But if you hire guys at $20 an hour, you will have less turnover, because he can make a living, okay. And you have a guy that will be with you for a long time. And so that’s also another issue of salary where salary was really low and now it’s been corrected by everybody in the industry. So, it should, down the road, if we focus on these people working condition, with the customers working with the customers, we should improve the quality of these guys and it’s going to be more efficient for us.

That’s helpful. Maybe just turning to your balance sheet. You provide a good color as to where you want your leverage ratio, where you think your leverage ratio will be at the end of this year. But longer term, what is the leverage target you’d like to have. Is it something below two times? Or are you comfortable in the low twos here and kind of redeploying free cash flow elsewhere once you get to 243? Alain Bédard: Very good question, Kevin. Leverage is still very cheap, but one thing is for sure is that it’s going to become more expensive, okay. We all know that. Unless something happens interest rates will go up. So when interest rate goes up, I mean, you have less, you will do less leverage. So this is why from close to 3 last year, now we are down to 269 and our intention is to be like in the 2 to 2.5 before the end of the year. Now, where are going to be in 2019 is with the free cash flow that we generate, okay, we could be under the 2 which is where most of these US TL guys – a lot of guys got no debt in the US. Some that have debt will say, 2 maybe is the right number, but our free cash flow is so strong. And us we can afford to use the leverage, because equity is way more expensive than leverage, okay.

That’s all. Alain Bédard: The answer to your question, we are going to be at about two and a quarter to 2.5 maybe by the end of the year and the trend is to go down unless we have a major acquisition. But I don’t see that in 2018.

That’s great. And just lastly for me here, if I look at the EBITDA you’ve done through the first half of the year, it’s about $316 million, so kind of doubling that gets you to in and around where you guided to. Maybe just a tad under, but it sounds like in the back half, there are significant tailwinds still whether it’s the pricing, the cost-cutting. I am just wondering why your guidance would it be higher or if you are being conservative, what worries you the most over the next six months? Is it unexpected cost inflation? Is it – it doesn’t seem like a deceleration of pricing. So just wondering what maybe worries you in the back half of the year to not make that guidance, maybe a little bit higher than it is today? Alain Bédard: Well, like you said, Kevin, we want to be very conservative. I mean, I went through a very difficult year, 2017 and I don’t want to have that again. So, I mean, we are fair. We are saying that we believe that this is attainable. Can we beat that? Well, we are going to work hard to beat that. No question about it.

That’s it for me. Thank you very much Alain. Alain Bédard: Okay, Kevin. Take care.

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

Thank you. Good afternoon, Alain. Alain Bédard: Hey, David. How are you doing?

Good. I want to talk a little bit about specialized truckloads. I noticed that has an order average tractor age versus the Canadian and the US fleets. Is there a rising for that in terms of how they are used or expected to change? Alain Bédard: Yes, there is, absolutely, David. There is a reason for that is that, those guys are mostly regional players. So the truck is not – our US TL, our Canadian TL the truck leaves on Sunday night and he is back on Friday afternoon. On the specialty truckload is not so much. So, we touch the truck probably like at least two or three times a week. So that permits us to be more efficient and keep the truck instead of keeping the truck, let’s say five years, we will keep the truck between six or seven years depending on the application of the truck.

Okay. So in those six to seven years, it probably gets many miles and your other trucks doing four or five. Alain Bédard: Absolutely. Yes, because, the really rule is the 500,000 miles or the 800,000 kilos.

Yes. On logistics and last mile, you talked a little bit about that and how changes have been made. You talked about in the terms of the foundation being set that you discussed with some of the other segments. Is the foundation there at the moment, is there some more work to do before you really go after the growth? Alain Bédard: Well, the foundation, Dave, on the Canadian side is really, really solid, solid, solid. On the U.S. side, Scott Leveridge has done a fantastic job with his team, okay. And we are very solid. As a matter of fact, I mean, the PPM acquisition, because Scott was really, really busy in 2017 with all the changes because, if you remember early in 2017, we lost $15 million of the e-tailer business. So Scott was really, really busy in scaling down and coming back with a very efficient operation. So this is one. When we bought PPM, we asked one of our Canadian guys to oversee PPM. Now, as of September, PPM will be transferred back to Scott Leveridge which is again when he showed. That tells you that, we’ve got a lots of feet now in our US operation being very solid, like our P&C in Canada.

And then, you talk about cross border a little bit. Any impact you are seeing or when you talk to customers about tariffs, are they changing any business strategies or are they nervous? Alain Bédard: No, so far, we haven’t seen anything. The only thing that we saw a little bit is a little bit of steel, okay, on the early days. But I would say, that right now, it’s business as usual.

And then last question on the LTL front, are there more tonnage losses to go or do you think that the book of business you have now is the book of business that you want to keep? Alain Bédard: No, I think we are done with that, because what we did David, is very simple is that, a small shipment where I have to pick it up, deliver and do some line of for 50 bucks, because it’s a minimum. I’d say guys, get rid of that or you can’t make money. So, it’s a loss leader and no, thank you, give it to somebody else. So this is all the tonnage that we’ve been losing is all those small shipments that we just said, no, give it to the other guy. So, to answer your question, I mean, we are done with that, I would say at 95%, we are making sure that nothing comes back, because sometimes you say, adios to the customer, but he can’t find anybody. And then he tries to sneak back in your network. So, we are done on that Dave.

Did you raised the minimums to take care of that? Or you don’t want to… Alain Bédard: No, no, because, I would have to raise the minimum to 150 bucks to make my money. So I just say, good bye.

Excellent, well, thank you very much. Alain Bédard: Okay, Dave.

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

Good evening, Alain. Congrats for the good quarter. Alain Bédard: Thank you, Benoit.

Just coming back on the OR for truckload in the previous quarter, you mentioned that you were kind of targeting the low 90s for the US TL somewhere in 2019, 2020. But given the nice surprise you brought in Q2, could you kind of achieve 85 to 90 in the same timeframe? Alain Bédard: Well, Benoit, I think we have to look at Q3. Okay, so, I said, when we came out with 98 in Q1, I said, guys, we are going to beat 98 in Q2 without a doubt, okay, so we came out with that 94.5. If you asked the question, are you going to beat 94.5 in Q3, I think so. We are going to be at 90 probably not, but can we be like a 92, 92.5 in Q3 on our way to a sub-90 in 2019 probably. But we have to see, okay what’s going to happen with our Q3. My guys had tell me, Alain, we are going to beat two and three. I am convinced that we are going to do that. We are going to beat it from 94.5 to 94, 93.5, it’s still, we are still just in July. So it’s still unknown. But for sure, we are on the way on the road to a sub 90 or with US TL operation. If we can deliver in the 86 OR in Canada, I mean, US guys should be at least 86. So we are going to get there, but it will take some time. It’s not going to be in the next two quarters, and 86 I am talking about, but for sure, we are on the right track we are on the right road to get to a sub-90 OR.

Okay, that’s. Alain Bédard: In 2019.

Okay. That’s pretty great color. And if we look at the last two days, there has been a pull back in a truckload shares overall. Some people are questioning whether there was a lot of buying activity before July 4, so they are longer, what are the first two weeks what we saw is kind of a reversal in terms of trends. So, any color with respect to the latest two weeks, whether it’s indicative of a new trend or it’s basically indicative or important at all, Alain? Alain Bédard: No, our business is really, really strong and when we talk to the other trucking company, I mean, this reaction of the market is not the reflection of what we see us on the ground. That’s the only thing I can tell you.

Okay, okay. That’s very good. And also if we look at the P&C, there was some announcement made by one big, let’s say, Amazon that’s opening new facilities in Canada. I am just wondering what are – I am looking at your margin, that expanded a lot. You also mentioned opportunities to further increase your customer base for P&C. So, could you talk a little bit about the initiatives that you put in place and whether the margins we saw in the P&C can sustain and grow maybe from current level? Alain Bédard: Well, you see, on our P&C side, we can afford to service the customer that you just talked about. I mean, so we are servicing the same customer, but with our last mile division. So the e-commerce customer that we service are brick and mortar guys retailer that understand the value that we could offer to them. Okay, so, we’ve built great, great business right now. This is why our revenue is up without saying any names, I mean, we are really involved with the large brick and mortar guys in Canada. We are just opening up some market for them in Florida. We are starting that as we speak. So, absolutely. I mean, it’s we are focusing on everything else, but in Canada, I mean, for those that e-tailer that you talked about, it’s quite difficult to deal without TFI. I mean, we are so big. We are so huge that they will probably try to do without us, because, you know us making money for our shoulders. We are not there just to practice delivery, okay.

Okay. And maybe at longer-term, could you talk a little bit about the platooning, Alain to give us maybe an update on where do you see a platooning evolving in the next two to five years? Alain Bédard: Well, I am not a specialist on that, Benoit. But what I could tell you is what everybody tells me is that, it’s coming. Now, don’t know when, could it be in the next five years, probably, but on that, Benoit, I am not the specialist. One thing though, I could say is that, this is going to be so helpful for the truckload industry in my mind, it’s going to be fantastic. But, again, I don’t know when.

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

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

Good evening, Alain. Alain Bédard: Hey. Hi, David. How are you doing?

I am doing well. How are you? Alain Bédard: Good, good.

Good. So, I’ll it a one question, I mean, a good call. It’s usual good information. You’ve made really good progress on margins here obviously. And it looks like you are getting most of that businesses into the kind of optimal operating levels and in terms of percentage margins. So, I guess the question is, what next? Right, you are going to organic growth or step up the acquisition program? Or if you could just talk a little bit about that? Alain Bédard: Yes, David you are absolutely right. Like I said on the P&Cs and now that we have such a solid base, okay, for sure now, our focus is going to be a little bit more on organic growth. M&A is in our blood. It’s in our gene. So, for sure, I mean, if you look at our specialty TL, we like to grow this business even in US, we would like to do something there. So, it’s going to be a combination now more and more. We are really happy with our people, with what’s been done. Can we do better? Absolutely, every day we are trying to better. But when you are running a 19% EBIT company, it’s going to be a little bit more difficult to get better. Okay, so this is why I said to the guys, listen guys, I mean, okay, we are good. Let’s see how can we grow a little bit more organically because, this is going to be fantastic. On the LTL side, the same thing. We’ve cleaned the house. We got rid of all those small shipments that nobody can make money with a small shipment on the LTL side, minimum. You can’t make money with that. So, let’s – don’t do that, let’s focus on something else. And for sure, M&A in every sector is something that we look at. But like I said, the earlier, nothing big is going to come out of 2018. All the small tuck-ins here and there, yes. Anything big, I don’t think so. Not this year.

Okay, do you think you have the footprint now that you are winding all the businesses or there are any that where something big would be quite helpful at some point? Alain Bédard: Well, on the Canadian side, for sure, I mean, we could be bigger in Western Canada. But we are fairly large. On the US, I mean, we are just scratching the surface. We could do a lot more over there, but there again, I mean, we are not solid there like we are in Canada. So, like I said earlier, we have to build the foundation. Okay, we have a new team. I am very happy with this new team that we have now in the US and the guys are building the foundation. So, after that then, we could start moving ahead.

Okay. Perfect. It sounds like a good plan. Thank you. Alain Bédard: Okay. Very good, David.

Your next question comes from the line of Jason Seidl from Cowen and Company. Your line is open.

Hi. This is Adam on for Jason. Alain Bédard: Okay, how are you then, first?

Hey, good. And the first question is, I guess, just on looking on into 2019, maybe around what percentage of your TL business is already under contract and I mean, what are kind of the rates that you are seeing there with regards to your TL business for 2019? Alain Bédard: Well, good question, but you see, most of our business, Adam, is under contract, okay. And we keep on renewing those contracts at a fair market price. So, but we are not done. We are not done. I mean, we are still reviewing Q3 and Q4, we saw some revision to do that. In terms of 2019, it’s still early. I don’t have really the information of what needs to be done in 2019 with our customer. But what I could tell you though is that we have a program working with our team to reduce our costs and that’s going to be the name and again, okay for us, even more importantly in 2019. When I say reduce our cost at the same time improve the asset utilization, because that reduces your cost at the same time, right.

Okay. Thank you. And maybe just a second one, I know something we talk about it, it kind of seems like, investors might be worried about that we are nearing that topic of trucking cycle and definitely not trying to call it a top or a bottom. But it does seem like a large percentage of your trucking business maybe have barely seen the beginning of an up cycle yet. So could you may be shed a little bit of light on this? Alain Bédard: Well, I don’t know what the guys are saying in the US. I mean, I am looking at the reaction on the stock price, it seems like everybody believes that, but what I am seeing and what we are seeing us is that, absolutely not. I mean, we still have lots to do. I mean, yes, we came out with 185, 186 in terms of EBITDA in Q2. But we still have lots to do. Can we do 10% more? We are working on that. But to say that the party is over and that something is going to be like every cycle that now we are at the peak and everything is going to start coming down, I don’t think so.

Got it. Thank you very much. Alain Bédard: Pleasure.

[Operator Instructions] And your next question comes from the line of [Indiscernible]. Your line is open.

Hello Mr. Bédard. Alain Bédard: Hello.

You talked earlier about the pace of which TFI is renewing its fleet of trucks and I’d like to – I’d like you to comment on the truck manufacturers’ backlog and to see if it’s had any impact on the pace of which you renew your own fleet and if this increased demand in trucks can eventually be a source of revenue with your used trucks becoming more valuable on the markets? Alain Bédard: Well, one thing is for sure is that, the pre-owned trucks for the last probably two years, market was really depressed and what we are starting to see now is that, that market has changed okay. And selling a truck today normally, if you’ve depreciated that truck in a normal fashion, I mean, you’ll get the price and you’ll make a small profit on it. So, we are back to a better valuation of the pre-owned trucks. Now in terms of the manufacturers’ backlog, it doesn’t affect us, because we’ve gave our orders early in the year and they are delivering the equipment according to the plan that was agreed upon between us and the manufacturer. So as an example, CFI gets 18 trucks a week, okay. It was 15. We had an option to buy 100 more and we said, okay, let’s do it. So, now from 15, we are up to 18 a week. So, no issues for us.

Thank you, sir. Alain Bédard: Pleasure.

There are no further questions at this time. I will turn the call back over to Mr. Alain Bédard for some closing remarks. Alain Bédard : Okay, well thank you all to be joining our call today and we’ll talk again as we come out with our Q3. Thank you. Bye.