TFI International Inc. (TFII) Q3 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to TFI International’s Third 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 for entering the queue will be provided at that time [Operator Instructions]. Before turning the call over to management, please be advised that this conference call will contain several statements that are forward-looking in nature and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Lastly, I would like to remind everyone that this conference call is being recorded, Monday, October 22, 2018. I would now like to turn the call over to Alain Bédard, Chairman, President and Chief Executive Officer of TFI International. Please go ahead, sir. Alain Bédard: Well, thank you, operator and thank you everyone for joining this afternoon. Within the past hour, we announced our third quarter results. If you need a copy of the release, please visit the Investor Relations section of our Web site. We generated record quarterly operating results for the second quarter in a row as we continue to have a strong year at TFI. Our main goal remains the creation and unlocking of shareholder value and whenever possible, returning excess capital to our shareholders. To accomplish this, we constantly strive for operating efficiencies, which means innovating to find value-added solutions for our clients, pursuing an asset-light business model, maintaining a strong balance sheet and seeking accretive bolt-on acquisitions in a disciplined matter. Our focus remains on profitable growth let’s just grow for growth sake. These have been principal for some time and they continue to guide our decision making. During the third quarter, our total revenue grew 9% to 1.3 billion, which is up from the prior quarters' 4% growth and the 1% decline back in the first quarter. Our operating income more than doubled to $125 million versus a year ago, and our adjusted net income per share on a diluted basis was 96% to $1.04. Our net cash from continuing operation, a very important metric for us, was $167 million which reflects 29% growth. We believe that these consolidated results are a testament to our overarching focus on driving profitable growth. Now, let's have a look at our performance by segment. As a reminder, we have four reportable segments and this quarter all four generated top-line growth, all four produced robust operating income growth and all four generated stronger margins. Starting with the P&C, Package and Courier, which represents 14% of our segment revenue, our revenue before fuel surcharge grew 3% to $155 million and this growth was entirely organic. Operating income expanded 19% to $28 million and the operating margin was up a very strong 250 basis point to 18.1%. As we continue to see volume growth and rate improvements, we remain focused on finding the optimal business mix and on efficiency initiatives. Turning to our LTL segment, which represents 21% of segment revenue, our revenue before fuel surcharge was up 5% to $228 million. Operating income was up a robust 80% to $25 million on a margin that expand nearly 5% points to 11.2% from 6.5% a year earlier. Our revenue per 100 weight, excluding fuel surcharge, increased 15.6% as we eliminated less profitable freight and we delivered an operating ratio of 88.8 in the segment. Within our Truckload segment which represents 46% of segment revenue, our revenue before fuel surcharge was up 7% to $521 million. Operating income reached $60 million, which is an increase of more than 300 fold from the $17 million a year earlier on an operating margin that expanded 8 percentage point to 16.6% from 2.5%. Our Canadian operating ratio was 85.2% in Conventional Truckload, 85.6% in Specialized Truckload. Our U.S. Truckload operation delivered their fourth consecutive quarter of sequential improvement in the operating ratio at 92.4%, a 210 basis point improvement over Q2. Our final segment to discuss is Logistics and Last Mile, which represents 19% of total revenue. Our revenue before fuel surcharge was 2% at $235 million. Operating income of $17 million was up 27% with the operating margin expanding 140 basis points to 7.2. E-commerce continued to grow as a portion of overall retail sales. And with our extensive logistics and last mile operations were very well positioned to capitalize. Summarizing our segment performance, we're seeing strength across the board despite the significant diversity and breadth we've achieved across geography and service type. We believe that's a testament to TFI's strong positioning in today's transportation and logistics industry. Turning to capital allocation. As I mentioned, returning excess cash capital to our shareholders is one of our guiding principle. During the quarter, we returned a total of $24 million, including $18 million of dividends and $6 million of share buybacks. Looking ahead, we will remain active in opportunistic buyers of our stock, always with an eye toward enhancing shareholders value. Taking a look at our balance sheet at the end of September, our debt to adjusted EBITDA ratio stood at 2.3 times, which is well within our 2 to 2.5 times target range. As many of you have seen, may have seen, on prior October 5 we filed a shelf prospectus with the Canadian Commission for an unspecified mix of debt and equity securities. This filing was done as a part of a general corporate housekeeping initiative and is a benefit of being a large season issuer, such as TFI. The filing allows us the option to issue security over the next 25 months via an expedited registration process on either the TSX or another exchange, but does not require anything from us. Such a filing allows us the flexibility to manage our business in a prudent and efficient manner. Now, let's review our updated guidance. The general freight environment is strong throughout North America and all of our segments are benefiting as I am sure you gathered. Volumes are rising and capacity remains somewhat constrained. As a result of these favorable conditions and our own success driving profitable growth, today we are raising our 2018 EBITDA guidance to a range of $665 million to $675 million from the prior range of $635 million to $645 million. And this also compares favorably with our initial forecast closer to 600 at the beginning of the year. Our adjusted diluted earnings per share guidance, which is an important measure of TFI's overall financial success, rise to a range of 3.35 to 3.43 from the prior range of 3.21 to 3.29. Our net CapEx, excluding real estate, for the year increased from $150 million to approximately $190 million. Approximately $30 million of this increase is due to the fact that since use of it since June of this year, we've been replacing leased tractors in our Truckload division with purchased tractor, and the remaining 10 million difference in part results of change in currency rates. This approach has little to no impact on net earnings, because what was one lease expensed will by enlarge be replaced with interest and depreciation expenses. We are also pleased to inform you that the Board of Directors today of TFI has approved $0.24 quarterly dividend. This is a 14% increase over our previous dividend of $0.21. In closing, thank you all for joining us today's call. We appreciate your continued interest in TFI. And operator, you may now open the call for questions.

[Operator Instructions] Your first question comes from Jason Seidl from Cowen. Your line is open. Jason, please go ahead. If you're on mute, unmute. Your line is open.

I wanted to ask a couple quick questions for you. On the LTL you said that you have your revenue per hundredweight was up a large amount. If we were to look at that on just pricing ex fuel surcharge, what would that have been? Alain Bédard: Well, you see Jason the big story behind that huge improvement on per hundred weight is because we let go a lot of insignificant freight, the low minimums and the small shipments, because this has always been, as you would say loss leader. So, we get rid of all -- most of all those loss leaders. So, this is why you see a big improvement in the 100 weighed like you see there. So, this is why also we are now running an 88 OR in our LTL. It's because of all these pricing, if you want, or getting rid of all those shipment that costs us a fortune and don't bring any revenue, or small revenue.

Let me ask it a different way. If you look at in terms of your same-store pricing renewals, how is that tracking in the Canadian LTL world? Alain Bédard: Pricing renewal or improved pricing in Canada on the LTL side is small, Jason. So, it's not like the U.S. market where the guy should come up with 5% or 6%, or 8% in pricing improvement. In Canada, we don't see that yet. The only areas where we can see some improvement is all the transport and LTL that we do over the road with companies like Cavalier and Tripar and Munden and all these guys that we do. Also, we have better pricing on the intermodal business there it's true, that's helping us. But the over the road, like the TST Overland or the CF, this is still flat to no increase on quality of revenue.

So it's more of a just addition by subtraction with some of that, great… Alain Bédard: Yes, for the over the road thing, Jason, that’s right. Now, the intermodal like I said in the trans-border, we see some 3%, 4%, 5%, 6% improvement in pricing there.

That’s pretty good price increases. If we were to look at the U.S. number, I mean it's nice to see you made continued sequential improvement there. But I am sure you would also say a 92 OR is probably not your target OR… Alain Bédard: No…

Talk to us about where you think you can get that business and what are the levers you’re going to have pull to get it there? Alain Bédard: Well, the 92 OR is the average between CFI and TCA. So right now, we’re showing an average. But let me tell you that the 92 OR, like you just said, we’re not happy with that. Absolutely, there is no future for a company that runs a 92 OR in a very good season, okay, like the 2018 is a good year for Truckload guys. Now, what are we going to do is very simple, is that we’re going to keep on doing what we’re doing, what we have been doing for the last eight, nine months. We are working on our cost and our efficiency and our productivity that is the name of the game. We've been very successful at CFI. Little bit late in the game at TCA. But we have a plan we’re working on it. And for sure in a good year, like in 2018, normally, if you look at our Canadian operation, we’re running something like an 85 OR, that make sense. So that’s normal. 92 is much better than last year, but it's still far from where we should be.

And blended, what do you think the goal is. I mean, you mentioned 85. Is that the goal for the division? Alain Bédard: Well, in a good year, Jason, that’s got to be 85. In a normal -- if you look at it on a 10 year spread, if you’re running a 90 OR, because in a difficult year you could be a 93, 94, 91, 92 guy. But on average, on 10 years, you've got to be around 90. So right now, we’re 92.4. But look at where we come from. I mean, we come from a long, long, long way. So we've made a ton of improvement. And every quarter we keep on improving. A lot has to do with cost, some has to do also with pricing, but also a lot has to do with cost. So Q4, we’re going to keep on working the same formula and hopefully we’ll get closer to 90 versus the 92.

Well, you're headed in the right direction. One more and I’ll turn it over to somebody else. Alain, can you talk a little bit about peak season and what are your expectations and what are you seeing so far? Alain Bédard: Well, if we look at the Canadian side, our P&C is just busting at the siege. I mean, the e-commerce, we're turning really, really well there. And just look at our numbers in Q3, I mean, 18% EBIT in our Canadian P&C businesses is second to none, it's -- we've never seen that. And talking to guys my guys last week when I was in Toronto, I mean, the guys are just going crazy with volume. And you saw little bit of organic growth in our P&C in Q3 year-over-year. On the LTL side, the trans-border business is doing very well. The intermodal business is doing very well. So, we’re going to be crazy busy there as well. The over the road thing there, no. There, I mean, we see some depreciation, some of our customers are losing to the e-commerce players. So the over the road traditional LTLs in Canada, I mean, we're not seeing any growth there. On the Canadian Truckload and the Specialty Truckload, it's all good. On the U.S. side talking to our guys, I mean, we feel good about Q4. We feel pretty good. Our last mile guys in Canada are just going crazy, same thing with our U.S. boys.

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

I guess, one of the things that we noted in the U.S. pricing on the Truckload side was a turn earlier in this year, or perhaps last year that now seem to be topping out a bit and might be seeing pressure on the other side. Are you seeing that at all in your U.S. operation despite the labor shortage and all those things? Are you seeing a little bit of initial softening in pricing in the markets that you serve within the U.S. side? Alain Bédard: Not yet, Walter. I mean, don’t forget we come a long way on cost but we also come a long way on quality of revenue. So, so far, we’re probably still behind the good trucking company, like Knight, like Warner in terms of the quality of revenue. So, so far us, we’re still getting every month after penny, a penny more, okay, total miles. But there again, I mean, we don’t control the market. So, our focus has always been the same guys, let’s address the cost issue, maintenance, fuel economy, et cetera, et cetera. Efficiency, making sure that the customer that we serve fit the network and let’s not be jack of all trade and master of none.

And would you say that in the Canadian environment you’re still seeing opportunity for pricing that is lagging what we saw in the prior periods in the U.S.? Alain Bédard: No, on the Canadian side we're market, I mean, we’re doing as good as the market can bear today. On the Canadian side, when you run, Walter, an 85 OR in Canada, it’s because you are very, very good. So market, we're market on the rage, there’s no catch up there. We’re still working on the cost, because that’s a never ending proposition of the TFI, but to say that --. Now, in terms of volume that could be a little bit different. I mean, we’ve settled this NAFTA thing there, okay, so which was a little bit of a cloud. Now, this is settled. So, what we believe on the Canadian side special TTL even more than the regular van, maybe not in Q4 but probably sometimes in ’19, we believe that we’re going to see a little bit of improvements on the volumes.

You also mentioned that the Canada Post potential strike had a little bit of a lift on your operations in Canada. That will probably amplify in the fourth quarter. What do you think is the opportunity for you to hold on to some of that share if it shifts your way even if we get a strike resolution on the Canada Post side? Alain Bédard: Well, you see that’s always a big problem for us, Walter, is because this is for all. We’re really busy with our existing customer and this thing, this rotating strike comes in, a lot of customer call us, customer that we don’t serve, some customer that we use to serve and we say, hey, we can't keep on servicing you with 4% bottom-line. So they walked in they went with somebody else. Now, they’re calling us back. So what we’re trying to do is we’re trying to protect the good customers that we have that sometimes split their business between us and somebody else. So that’s a really -- our goal number one, because to tell you that we’re running at 60% capacity and we could take a lot more freight, it’s not true. I mean, we’re very close to capacity in the fall…

Okay, and then… Alain Bédard: But it's not going to be highly significant for us in Q4, this thing with Canada Post. Now, one thing is for sure, some of the customer that we’re helping, existing customer of ours, for sure, they’re thinking. Well, if I use TFI, better service, more money though. But you’ve got a great carrier that you deal with, maybe they’ll stick.

That sounds good. And then last question here, I know we’re looking into 2019, you're little reluctant to provide anything into 2019. I guess we’re three months closer now. Are you able to give us guidance in terms of relative growth rates? Are you expecting a meaningful growth in EBITDA next year to locking in some of the gains on a full year annualized basis in 2019 that you achieved in 2018. Is there any sense of outlook you can provide into 2019 for EBITDA? Alain Bédard: Not yet, Walter. The only thing I can say. Well, first of all, we’re not done with our budget. So, it’s always the same story, fall is a busy time for us. What I could tell you though, is that we revise ’18, and I would feel very confident that ’19 is going to be better than ’18. I could say that so far. Now, more than that, it's still difficult for me. But I feel very good about ’19 when I look at some improvement on the costs that we could still do in ’19 on U.S. TL operation. If I look at the volumes that we’re growing on the P&C side with the e-commerce, the opportunity that we have. We just signed a new deal with a major customer. And we just said to this customer, he said sorry sir, we cannot service you in the fall, we're too busy but we'll definitely take on your business Jan 1, major customer. And don't forget with this new thing the minimals that have been in the new deal with Canada U.S., you're going to see a lot more e-commerce trans-border between U.S. and Canada. And that new customer is going to highly benefit from that. So we feel good about our LTL as well, I mean, our trans-border LTL is growing, intermodal too. So this is why the only thing I could say as of now is we are convinced that we're going to beat '18. By how much, still too early.

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

I just wanted to ask you a few questions, first of all, on the LTL side. We talked a little earlier in the call you had revenue per hundred weight going up quite a bit. I guess on the flip side, your revenue per vehicle is going down and that's obviously because you're getting bigger shipments. So that makes sense as I see it. Just wondering how much excess capacity, I guess, do you have in the segment and/or should we just expect you to maybe have some truck for sale here? Alain Bédard: We're always adjusting ourselves, Turan. So I just said on the international LTL, we don't have excess capacity, as a matter of fact, we're growing there. The only areas where we have excess capacity and we shrank our footprint and we also sold some equipment is our traditional over the road LTL, like the Overland. So there we shrank -- we shrank the number of shipments, we shrank the number of trucks, et cetera, et cetera. And we don't see that coming back. So really our area of focus in our LTL is really the trans-border and the intermodal, there we are really, really happy with what's going on there. We have a new team under Bob McGonigal's leadership on the intermodal. I mean brand new team, Tony at Vitran retired about nine months a year ago. Darrell did the same thing and the guy at NFF he retired probably like eight, nine months ago. So we feel really, really good there. So we're not in the practice of -- we're not in the business to practice that delivery in 2%. So if you go back two years ago, we were running our LTL at 5%, 6% EBIT, and we were not really happy. How can we invest in a business buying trucks for 5%? No way. And the guys, they're back to work, we're really happy with the results and it's just going to keep improving there.

And I guess just in terms of the U.S. truckload, obviously, the operating ratio there also getting better. I know you mentioned that you're still not as good as you like it be. Is it fair to assume that you should get to below 90 OR in the U.S. Truckload operation in 2019? Alain Bédard: Well, if market stays the same, because a lot of people are speculating now that maybe we're at the end of the cycle, maybe, maybe not. I mean, nobody really knows. Well, let's say market stays the same in terms of quality of revenue. I am a firm believer that with the super team that we have in the U.S. I mean, a year ago, we didn't have really a team. So the team has been built over last year. And if you just look at the results, I'm really proud of these guys. So market stays the same in '19. I am convinced that we're going to be at least at 90 and maybe a little bit better. But let's say we're going to be at least in 90.

And just last question from me on leverage, that's obviously come down quite a bit as well. I guess, that opens up the opportunity for acquisitions. Are you looking at any deals right now into 2018 or early 2019? Alain Bédard: We're looking at a lot of transaction, lots of deal right now. We just purchased a great carrier in Windsor Gorski. We pull probably by two or three, four more carriers before the end of the year in Quebec and in Ontario. We're really, really busy with that. This is why we've added the guy on our M&A team, [Mr. Saint Jones] who will start in the next few weeks working with David there; lots of possibility there, big -- well, big transaction, probably in '19, I don't see it, we never know, but probably just in '19.

As we end the year here in 2018, there's no major reason to believe that leverage goes up substantially? Alain Bédard: No, with only transactions that we're looking at, if we close all of them, our leverage will stay around to 2.3.

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

So just on the 2018 guidance and just wondering if you can talk a bit about the free cash flow expectations. I mean, you've increased your CapEx a little bit here but EBITDA is coming in better than expected. So maybe you can just update us on that. Alain Bédard: Well, I think that if you include the new CapEx -- and you guys, I'm sure you understand what's going on right now is that we -- in Canada, we used to lease the trucks to a certain degree on our U.S. TL the same. We used to lease the trucks on the truckload. So as of June, we made the decision stop leasing. When we started looking at this IFRS 16, we said this doesn't make any sense. So we're going to stop leasing and we're going to start buying. So this is why from that time we start buying the trucks, both on the Canadian and on the U.S. side, so that's why our guidance of 150, we're going to miss that. And we know why. And the other portion is that we buy trucks in USD. So for sure the dollar now is $1.30 or $1.31. When we made the forecast, we were talking about $1, something $1.20 or $1.22. So that's the FX thing there. Now, if you take these new CapEx and if you look also at our new guidance for EBITDA, free cash flow will stay about the same.

I think if I remember correctly, it was in that 3.55 to 3.70 range? Alain Bédard: Yes.

And just on the U.S. Truckload, obviously, pricing is helping you guys. I know there is other things going on there to improve the margins. But can you just talk a bit about the contract renewal profile? I mean, just wonder if there's more of that that flow through things that maybe you've priced higher in Q3 that we've yet to see in the numbers? Alain Bédard: Well, definitely that’s a very good question, Cameron. We're probably done with all this stupidity that we had to live with the past. But that will take also -- that will trickle down in next year in Q1 and Q2, because you have a new pricing in Q3 so that takes -- it changes the picture completely for next year. But in terms of the major business that didn't make any sense for us, I mean, we just finalized one just lately in TC dedicated that we were running freight for $1 -- a buck a mile or close a buck of mile, doesn't make any sense. So we just changed that at the end of October -- at the end of September. So but those mistakes, we're done with. I mean, big thing there we're done. I mean, now it's just the fine-tuning, making sure that the freight fits the network, making sure that the price is really the market. So I don't see major improvement in the quality of revenue. But what I see is major improvement on the cost side of things.

And maybe just final one for me just one, I guess, the last mile business and in particular with e-commerce growth. I mean, you mentioned a new customer signed that sounded like it was fairly large. I don't know if there's any way you can quantify that for us. But I guess maybe more importantly is what e-commerce growth you're able to parse that out, what growth are you seeing right now? And given the customer wins you've had, I mean, how do you see that trending over the next year or so? Alain Bédard: Cameron, we could grow e-commerce by 30% or 20% if we would want to do that. That's not an issue. The problem is to grow that with 10 points or 15 points, or 8 to 10 points. So this is why you look at Q3 on a P&C side and say, yes, he's growing but 3%. But our main focus is really to grow the bottom line it's always been like that. So what we're seeing now Cameron is we believe that in '19 and in Q3, we're going to play maybe 3% to 5%. So we're not going to be like the 15%, 20% or 30% that maybe some of the guys could do on the e-commerce, because we're very difficult in terms of pricing loss. I mean, we have to make our 10 points. If not, then we'll let the other guy do it.

Your next question comes from the line of Brad Delco from Stephens. Your line is open.

This is actually Scott Schoenhaus on for Brad, how are you? Alain Bédard: Hi, I am good. How are you, Scott?

Good, thanks Alain. I wanted to follow-up on the M&A question earlier. I know you mentioned you have some maybe Canadian Truckload deals that you’re looking at. Since last quarter, we've seen the U.S. Truckload guys' multiples contract significantly. I am wondering if that has changed your perception of doing more -- growing your U.S. TL revenue stream by M&A. Alain Bédard: Right now, focus is really to work with our U.S. team to be closer to 90 OR. Until we get to that point, for us, it doesn’t make any sense in my mind even if the price is cheap to start investing into a new company. We need a solid team in the U.S. and that’s what we’re working on with the people there. Once we have that then we could go to next phase. You need a deep bench to grow. The only exception I would say on that is special TTL. We are really in love with that. We are doing fantastic in Canada. And we have so many customers that are asking as guys when are you coming to the U.S. I mean guys customers that are around the states like Michigan, around Canada. So, there is a possibility there that maybe as a small acquisition, we can start looking into the special TTL in the U.S. Right now, on the small deals, we’re so busy in Ontario and in Quebec that that’s been our focus in Q3 and in Q4. Now, come 2019, a sizable deal has to be from the U.S., in my mind.

And when you say specialty, do you mean like flat bed or is there a particular… Alain Bédard: Flat bed, tankers, no refers though but everything that is not event, dumpers…

And I guess my follow-up question is when I am thinking about your final mile business you continue to grow that. And I am wondering how you’re trying to scale that in the U.S. I know that’s a big question that we get repeatedly is how to scale the final mile business within the U.S.? Alain Bédard: Yes, that’s a tough one, that’s a tough one. So right now, what we've been doing for the last, I would say three or four years, is really shedding low margin business and replacing that with better business. That’s what we've been doing for the last few years. Now, it's tough to buy in that last mile, because there is not that may players of size. There’s lot of small players. So right now, our focus has always been to, hey guys let’s get rid of that 2% guy, 3% guy, 4% guy, which we've done a good job on that. Now, the next step is, okay, what can we find -- is there anything that we could do, and that’s what we’re working on. Now, it's still early in the game, maybe in '19, we’ll find something that make sense. It's still early.

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

So focus back on the Truckload segment. You I guess give a comment on where you guys are in the driver recruiting and retention side and what the unseeded truck count looks like in the U.S. sector or… Alain Bédard: Doing well, doing very well, doing better. Well, it's maybe too strong but doing better, absolutely. I mean, we have some success in retaining our drivers at CFI. That’s the asset, it's your driver. So, we’re not where we would like to be, but we’re getting better.

The tractor age is pretty young, looks like the U.S. fleet is in very good shape there. But we have seen the trailer age creep up a little bit. Is there an issue with your replacements in terms of getting the orders from manufacture sometime, is that a strategy where you… Alain Bédard: No, it's not that, David. It’s a decision that we made. We’ve decided to age a little our seat at CFI, because we get lots of trailers in Mexico at one time. So, talking with Greg and the team there, so they said what, I think, we could live a little bit with a little bit older fleet there on the trailer side. So that is really the reason why we’re living with a little bit older. So on the trucks [Technical Difficulty] on the trailer side I am really happy with our maintenance cost on the trailer. So I don’t see any reason why we should run a younger fleet than what we have today. The fact also that CFI wants more trailer available in Mexico.

And then moving on to the Logistics and Last Mile segment, personnel expenses were down year-over-year, even as you grew revenues a little bit. I guess, what went on there? Was that just some cut cutting from some unnecessary positions or what? Alain Bédard: A little of that. I mean, we had one of our divisions that have a program with their employee that didn’t make any sense. So, we took the bull by the horn. We have Scott Lane that took over Scott is one, the person responsible for those divisions and he has done a fantastic job of adjusting our cost to the reality.

And then last question around the U.S. Mexico, Canada trade agreement. You made a comment that it may generate more cross-border activity. Can you elaborate a little bit on that? I guess with the resolution now, what is good, what goods are flowing and what you see in terms of the growth? Alain Bédard: Well, there's an e-commerce -- David, what we see is because now they moved the minimus from 20 bucks to $40. And also the fact that there is no duty in Canada on every shipment that is as high as 100 U.S. We believe that we're going to see a lot more activity between U.S. and Canada, goods flowing from the U.S. to the Canadian consumer. We haven’t seen that yet, because the new thing is not in place but this is what we believe is going to happen. On the Truckload side, I mean we’re so busy right now and we have tariffs on sea, we have tariff on aluminum, they're still on. But what we are hearing is that that's also another thing -- there is a lot of discussion about that. So we lost a little bit of volume on the steel side but our guys are so busy in other sectors that we don't see anything, we don't see a drop in our business. And now if the tariff now go away on the steel side, I mean we're just going to be even more busy. You will see us adding to our specialty fleet in Ontario within the next two to three months. The Gorski acquisition was fantastic. Gorski has a small operation in the U.S, very small but it's our first the foothold on the U.S. territory in terms of specialty truckload. And we could add to that probably within the next six months to 12 months.

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

My first question is just on Canadian ELD, so looks it's going to become real. I was wondering if you have any thoughts on how you see that affecting the business in 2019. Alain Bédard: It's going to be in my mind a big benefit for safety in Canada and it's also going to eliminate some cheating, sadly to say. I mean, we have some small carriers that are cheating the system and it's very dangerous for safety. So I think that what we've seen in the U.S., we'll probably see something similar in Canada, which will be a small contraction of the offer. I don't know maybe 1, 2, 3 points. So that's going to be favorable to us, because us we don't cheat.

So would you expect to see the pricing power that does seem to contribute to you in the U.S. and Canada this year maybe in the second half? Alain Bédard: Yes, you know what we saw David is this so far. Listen to that, I mean a lot of Canadian but not a lot, but some Canadian drivers, when the ELDs came into force into the U.S. they said, I'm not going there, okay. So that created little bit of shortage okay in terms of Canadian running into the U.S. So we had to increase salary and at the same time shipping rates went up, and we were winners on that. Now, those guys went to Canada and stayed in Canada. So when we have the ELDs in Canada, I don't know where these guys going to go. Maybe in Mexico I don’t know. But one thing is for sure is that, this is going to help the Canadian market and it's going to be a blessing for safety and for us at the same time.

And then the other question I had was on the P&C margin there is high, I think they’re high, what they’re the highest that I can see anywhere in my model and it looks pretty fair. I guess the question I have is, how -- obviously there must be a decent amount of cyclical element to this. In your mind, how do you move to a sustainable… Alain Bédard: Sustainable.

Yes, how sustainable are they? Have you moved to a new level that’s like 5 points higher than it used to be or? Alain Bédard: Well, David, you have to go back to 2011. 2011 our EBIT was around 14% and we bought Dynamics and we bought DHL Canada, and then we went to the ship at 5% or 6%. And if you go back to what I was saying two three years ago, I said guys we’re going to be double digit. Now we took on with this new classification, we took the last mile out of there and then people started to see, oh wow, these guys are 12%, 13%, 14% EBIT, that's good. Now, this is all about all the investment that we made on equipment, sorting equipment consolidation of the sorting in Toronto, in Montreal. We’re doing Vancouver now. We’re going to do Calgary next year. So this is how we bring cost down, more efficiency. Yes, it cost us a lot of severance. We probably spent over last four five years $20 million to $25 million in severance in our P&C in order to achieve those numbers. Now what do we see for the future is 18% or 15% sustainable absolutely. Unless something happens in the market starts to going into pricing war which we don't see happening at all, we’re going to stick with that 15 to 20.

Your next question comes from the line of Gianluca Tucci from Echelon Wealth Partners. Your line is open.

Just quickly here on the e-commerce side, how much business today can you quantify that you’re doing in e-commerce or e-commerce related and how does that size up to one year ago? Alain Bédard: So, if you look at our e-commerce across the board for TFI, we’re in the 375 to 400, okay. So it’s basically like flat over last year because in 2017 we lost like $40 million or $50 million of business in the U.S. with the largest e-commerce player in the U.S. In 2018, the same retailer we have decided to walk away from those guys to a certain part of the business. So, we've replaced all that. But it’s like we play on the standstill, but for coming 2019 I think that all this standstill is going to go and probably we should be growing that between 2% and 5% in 2019. But like I said earlier, our focus for us is growing the bottom line. We could do more in that, absolutely, but it’s by choice that we say guys know we are going to work for the guys that can afford to for us to make money.

So, you’re focused on the quality of that revenue as opposed to just expand your timeline? Alain Bédard: Quality, quality.

And secondly, can you just give us a quick update on labor shortage? I mean, has it gone better or worse compared to Q2? And so far in Q4, what are you seeing out there? Alain Bédard: It’s tight. On the U.S. side, the market is tight. Everybody can see it. The unemployment is around 4%. So the market is tight. So, this is why, why would you invest capital for a truck and time to recruit a driver for 2%. You’re going to be stupid to do that, right? So, this is why our focus us is to keep the drivers we have as much as we can and the trucks that we have and also service customer, good customers that fit our network and fit our profit profile.

That’s great color. Thanks Alain. And turning the tape here in Mexico, nice growth, you consolidate growth down there, it was about 12%. What’s driving that growth? Now that I mean, I think it’s about two quarters in a row now of growth over 10%. Where’s it coming from and do you have any plans to be acquisitive in the region? Alain Bédard: Not in Mexico, no, we don’t plan on buying any company in Mexico. But what I could tell you though is that CFA’s share, Mexico share revenue still below where it should be. So, we want to low, I’m just speaking. I would say as low as 26% to 28%, and we should be closer to 30% to 35%. So, we still have a lot of catch-up to do over there in Mexico. The other thing also we just struck a deal with LTL company in the U.S., where they’re going to use us to service Mexico on their behalf. So, yes, we have a good team of people. We have, I don’t know, I think it’s 12 offices in Mexico and our employees are doing a fantastic job.

And then just lastly here on my end on some housekeeping items. How should we think about CapEx in 2019, if you benchmark that to 2018 given the updated guidance on that side? Alain Bédard: Still early, but I think that the big question is how many trucks in 2019 do we have to replace? If this would be not an issue, I would tell you that CapEx for me would be basically the same as before in ’19 as it was in ’18. But now that we have all this truck replacement buying the truck instead of leasing the trucks, the guys are working on it, and also our budget is not done completed. So, it’s still early.

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

Just to come back on the ELD, you provide some great color about how good impact the Canadian landscape. But I was wondering, if you could talk more -- provide more granularity about how it impacts the M&A? Is it kind of the key driver where you're confident to make a more acquisition by year-end in Canada? And does it drive the valuation lower? Alain Bédard: Well, I don’t think the ELDs have any effect on that, Benoit. I think that it’s those carriers are just getting to a certain age and then they look at where could I have my team, my people. What is the best home for those guys, okay? And that’s what we see in Quebec and in Ontario that this is really the driver. The guys are just saying you know what I’m a certain age, I want to retire, but I want to find a nice home for my people, where they can grow. And they look at the TFI and they say, shit, those are the best. So then they pick up the phone, they call our guys. Our guys, they’ll take the first call and they say, yes, I mean this makes sense, this fits, we like this company, it’s a great company like this no-man didn't acquisition that we just did in the spring. This is a fantastic company. We like the management. They do a fantastic job. So, the Gorski thing that we just bought, the Brasseur in Quebec, I mean this is all the same thing. I mean Mr. Brasseur wanted to retire, so okay, fine. We did the deal. Same story with that, that is really the driver and where’s the best home for, if you want to sell your in Canada, if I.

Okay. And my second question is more around the long-term margins. Obviously, you provide some comment about the sustainability of your EBIT margin for package and courier. Also more color about the U.S. truckload. But could you maybe give us more color about LTL Canadian truckload logistic and last mile given the great results that you published in Q3 kind of the long-term margin target? Alain Bédard: On the LTL, I feel really good because our mix of transborder and intermodal is really changing, okay, the way we run our LTL. So, I would say that we run transborder and intermodal. Transborder is already above 10 points EBIT it's got to be. And the intermodal is not at 10 today but it will be probably by the end of 2019 because that's where we have to be. And intermodal in my mind, 10 point is now where we should be, we should be between 12 and 15. So, still lots of room to play. On the over the road, our focus is being profit not volume. I think that over the road in a very difficult market that live right now in Canada. I'm confident that we could be an 8 point guy. We're very close to that right now. So 8 to 9 points I'm going to feel good, because don't forget the sum of all in Q3 is about what 11-11.2 on our EBIT in Q3. On the last mile side, that's all we have not Canada. Canada, we're doing well and we're going to do even better, okay. Canada is a double digit EBIT company the U.S. is not. The U.S. is not and the reason being is that we compete with a lot of guys of size that don't like to make money. It just they don't like to make money. One of our competition of size, they don't make money they lose money. So, this is why my guys started this team, it's not easy because they compete with guys that don't care they make money, right. So, this is why slowly but surely if we could add to our organically to our business number one and also maybe do a little bit of M&A to eliminate some of these guys that don't like to make money or don't know how to make money. Maybe that's the problem. And on the Canadian TL, 85, 84, 86 are I think that in Canada. Because of our size because of we're the leader in Canada specialty and van. And I believe that on the 10 year period when I was talking U.S. 10 year I think it's attainable it's normal. On the Canadian side, I think an 87 are on 10 years. 87-88 is attainable. Maybe 2-3 points better than the U.S. long term.

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

So I know you spoke extensively kind of your expectations for growth for 2019. And just looking at the numbers ahead, I just wanted to clarify as my takeaways were correct adding up the points. So you spoke up of continued efficiencies specifically in the U.S. TL side and organic growth to continue kind of in the low-single digit by your focus. If I view this correctly is to expect margins to remain at the current levels with some further expansion in pockets and all of that to be augmented by marginal top-line growth. So net-net kind of very low to mid-single digit growth should be achievable for next year. Will that be correct? Alain Bédard: Well, Mona, you got to look at sector by sector, right, or segment by segment. So what I said is that my P&C unconvinced that we're going to do 2% to 5% organic growth in '19 and the bottom line will follow probably even better, okay. If you look at our LTL, there I'm saying that our tranborder and our intermodal will grow 2% to 5% there as well. And the bottom line would probably even improve even better than that because we're still away from our 10% minimum EBIT in our intermodal. Now the over the road LTL, that will shrink probably 1% or 2% or 3% because we always shed the small guy, small shipping not the small, small shipping, where we can make money and we got more competition as well, okay. So that being said, we will probably reduce a little bit in terms of revenue on the overall LTL, but our profits will go up because we still have lots of good stuff that needs to be done there. Last mile on the Canadian side doing great, e-commence will help us few points. Bottom line is fantastic. On U.S. side, some growth a little bit more difficult to improve the bottom line because of competition that we have that don't want or don't know how to make money. And that puts pressure on pricing. Tough for us to really grow and make our 8 to 10 point there. So, this is why I'm saying little bit cautiously that if we could eliminate one of these guys in now, that would help us. On the U.S. TL, it's really a game of keep on doing the more the same working on the cost, reducing the cost. And I don't look really at a lot of major improvement on the quality of revenue there. But our focus on the U.S. side is really, how can we take that 92.4 inch in Q3 2019 closer to a [Technical Difficulty] future.

Okay, we're just breaking up a little bit of time, but I will check the time separate got most of it down. Can you hear me properly? Alain Bédard: Yes.

Okay. Perfect. And just, so that was very helpful. And just turning to Greg, the current CFO, retirement still plan for early next year, is the CFO search ongoing? Is that the focus for you or your eyes on the business and not a huge priority at this point? Alain Bédard: No, no, CFO is a priority. I mean, Greg has done a fantastic job for the Company. And I said it I think on the last call. We think that will be announcing the new CFO before the end of the year, 2018. So, there is there going to be some transition with Greg.

Okay, perfect. And lastly for me, you touched on driver of recruiting and the labor shortage. But just delving a little bit more into the wage and labor expenses. Looking at a number of U.S. appears, they've been citing a significant uptick in labor, double digit increases that have been pressurizing the bottom line. I know you mentioned I think on the last call even that you've already put through wage increases. I'm just looking at yet note '16 in the statements. I'm not seeing that significant double-digit increase from you guys albeit it could be clouded by other thing. So have all your labor costs kind of increases been put through? Or do you expect some further increases going forward in the near-term or if it's status quo to continue? Alain Bédard: No on the U.S. side Mona for sure I mean we have more increases to our employees that are schedule for next year, absolutely, right. Now, the reason maybe you don't see that is also at the same time we're improving the productivity of employees, on the U.S. side and to a certain degree the Canadian side. But whatever increases we were so happy to give our employees, we've also worked with our customers to pay a improve rate, fare rate for our services.

Your next question comes from line of Brad Delco from Stephens. Your line is open.

Alain, sorry, I wasn't on earlier, but just one follow-up me real quick. In your remarks you talked about that shelf, and I think you said, this will allow you some flexibility issue in Canada or any other exchange. Is it possible we could see a U.S. listing as a result of this? Alain Bédard: Well, you know what another exchange could be U.S. I don't think is going to be Mexico.

Well, I wouldn't expect so. But could you provide anymore color on your thoughts behind that? Alain Bédard: While we said at I would say for I don’t know maybe the last two years that we would like to list on the New York Stock Exchange, when the time is right, okay, absolutely. And one of the reason behind that, we don’t need to issue equity because like I said our debt EBITDA is 2.3. We don’t have a big fish. We don’t have a big whale in terms of acquisition. So we don’t need that equity. So, this is why when time is right, absolutely, we would like to do something like that. But the timing has to be right, okay. And then we are not force to do something like that, we will do if it make sense. One thing we know based on our experience of what we have done over the last year, as we did a lot of non-deal road show in the U.S. and that really confirmed to us that that’s one point when the timing is right, absolutely. Because there is a big valuation [Technical Difficulty] CFI is still value in Canada mostly on an EBITDA, which to me I have said it many times doesn’t make any sense because our talent intensity is only 4%. It doesn’t -- the cash flow that we generate from our operation, it doesn’t make any sense to be valued on an EBITDA basis. So, we’ll see, but we have 25 months, right. So that’s two years. When the timing is right, absolutely, we’ll look at it.

Alright, we appreciate the color. Just let you know we're ready for you. Alain Bédard: Thank you.

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

I just had one question. I think some of the drag in your U.S. steel business. You have talked about in the past where some of your trucks coming off warranty and you have talked about some of the tariffs you're going to spend. Do you basically lap all those headwinds in 2019, and if so, just wondering how much that alone would improve your OR relative to what you are doing today? Alain Bédard: Yes, that’s a very good question, Kevin. Even with an average age of 2.1, okay, we still have lots of trucks out of warranty because the fleet was poorly managed, not so much at CFI. CFI is probably by the end of the year, the trucks out of warranties going to be back. TCA, we had a major issue there in terms of managing the fleet properly, and normally you have trucks out of warranty because of agent because of miles. If you have trucks out of warranty because of miles, I mean you didn’t manage your fleet properly. And at the same time you have trucks out of warranty because of age. So this is not normal. So for sure now our guys are really being very focused on that. So this is why probably by the end of '19, we’ll be done with all the out of warranty trucks. The other thing is that you could buy an extended warranty, so in Canada we buy up to 6 years warranty on the trucks. In the U.S., the guys were thinking more about four years. So again that doesn’t help. So -- but all the new stuff that we have been doing from last 12 to 18 months is being brought with these protection and the same thing in terms of safety, the collision avoidance and lane change, the four facing camera. These are all different things that will help us to reduce our cost of claims. Because would you believe there are cost of claim in the U.S. is four times our cost in Canada. So, turnover, driver turnover doesn’t help, but for sure, safety equipment should be there to help our drivers, reduce the number of incident, or accident.

That’s helpful, actually on that last point, if you were to -- if you had a comparison, drivers that have newer equipment with all the safety features versus ones that might be driving older equipment. Do you have sense of the potential cost savings as you replace that fleet with equipment with all the bells and whistles? Alain Bédard: It's important Kevin. I mean if you exclude the maintenance, because maintenance we let's say when we start at CFI, maintenance cost per mile was between $0.10 and $0.14, which is unheard though. I mean this is a disaster. Now CFI's maintenance cost is closer to $0.05 to $0.06 which is not perfect, but it's really close to where it should be. In terms of the fuel economy between 2014 poorly built and 2018 well built. I mean fuel economy could be a few cents a mile which important. And the safety, I mean it's still an issue, but in my mind $0.08 a mile on safety and clean its way too high. I mean could we do it for safe so for, it will take time for sure, but that's the goal.

There are no further questions at this time. Mr. Alain Bédard, I turn the call back over to you. Alain Bédard: Alright, well, thank you operator and thank you everyone for participating in today's call. We're excited about the opportunities ahead. And we'll continue our focus on creating and unlocking shareholder value and whenever possible, returning excess capital to our shareholders. Well, thank you again, and I look forward to updating you when we report our fourth quarter results. Have a good evening. Thank you all. Bye.

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