TFI International Inc. (TFII) Q3 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, thank you for standing by. Welcome to TFI International's Third Quarter 2019 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. 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 are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. In addition, the company earlier this year adopted the new accounting standard under IFRS 16 and as a result certain numbers are not directly comparable with past results. Lastly, I would like to remind everyone that this conference call is being recorded on Friday, October 25, 2019. I will now turn the call over to Alain Bedard, Chairman, President and Chief Executive Officer of TFI International. Please go ahead, sir.

Well, thank you, operator and thank you everyone, for joining our call this morning. Yesterday after the close of trading, we released our third quarter results. If you need a copy of the release, please visit our Website. Our continued strong performance at TFI International through the first nine months of the year reflects our unwavering focus on the fundamentals of the business regardless of the economic condition that have continued to fluctuate. By always concentrating on the fundamentals of the business, we are able to drive strong and consistent free cash flow and earnings per share which in turn has provided us the flexibility to optimize our approach to the business and ultimately create shareholder value. How did we put this philosophy to work during the third quarter? We pursued an asset like business model. Our team was constantly on the lookout for potential operating efficiencies. We maintained a strong balance sheet and we completed two accretive business acquisitions adhering to our highly disciplined approach to M&A. If this sounds familiar, it is because at TFI International our operating philosophy does not change and our quest to generating not just growth, but profitable growth. So this approach, it remains our attention to create and unlock shareholder value and whenever possible we return excess capital to our shareholders. Now let's have a look at our third quarter results. The revenue was up 1% compared to the prior year third quarter and sets an all-time third quarter record for TFI at $1.3 billion. However, as I mentioned we are focused on positivity, not revenue growth for the sake of revenue growth. Our operating income was up 3% to $132 million and our adjusted EPS on a diluted basis were $1.4 consistent with the prior year. In terms of our cash flow performance, which is important to us, net cash from operating activities of $187 million was up 12% and our free cash flow of $130 million was up 50% compared to $86 million in the prior year third quarter. Driving our strong operating and financial results is the continued strength of our four business segments. So starting with our P&C, Package and Courier, this segment represents 14% of the total segment revenue and revenue before fuel surcharge was flat at $155 million. Operating income grew 1% to $28 million and the operating margin was 18.2%, also up slightly versus 18.1% in the corresponding period last year. We view this as a solid performance given the slowing freight environment over the past year. Regardless of macro factors we're committed to deploying cutting-edge technology, optimizing the business mix and asset utilization and leveraging our strong network to capitalize on e-commerce growth opportunities. LTL represents 18% of our total segment revenue and generated revenue before fuel surcharge of $205 million relative to $228 million the prior year. Operating income was $26 million up slightly versus $25 million a year earlier and our operating margin was very strong at 12.6% which is up 140 basis points from the prior year at 11.2%. This strong performance reflects strong cost management and a 2.5% increase in our revenue per hundred weight excluding fuel surcharge as we continue to focus on the quality of our freight. Our Truckload segment represents 48% of total revenue and generated revenue before fuel surcharge of $557 million, an increase of 7% over the prior year period. Our Truckload operating income was $76 million, up 19% relative to $64 million a year earlier and our operating margin was 13.6% compared favorably to 12.2% last year. Our adjusted operating ratio was 83.1 for our Canadian Truckload, 87.1 for our special TTL and 90.9 [ph] for our U.S. TL [ph] operation reflecting improvements for both Canadian and US Truckload. We're very pleased with the year-over-year performance of our Truckload segment given how strong our third quarter was in 2018 and given also the weaker truckload freight market. Logistics and Last Mile represent 20% of total revenue and generated revenue before fuel surcharge of $257 million, up 9% relative to $235 million in the prior year third quarter. Operating income was $13.8 million relative to $16.8 million a year earlier. Within this segment we're very actively executing on a margin improvement plan, following the same strategy that we have many times before, as a result we are confident in our team's ability to deliver. Turning to capital allocation, our approach remained balanced and disciplined. During the quarter, we made two accretive business acquisitions and we returned $84 million to our shareholders, including 20 million of dividend and $64 million of share buybacks. You will recall that twice this year we expanded the size of our buyback authorization that commenced in 2018 from 6 million shares originally and ending with a total of 8.3 million shares and we repurchased 7.3 million shares under that program by September during the one year period. More recently, on September 30, TFI International was granted approval by the Toronto Stock Exchange to repurchase for cancellation an additional 7 million common shares, representing 9% of our public flow over the 12 months period from October 02, 2019 to October 01, 2020. Going forward, our capital allocation plan is unchanged. We plan to buyback additional shares, payout quarterly dividend, and extend our track record of identifying attractive acquisitions opportunity executing on them in a highly disciplined manner. I'm also pleased to announce that yesterday we raised our quarterly dividend by 8% to $0.26 per share. And now operator, if you would mind, opening the lines, I'll be pleased to address questions from the audience.

Thank you. [Operator Instructions] Your first question is from Konark Gupta with Scotiabank. Please go ahead.

Thanks operator and good morning Alain.

Hey, good morning Konark.

Good morning. So, on the free cash flow it was a pretty decent quarter from a free cash flow perspective. It like you are tracking ahead of $400 million on a trailing 12-month basis here. So do you see any upside to your $400 million guidance that you provided before and do you expect any more asset sales in Q4?

Yes, well that's a very good question. So yes, first of all in terms of asset sales on the real estate side, as you know, we've always been able to identify things that we could do. So for sure we anticipate that probably one or two properties, that we could sell probably in Q4, one small one in the South Shore Montréal, it's a possibility around Montréal. We also have some other areas that we could see some potential. So probably like maybe, so we did about $20 million so far I think this year in real estate sales. So maybe we will be able to add between 5 and 10 and we see something kind of similar for 2020, probably like 15 to 20 in 2020, but also we're also buying a terminal in Toronto, the old Vitran, well it's not really an old terminal, but the Vitran terminal in Toronto, okay that was a kind of sales and leaseback. So we're buying that back for $38 million in Q4. We've also bought a building in Montréal for about $6.5 million which is going to be housing our head office because right now we rent one floor and we've decided to buy a building next to the airport in Montréal. So these will be major CapEx that we'll do in Q4 on the real estate side, but the other side of the point, we saw same real estate during the first nine months and we will be selling more of those excess real estate in Q4 and in 2020. Total probably between Q4 and the end of 2020 is in the neighborhood of $15 million to $25 million.

Okay so like that, the free cash flow like that might progress more sort of towards $450 million you think for the full year then?

Yes, but don’t forget that we're buying this terminal that is going to cost me $38 million and we bought this head office that cost me $6.5 million. So if you put that, this is why our guidance is still because of those real estate deals, are still in the same kind of zip code, the same neighborhood. But assuming that, you are right, I mean we would do better than that, yes.

Perfect, now thank you for that. And then on the Logistics and Last Mile segments couple of questions here. Can you help us with the volume and pricing trends between the Logistics and Last Mile, so they are the two different entities, right? So can you help us understand the trends on those?

Yes, so if you look at that, I mean what we're doing is we're combining those two because they are really, really asset light. I mean we don’t own any asset, but in terms of the logistics what we do, we have operation both in U.S. and Canada, so in that sector we do about 30% of our global revenue 25% to 30%, the rest is all of our Last Mile mostly U.S. based and some are also in Canada as you know. Now our gross margin and our EOE [ph] is down okay, year-over-year not because of Canada. I mean, we conform fantastically in Canada. I mean, revenue in our OE [ph] is just outstanding what we do in Canada and this is why we've made some changes. We asked Kal our EVP to help us in the U.S. help the team there. We have a very good team in the U.S., but we need more support and that team was reporting directly to me until just a few months ago, and maybe I was not doing a good job and also this is why I asked Kal to help me, okay, help those guys over there in Dallas. So what we see there is that we have opportunity to improve our margin, number one. And number two is, we also have opportunity to reduce our cost. The problem we have with our Last Mile in the U.S. is, we're competing with a lot of guys that don't like to make money. So we bought [indiscernible] this year like Bemex [ph], like logistics division of Dicom U.S. and there's more maybe that will happen in the future. And this is a market where a lot of these guys you know, if they make one point they are really happy. So this is why when we look at our U.S. operations we're running between 5, 6, 7 points which is not even for 50% of what we do in Canada. So we're far, far, far. But some of it is the markets, but some of it is us too. So this is why we're going to be working aggressively in the U.S. with the team to reduce our costs, improve our margin, because in some areas maybe our pricing was based on the facts that don't reflect reality. So we will be working very aggressively in trying to improve that. So I think that you will see some great improvement over the course of the next 12 months.

Okay, that's good color. So, on the logistics side you had these two new tuck-ins that you just described, one in Canada and the other in the U.S., any sense on the revenue and margin profile for these things? You said that's accretive, how accretive would they be?

Yes, for the one in Canada is really a great one, because it is based out of Montréal. I mean, those guys have done a fantastic job. It's an hybrid. Right now these guys were on logistics and a few trucks, a few assets and we will see down the road, because normally we don’t like those hybrid models, but we'll see. I mean those guys are doing well. The guys in the US, this is the logistics, the one I called or talked about is Dicom. Those guys were doing okay, not good, but okay but the purchase price was really favorable to us, because I think nobody wanted to buy it anyway. So it's going to be accretive to us, no problem. The revenue of the U.S. one is about, was about $50 million, but after you know everything that doesn't make any sense for us, we're probably down to $30 million to $35 million, but making money, not 4, 5 points, you know that's one of the trade that probably will be closer to 8 to 10 by the end of four months that we run the show there.

Okay, that's perfect. Thanks so much. I'll get back in queue.

Thank you.

Your next question is from Jason Seidl with Cowen and Company. Please go ahead.

Yes hi. This is Adam on for Jason. Maybe just a quick one and kind of following up there on your previous comments, just asking kind of how the M&A market looks like right now and how your M&A pipeline looks? Do you guys see multiples coming down, in what specific areas are focused on in M&A?

Yes, that's a good question. I mean, you know, if we think about the U.S. markets we're really focused on the Last Mile. So if we could do more of these transactions that we've done so far to eliminate some of the players in the market that like I said earlier cannot make money or don't like to make money. So that's one focus of ours, Last Mile U.S. If we could do something in Canada, that would be great as well. Then if you look at the Canadian markets, our focus has always been in the LTL. What can we do to -- because as you know, our revenue keeps on coming down, organically it is negative growth for the market. So if we could find a good fit with another LTL company that would be great. Specialty Truckload, where we've been active in the U.S. market, we're the number one player in Canada. We want to grow our base in the U.S. with our Specialty Truckload. So we're active in that. So we did two interesting acquisitions so far in the US. So we're on the lookout for that as well, same thing for Canada on the Specialty TTL [ph]. In terms of valuation, I think guys, valuation is okay, is acceptable. Some areas, where you look at the file and the guy is asking for something that we can't afford, so we just pass. But we're decision, I mean us, we -- M&A is not an easy business, so you've got to be very careful about what you do. It's easy to buy a company, but then you have to integrate, you have to manage, you have to improve, you have to generate the free cash flow and all that. So it takes time, so this is why with TFI's size today we could do, we could do multiple in a year, like we're doing this year and the previous year. We could do a major one maybe in 2020, but discipline is the key there and the fit also within TFI has got to be, or maybe a new platform like our U.S. special TTL that we've done this year. It's a new platform for us for growth in the us. So we feel good about that. I think 2020 is going to be again a good year for us. In terms of valuation, it's still acceptable. Are they less than they were a year ago? Well, in terms of, if you say that five times EBITDA and your EBITDA is down 20%, so maybe the valuation ratio is still at five but maybe the EBITDA is down 5% or 10% or 15% or 20%. So price goes down accordingly, right?

Got it, now that all makes sense and I appreciate the color there. Maybe just a quite followup and switching gears a little bit, obviously the U.S. trucking market has been soft now from much if not all of 2019 and also it is a difficulty to kind of, be more publicized, and I wanted to ask a little bit about the Canadian trucking market and how that compares to the U.S., to the current state of the U.S. market and what kind of trends do you see in the Canadian trucking market?

Well, it is basically the same. I mean the big difference Canada and the U.S. is on one sector our specialty Truckload on the flatbed side has been affected badly with the steel tariffs that took effect I think late last year into early into next year, the steel tariff between U.S. and Canada. I know that these disappeared a few months ago, but it takes a long time for the steel industry to get back on track. So that has been a negative effect for us, but that should go away in 2020, also the strike at GM or the strike right now at Volvo Mack affects aluminum, affects shipments, affects also the steel shipments to those guys. So our flatbed have been very unlucky right now. Now in terms of the van side, now if look at our Q3 numbers for Canadian van I mean we're at 80 [indiscernible]. I mean, it's tough to do better than that. Now we have pressure on freight for sure, freight is soft there as well. Why? Because a lot of corporations are just waiting on the sidelines for investments, in order to understand what are the new rules of international trading because of all this fight between let's say the U.S. and China, re-trade deal between Canada and the U.S. that has been agreed upon, but not signed yet. So there's a lot of standby investments that affects us in Canada as well as it affects us in the U.S. but still, I mean our guys have done a fantastic job of adjusting the costs to the reality. We also have another factor in Canada that is very negative for us is the principle of what they call Driver Inc. So this is really unfair competition to us and other companies that operate legally in Canada. Driver Inc. is a model that you hire a driver, but you don't pay the driver as an employee. You say to the driver, oh no, no, we're going to hire your company. And then there is no fringe benefit. So it's like a very grey area that slowly will probably be addressed by the local authorities in Canada. This is really unfair competition to us. Those guys are mostly based in Ontario. It's a big problem. It has been there for a long time, but it's been growing like weeds and that's another issue. Our guys have really done a fantastic job of fighting these kinds of unfair competitions. So hopefully, the Canadian government and the Ontario and Québec guys will wake up and smell the coffee and start to address this situation, because this is really, really major unfair competition for us.

Got it, I really appreciate the color there. Thank you, guys.

Pleasure to do that, take care.

Your next question is from Cameron Doerksen with National Bank Financial. Please go ahead.

Thank you, very much, good morning.

Good morning, Cameron.

So, I just wanted to maybe ask a few questions for you just around the capacity situation and maybe you are seeing a competitive capacity, because there has been some, I guess maybe some early indicators that maybe some of the smaller competitors in the U.S. and maybe even in Canada are in some financial difficulty and maybe exiting the market, so and I guess we've also seen truck orders down massively year-over-year. So I'm wondering if you could sort of talk about what you see as the capacity situation as we look ahead into 2020 whether you see a supply and demand balance kind of getting a little better for you?

Yes, I think that in the U.S. particularly, Cameron, there's some equilibrium that's coming. I mean, there's bankruptcy every week in the U.S., every week and you have a large trucking company like Road Runner that says, you know what we're going to shed 400, 500 trucks from our truck load operation. So, for sure, I mean you know you look at the situation today and you look at the situation in six months, the fact also like you said that the Class 8 order for trucks are down big time for sure. I mean, there's going to be less offered down the road versus what it is today. I mean it's the nature of the trucking industry. 2018 was great. The truckers were able to adjust rates to a more reasonable level and then guy says, oh let's add trucks. And this is, I've been 20 some years in the business and I look at that and I keep saying how come we don't understand this basic principle of offer and demand. I mean, when the demand is high, what do you do? I mean you move your price reasonably, okay, but you don't add capacity because then in six months or a year then you're going to be stuck with the other problem where there's too much capacity then you've got to bring the rates down. It's the stupidity of our market. But I think things are starting to change in the U.S. Things are also improving in Canada, except like I said earlier for the Driver Inc., okay, situation that we have in Canada, which is really unfair, except for that, I mean, in Canada, things are getting better. And I would say that the U.S. is going to get back to a more of an equilibrium probably within the next three to six months, faster than Canada. The problem in Canada is we're adding capacity with those Driver Inc. guys.

Right, okay, that's great. And just you’re specifically looking at your U.S. Truckload operation, just maybe an update on some of the operational improvements that you're still implementing there, what sort of left to come? I know the TCA business is the one that's been kind of underperforming, but if you can just talk a bit about that?

Yes. Yes, absolutely. So, it’s a very good question, Cameron. So, what we've done with trying to help TCA is we've asked Greg or the guy that runs CFI, doing a great job there with his team. I said Greg, could you help us with TCA and he said, no problem, we’ll do that. So we've started to implement some principles, some KPIs there, and we're starting to see some improvement, because if you look at our OR in Q3 year-over-year, it's still an improvement. And most of the improvement comes from year-over-year from TCA, okay? So, we've invested a lot of capital in TCA because right now in 2019, my free cash flow coming out of TCA will be zero. Why is that? Because we're investing a lot of dollars in the capital of the fleet, buying new trucks. But the beauty of that is that the guy delivered on that. So, our maintenance cost now at TCA is comparable to CFI and comparable – basically comparable to what we do in Canada. So, I'm really happy with that. So, we're starting to see some improvement there. More improvement has to come from utilization of the assets, okay. We have to do a better job on that. And globally it's not easy to do when you have a soft rate environment. Okay? But if market is soft then you have to adjust your level of assets. The other thing also that's important that we do better is own our operators. So, we have to try to grow this fleet of owner-operators that we have within TCA and CFI. If you look at what we do in Canada, our percentage company drivers are all is, you know like 65%, 70% versus 30% asset-light operation and logistics brokerage. We're still far from that in the U.S. So, this is another area of improvement. So that would improve our return on invested capital because we have to invest less capital. Okay? So, we still have some good stuff to do. One other thing also that I think I said earlier on the call I think was in Q2 is that we're implementing the same software for financial purposes as the one that CFI is using. So that's going to be easier for the finance team to KPI the two companies so, because now we don't have the same finance software. So by January of 2020, we'll be running on the same financial software, and then part of our plan for 2020 is also to move the operation into a different TMS which is the McLeod System, which a lot of the U.S. truckload guys are running on versus what we’re using now, which is kind of green screen old technology. So that will be again a very important progress for us to try to improve our operation, improve our lane density, but you know what, I'm really happy with it because when I look at our Q3 numbers for our U.S. here and we compare that to the best guy which you could say Knight is probably the best or one of the best and we compare ourselves, I mean, we’re getting closer to those great truck-load guys.

No, that’s…

The feet environment that's difficult.

No, that's great. Maybe just final very quick, just on the EPS guidance for the full-year. I sort of assume here that you're still quite comfortable with the $3.90 to $4.10 you'd kind of talked about?

Yes, yes.

Okay. I just want to confirm that. Great and thanks very much. That’s all from me.

Thank you, Cameron.

Your next question is with Benoit Poirier from Desjardins. Please go ahead.

Good morning, Alain.

Good morning, Benoit.

Yes. First question, if we look at the Logistics and Last Mile, obviously, you mentioned that there are some margin improvements with the integration of the latest acquisition. So, first, could you talk a little bit about the contribution of the last two tuck-ins? I've heard you on the call saying that the US$50 million that will come down to $35 million, but were you including for other as part of those? It wasn’t included…

No, no, no, no. The $50 million is the last one that we bought in the U.S. and this is just the U.S. It will come down to US$35 million. Some of that is line haul business. Okay? These guys were doing line haul for a customer. I mean, we're not a line haul kind of company. So this had to go away. There was also some logistics kind of business in there, so what we've done is small, 4 million, 5 million. So we've moved that to our CFI Logistics business, okay, because that's what these guys do. So this is why when I talked to my Last Mile guys from 50 million, now we're down to probably like around 35 million. But in there, okay, we have a great piece of business which is about 20 million to 25 million that is health care related. Okay? So, if you remember when we bought BeavEx, there was also a health care thing there that's called GML, Guardian Medical Logistics. Okay? So, I mean we have all the cards to do a much better job than what we're doing today, but it will take some time because and this is why we asked our Canadian team, leadership team to help our U.S. team, so that we could start getting better results faster. Right?

Okay. Perfect. And what about the size of Crawler [ph], the other tuck-in that you made during the quarter, Alain?

Crawler is small. Yes, Crawler is small, I mean it's a 20-some-million-dollar company based out of Montréal, but it's a great asset, great team, good fit with our other business like Cavalier, like Tripar, all these guys, it's a great acquisition, and we're going to do well. Those guys are great team, lean and mean, perfect, good fit.

Okay and when we look at the margin profile for Logistics and Last Mile close to 5%, obviously down versus last year because of the integration of those acquisitions, but longer term, where do you see the margin potential for Logistics and Last Mile once those acquisitions are fully integrated, Alain?

Well, you know what, guys? I think that I haven’t seen the plan for 2020 yet, but when I talked to Kal and to the rest of the team, for sure, in 2020, we see a 200-basis-point improvement over this year. No doubt about that. So, let’s say we end the year with something around 5% or 6%, I think that next year, we’re going to be closer to 7% to 8%.

Okay, okay that’s pretty great.

And that mostly comes, excuse me, but that mostly come from improvement in the U.S. I mean, because in Canada already I mean we do very, very well in Canada. I mean our team is lean and mean. The guys are really focused. In the U.S., I mean we've made some changes. Let's refocus because those guys were through -- two acquisition, now we bring the Canadian team as the support to help those guys turnaround the situation because those companies like BeavEx, the reason they went bankrupt is not because they had a star management team. So it put a lot of pressure on the U.S. team. So, this is why I say, hey guys you know what, Canada is running perfectly good, so let's have these guys support our U.S. team guys and you’ll see.

Okay, okay that’s clear.

And you'll see, you'll see. I'm telling you you'll see major improvement in 2020 within our Last Mile division, Logistics and Last Mile, mostly coming from our Last Mile in the U.S.

Okay that's great color, Alain. And when I look at the truckload business in Canada, you've been able to improve the OR by 4% so from 87% to 83%m while when you look at the U.S. TL it's been almost flat quarter-over-quarter. Close to 90%, 91%. So, I was just wondering what – if you could provide more color about why Canada was able to improve so much and if you still see the opportunity for U.S. TL to reach kind of the 80%, 85% over time?

Wee 80%, that’s going to be quite a challenge. What I said, Benoit, is always the same. I mean you have to run a truckload operation with 90 OR over a period of 10 years on average, okay? So, 2019 is a difficult year versus, let's say, 2018 was a great year for truckload guys. So, to me in 2018, we should have run between an 82 to an 85 OR because that was a great year. We didn't do that because we came from 105 OR in 2017 as we had a lot of work to do. Now, if you look at 2019, with this kind of freight environment, when you look at the star of the U.S. truckload, okay, and you look at a star and those guys are running an 80-something, 88, 87, 86, and you’re running a 91 or 90.9, you say, well, we still have some work to do, absolutely, okay? But we're on the right track. Now, in Canada, the big difference is, we have a solid team that's been there for a long, long, long time, okay? Now, that being said, okay, we have pressure now that like we've never seen before with those Driver Inc. like I was saying earlier. Okay? So, I mean, the guys are working hard, but if we don't have a solution, this unfairness practice could put some pressure on the possibility of us running an 85 or an 88 OR when these guys are running maybe a 95 OR, but with 15%, 20% less cost than us on labor. Okay?

I see. And assuming, let's say, that U.S. TL finished close to 90%, 91% for the full year, and also in light of the market condition that should be more favorable in 2020, as you mentioned, what kind of the margin improvement or OR we could see, let's say, toward the end of 2020 for the U.S. TL?

It’s still hard to say, because I haven't seen the plan from our guys in the U.S. The guys are working on their 2020 plan, which we're meeting those guys November 11. So, I'll be in a better position to answer that kind of question. But my feeling is that, we still have room to improve our cost, improve our asset utilization, improve our revenue per mile. Maybe that depends a lot about the quality of the market. So, I wouldn't say anything about that, the quality of the revenue, but our cost, we still have some room to improve. So, let's say the market condition remains basically above the same rate environment, a little bit more favorable to truckers, we work on the cost. I think that we should end up in 2020, although this is still early judgment, but I think that we could do something like closer to an 89 to a 90. If market helps us a bit, we work on the costs, we improve our asset utilization, I think it can be done. I mean, we have a great team now running our Truckload operation in the U.S. A great team.

Okay.

So, I mean, we're going to get there.

Okay. And in terms of contractual rates, in terms of renewal, what do you see these days, Alain, what would you expect going into 2020?

Well, what we're seeing right now is that one of the reasons we have so much freight softness over the first 9 to 10 months, even now, October, it’s still not a normal October what we've seen so far. But the reason being is that, there were lots of inventory at the level of our shippers. If you look at the inventory level in the U.S., December of 2018, and that keeps on falling, until let's say October of this year. So, that bodes well for us in 2020 because freight environment is got to be soft if those guys have too much inventory, which is a problem that we went through all of 2019. Now, 2020, it’s still early in the game. It will – we'll see better now in the next two months.

Okay, okay perfect. That's it from me, Alain. Thanks for the time.

Thank you, Benoit.

Your next question is from Fadi Chamoun with BMO Capital Markets. Please go ahead.

Thank you. Good morning, Alain.

Good morning, Fadi.

My first question is, I wanted to get your thoughts on now that we have seen maybe two or three quarters of CN Rail kind of becoming a little bit more involved than those Last Mile operation with the recent acquisitions they've been, have you seen kind of the market in the competitive environment and kind of the kind of change little bit? Any additional thoughts on this now that you've had maybe two or three quarters to see it play out?

Well, I think Fadi, you would see [indiscernible] is great. I mean they took TransX and they took also the Intermodal division of H&R and it’s just normal for them. I mean it makes a lot of sense those moves. Now, do they want to be truckers, well that’s the question. I think that everything that they do over the road probably will not fit CN in the future, but that’s their decision. But what I’ve seen so far is that those guys are moving into the Truckload segment of the Intermodal, which is something that we don’t do except within our Quik X truck okay, which is small. It’s about $40 million, $50 million of business that we do, truckload on the rail referred from east to west, with customers like in the dairy industry out of Quebec and some food industry also out of Ontario into the Western Canadian market. So, I mean, I see that's very positive because CN is all about making money. And when I see a company that grows, that their focus is about making money, I like that. What I don't like is when I see all those guys that don't like to make money and they think that 1% or 2% is great, I don't like to compete with those kinds of guys.

Okay. That's helpful. My second question on the truckload side, it sounds like you have good management team in the U.S. But you also always characterize this market with being kind of very competitive and maybe even irrational a little bit. And you're still on the smaller size in terms of the U.S. So, is this business much bigger in three to five years or is the strategy maybe is to exit, make it smaller in three to five years? How should we think about where do you see capital deployment going in the next three to five years? Is it going to truckload or retreating from that business?

Yes. That's a very good question, Fadi. So our approach to that is very simple. What we said is we have a great team that can run 3,000 to 4,000 trucks in the U.S. So we’ll never be a 15,000 or 20,000 truckload guys in the U.S., no way. So the size that we have today is good. We could do well with that. Now, our focus now is to grow, like we have in Canada. In Canada, we have a balance between van land and special TTLs. We favor the specialty in Canada. And right now, in the U.S., it's the complete opposite. So, right now, let's say we have about 3,500 trucks on the van division, while we don't even have a thousand trucks in our specialty TL to date in the U.S. So, really, the focus for us in the U.S. on the Truckload side is specialty truckload. So, we made two very interesting acquisitions, so far, with Schilli and Aulick. We're really very happy about what's going on over there. So, the focus, to answer your question, Fadi, is not to grow our van division in the U.S., at least for now, is to grow our specialty truckload. It's the same in Canada. So, absolutely, we're looking at all kinds of opportunities to grow our specialty truckload operation both Ontario, Quebec, not so much out West because our philosophy as you know is we like to be the big fish in the small pond, never the small fish in the big pond.

Okay. Thank you.

Your next question is from Walter Spracklin with RBC Capital Markets. Please go ahead.

Right. Good morning, Alain.

Good morning, Walter.

So, I’d like to focus a little bit on your guidance side, and so it sounds like not a lot has changed, but you have – I mean the world has changed around us. You've done a couple of acquisitions, so I just wanted to just check, make sure I know you mentioned $400 million for free cash flow is still the target. But I think it would have been higher if you weren't doing those real estate purchases. So, coming back now, EPS you’re at, I think $3.90 to $4, any reason why that would change at all in 2019 here?

No, not really. I mean we want to be very conservative, Walter. As we said, I mean the same question was asked in Q2, and we said, no, no, guys – I mean, yes, Q2 was great, but we're sticking to our guns with the $3.90 to $4. I mean if we beat it, I mean fine. But, so far, what we’re seeing like I said earlier, I mean, we're seeing an October that we haven't seen before. This is not a normal October. Now, don't forget, we had an election in Canada and election always affect the consumer and the things that happen. We have all kinds of situation in the U.S. with this China thing there that hopefully we could get some resolve in there. It seems like it's going to go well with their phase one kind of deal. So, that will alleviate also some clouds. There's lots of cloud because of that. And not with the consumer, with the corporate world, they're not investing. So, it's affecting us. So this is why to me, I said to our guys, listen if we can deliver between $3.90 and $4 guys, with this kind of freight environment in 2019, it's okay. I'm happy. 2020, we'll see. But no, we're not increasing our guides, Walter.

So, 2020, I think though most are taking a cautious view. Certainly, that's the tone that came out of the rail report and I think that's where they were kind of pointing everyone. Consensus out there right now for you is in the $4.20, $4.25, maybe up to $4.30 range implying about 5% growth, is that reasonable you think, and do you think in a environment where we have a sluggish first half but a back half rebound which is what the rails were kind of intonating, can you do 5% in a kind of -- not a recession, but a sluggish first half and improving back half?

M&A is a thing that helps us a bit, Walter, because when you look at it organically, I mean, we have no growth. It all depends how good our M&A will be late 2019 and into 2020. So, if we don't do anything, Walter, let's say we don't do any M&A, this is not reasonable. I mean, $4.25, it's out of the question. But, as you know, the proof is in the pudding, saying that we're not going to do anything, never happened.

Right.

Right? So…

With that in mind, just say you have a dollar of free cash, now as you look into the 2020 kind of framework, where do you want to spend that dollar, do you want to put it all back in your company, do you want to focus on a few tuck-ins here? I mean your balance sheet looks good. Or are you increasingly focused on valuations becoming appealing enough that you're going to get much more active, do you think, as we go into 2020 and through 2020 outside of that larger acquisition that you could get a little bit more active on the acquisition front?

Yes. So let's say there's no big whale for us in 2020, Walter. We're going to do about $200 million of M&A, for sure, in 2020. I’m convinced. Now, this is not in our forecast for 2020 because in our plan, every year, we never forecast any M&A to say that we're going to be at $4 a share or $4.20. M&A is always out of that equation. But based on what I can see, based on our pipeline, based on the market condition, I think that $200 million investment in 2020 is reasonable on M&A for us.

And barring any large acquisition, the other $200 million goes into buyback is that right?

Right, yes.

Yes.

Yes.

And finally, on CapEx, then, you were you guiding us I think $200 million to $225 million net, any change in that, and any indication for 2020 as to what your CapEx spend will be like?

It's about the same, Walter.

Okay.

It’s about the same. What we're trying to do is it should do more with less, okay? So, this is why we are able to sell some real estate. We buy back real estate when it makes sense like the Toronto terminal from Vitran. We're trying to work with our U.S. guys to try to do more with owner-ops. If possible, try to do more revenue with our CFI Logistics operation, our CFI Logistica in Mexico. So, that's the focus, but basically I would say so far early numbers that I'm seeing is that CapEx is basically going to be the same. Now, maybe just a tick less because TCA, we did a major push at TCA in 2019. So, those guys are back. If you look at our MD&A, you'll see that the average age of our trucks in the U.S. Truckload now is really where it should be. So, there's not going to be a major push in 2020. It's going to be just replacing, in a normal fashion.

Okay.

Maybe a little bit less.

Okay. No. That's great. Thank you. Final question is on pricing. I've been doing some channel checks with some of your larger and smaller peers in Canada. It's been an interesting dynamic where the smaller peer was saying that pricing is just falling off a cliff. When I compare that to some of your larger private peers, they're saying that no, the smaller players really jacked prices high in 2018 and now to the point of being – of taking advantage of the shipper and now they're – now, it’s swinging back on them. Larger carriers did not do that, and therefore, you didn't see as much of that swing. Would you characterize that for your company that, yes, there might be some pressure on pricing, but we're not falling. It's not – the bottoms are falling out like it might be for some of the smaller peers.

No, absolutely. I mean if you look at our results, Walter, I mean pricing – the problem that we have if you talk – are you talking truckloads or LTL or P&C or in general?

This was truckload…

Truckload, yes it was…

It was truckload for sure and a little bit of some of the smaller guys, they were a little bit all over the map but, yes, yes.

Well, the big problem we have in truckload in Canada is very simple. It’s the Driver Inc. situation in Ontario. I mean the freight market has been soft so – and those guys keep on bringing new Canadians into this truckload market and hiring those guys who are driving model. So, this is to me the big pressure and for sure the shippers they like to use those guys because it's cheaper for them. So that's the kind of pressure that we see on rates right now and us our answer is that listen guys I mean this is completely unfair competition. So if Mr. Shipper you want to use these guys, well go for it, but it may be not going to last. So, no we don't see – we see pressure on rates, we see more pressure on volume, Walter. The same in the U.S. We see not so much pressure on rates, but we see a little bit of pressure on volume, the freight environment. And like I said earlier, October has not been the normal October that we normally see. But when we read about the general economy in the U.S. or in Canada, we're confident that this situation probably will resolve in 2020. But like you said, probably first six months is going to be not so good. Maybe the back half of 2020 will probably be much better.

Okay. I appreciate the color as always, Alain. Thank you.

Well, pleasure Walter.

Your next question is with David Ross from Stifel. Please go ahead.

Alain, good morning.

Good morning, Dave.

Just a quick followup there on the comments about the tone in October and into 2020, is that much different than you would have thought a few months ago?

Well, to say the truth, David, I'm a little surprised about October. I thought that October we would start to see back to normal freight environment, but we're not seeing that yet. So, I mean, maybe November will change the trend, or maybe it's going to have to go into 2020. We don't know yet, but what we're seeing is still a soft environment. And if you look at the guys that came out this year, so far, in Q3 with the U.S. TL, I mean some of the guys are down 8%, 5%, 10% volume wise, I'm talking about. So, us, we're down also, but not so much. So, we'll see, but I'm confident that when I look at the level of inventory coming down big time, versus what it was in January of 2019, versus what it is today, consumer confidence is there. The only problem we face both in Canada and U.S. is the corporate world not investing, okay, because of all this unknown about these trade wars and different political situation right now.

And then, another thing that the truckload guys have been talking about besides the weak volumes and the pressure on pricing from customers, is the rise in insurance costs. How are you thinking about dealing with insurance at CFI and TCA given all the jury rulings and other issues?

Yes, absolutely, absolutely. You’re absolutely right, and this is a fact for both Canada and the U.S. Okay? So, in Canada, we see a lot of pressure. The market for insurance is tightening up so bad. I mean, we saw a guy that just got a 75% increase in insurance premium. So the way we service Canada, us, is different than the way we service the U.S. So, in the U.S., I mean, we don't use our captive or whatever. So we use really the insurance market. Our focus in the U.S. has been safety. So what we did in order to prevent those huge insurance premium increases is that we said to our guys, listen, we have to spend more on safety and making sure that those accidents, okay, if they occur, we have the reality of what happened. So we've invested in forward-facing camera because when we bought CFI, there was no camera on the trucks. So, by the end of this year, according to what Greg is telling me is that 100% of our fleet will be equipped with those facing -- forward-facing camera. So that helps because if you're involving in an accident now, we have a clear picture of what happened. It's not just can you say or this is what the guys are saying. So safety is big. We've also invested within our new trucks with all the safety like collision avoidance, lane change, and all that. So that's been the focus for us in 2019. There, again, I mean we are going to be renewing our policy in the U.S. Our retention is quite high in the U.S. But the idea – our focus, Dave, is, okay, premium will be what the market is and what do we do to do better is to have less of these accidents. So the quality of your drivers, so instead of just trying to hire drivers with little or no experience, we're trying to focus on drivers with lots of experience because we have better results. So, as you look at CFI, Greg was telling me that we probably have like 600 million or 701 million mile within CFI. So driver with experience help us. Also the turnover, so we're trying to focus on driver turnover. Turnover is another factor that is negative in terms of insurance claim because you got new guys, you got guys that don't know the customer, don't know the area well, and they make a mistake, and then, oops, we’re involved in an accident. So, I agree with you, Dave. The pressure on the raise on the premium from the insurance company is great in the U.S. and the same in Canada. And now so our focus is guys, listen, I mean let's reduce our claim. Let's be better. Now, so far, if I look at my claim this year 2019 versus 2018 per mile, okay, we're doing just a little bit better. We're not where we should be, but we have a great team in safety like Lisa Gonnerman, the lady that runs the safety department. She’s really working hard in trying to educate safety and all that. And I feel good that we're going to be in a position to really reduce that. In Canada, I mean, our teams are very experienced there and we're doing a great job. Now, we were hit with some claims from one of our operation from four or five years ago in 2019, but what we've seen, so far, I mean we are really under control in Canada. So, we feel good about that. Now, our competition, the small guys and the medium-sized guys, both in Canada and the U.S., for sure, they're getting hit with all kinds of insurance rate going up.

And then on LTL, the quality of focus there has been terrific as we’ve seen in the margin expansion, but when does the growth focus resume? When do you feel comfortable enough there to add more volume back as before?

The growth, the problem with growth – organic growth, Dave, in my mind it’s very difficult to do right now in Canada because the market is shrinking and a lot of these other truckers don’t understand that when the market is shrinking you have to shrink your offer. You have to shrink your fleet, et cetera, et cetera. So, it’s a difficult situation. So, you should never anticipate seeing TFI’s organic growth in LTL. What you could think of is, okay is he going to buy another LTL company anytime soon? Maybe okay, if we could find the right company, the right fit, but I’m telling you every LTL company that I look at right now, they’re not highly profitable. There’s some in Canada that are probably highly profitable, comparable maybe to us but these guys are not for sale. I mean these guys are running a good operation. So, they’re trying to grow their business slowly. But us, I mean, our focus is really on the bottom line. So, I don’t think that if you exclude M&A you’re not going to see topline growth in our LTL in Canada, no. But I think M&A is the solution like we’ve done in the past. I mean if you look at what we’ve done. We bought Cavalier. We bought Normandin over the last 18 months and it has been fantastic. But in terms of topline we’re back to square one. I mean we're flat. Bottom line we're flat, topline we're down.

Excellent. Well, thank you.

Thank you, Dave.

Your next question is from Gianluca Tucci with Echelon Wealth Partners. Please go ahead.

Hi, Alain. Good morning.

Good morning.

Can you talk quickly about the impact e-commerce had on your overall business in Q3 in Canada and the U.S.? And secondly, how your strategy differs in both of those markets pertaining to e-commerce? Thank you, Alain.

Thank you. So, the problem we have with our e-commerce is that one player, okay, which is the largest player in North America. I mean, we basically don't service this customer or this company because we made the decision that these guys are not part of the solution. So our focus has been, let's try to see what we can do with some of the brick-and-mortar guys that understand what e-commerce is all about. And this has been the success of our e-commerce solution to our customers. So we have some great brick-and-mortar guys that finally we’re able to understand how about, the e-commerce market works and we're trying to grow with that. But if you look at my annual revenue from e-commerce, I'm basically flat. The reason being is that some of my competition, the focus is volume. It's not about making money, it's about just growing market share. And hopefully, one day, we'll make money. It's like this philosophy that comes from this large e-commerce guy that says, well, we're there to service customer and are we making money on doing that, probably no. They came up with their numbers just a day or two ago. And in terms of delivery, their cost is just going through the roof because we're lean and mean. We could do a good service, but we can't work with a customer that says that your margin is my opportunity, okay? So, there's no future for us in trying to work with this guy. So this is why for us we're trying to work around the largest e-commerce guy in trying to grow profitably. We could grow our e-commerce at least by $100 million a year, easily if we sacrifice the bottom line. Well, I said to my guys, we can't do that because, us, I mean if we don't have any bottom line, why would we have investors. The guy would say, well, those guys are running a great company, but they don't make any money. So, I mean, we're not in the world of maybe some players that they don't make any money and they have a huge market cap, but in the truckers’ world, if you look at UPS, one of the best company in the world, those guys are all about making money like us.

That's good color. Thanks, Alain. And then just one more question here quickly. Your overall business in Mexico seemed to have shrunk quite considerably, albeit it's a small number, but can you just talk about how that market is shaping up as we enter 2020 and your growth strategy down there over the near term? Thank you.

Yes. So, our strategy there is in Mexico, we have a logistics company there. Our revenue are down a little bit with our logistics company, but our investments are huge. So, we see a lot of potential there. But, so far, the results are not there 100%, but we keep on investing in our CFI Logistics and our CFI Logistica in terms of people, in terms of trying to grow that, because our focus is to try to run as much possible an asset-light operation. In terms of our truckload operation, we still have about 2,000 trailers in Mexico every day with freight coming in and out of Mexico. Now for sure, our focus is always to run a very profitable operation. So, if there's no money there for us, I mean, we're going to shrink, we're going to adjust ourselves. So, we're down, we're down a little bit, like we were down a little bit with our Truckload U.S. in terms of top line, because we have to adjust to market condition. Now, if market condition improves, like we believe it will in 2020, then we'll see what needs to be done and adjust ourselves accordingly. One other thing that's very important to TFI is the return on invested capital. I mean, this is key, key, key to us. And somebody comes to me and said, Alain, we're going to invest $1 million and make two points. No. Why would I do that? I mean, I'm going to take my $1 million and invest in, I don't know, maybe RBC or one of those great Canadian banks and make three or four points in dividend. Why would I make 2%, take all kinds of risk, that's our philosophy.

Understood, thank you, sir and enjoy the weekend. Thank you.

Thank you. Likewise.

Your final question comes from Kevin Chiang with CIBC. Please, go head.

Hey, Alain. Thanks for taking my question. Just a couple of here, just on the logistics front you've talked about the delta between your U.S. and Canadian margin profile. For that U.S. margin profile to improve, is it really just cost cutting and maybe repricing some underpriced contracts or would you need to be bigger there like is M&A part of the strategy to maybe get scale plus have a margin profile that sounds it could be double-digit?

Yes.

Is that necessary – is that necessary?

You now, M&A is not necessary, but it would be a good plus. But really the job has to be done by us, Kevin. I mean, we have to do the job in the U.S. like we did in Canada, okay? So don't forget that when we bought this company Dynamex in 2011, those guys were 1- to 2-point guys. They were happy with 1%, 2% bottom line. So it's a huge culture change. We had – we'd been doing a better job in Canada in trying to change this culture. And in Canada, we're running a double-digit EBIT company now for the last two, three years. But Canada is smaller, okay? It’s smaller. So, we were faster into changing the culture in Canada because over – again, we are a big fish in Canada. We have a deep bench in Canada. So it was much easier for us to change the culture and the philosophy in Canada. So what we're doing now is through all these M&A, okay, because, don’t forget, the U.S. excuse is that, well, we are competing with BeavEx and those guys don't want to make money and we're competing with Dicom U.S., those guys don't want to make money. It's true. So those guys are gone now. So, yes, but there's others. Okay, fine. But in the meantime, we have to change a little bit the culture and be more focused about being hungry for making money. And 5 points to me, it's not making money. It's not. So, I mean, the guys, they understand we have to do a better job. And the guys are really focused. So this is why I had a meeting with them last week in Dallas. And I feel so good about now the team, their dedication, and their focus. That's why I feel good that I'm convinced that those guys will improve their bottom line by at least 200-basis-points 2020. Now, this is a combination of pricing improvement because pricing was priced wrong. Okay? It's not that we're raising prices, we're just pricing it correctly, number one. Number two is, we have to address the cost situation. It's something that we have to do a better job. And real estate is a big killer for us in the U.S. right now because as a percent of revenue, we're hovering around 5%. That's not good. We should be closer to 2%. So, we have to work with our customer to try to work more off their dock instead of having our own dock. This is all kinds of changes this culture. And when you talk to the customer now, don't forget it's – when you have BeavEx as competition, and those guys said, well real estate, for us, is not a problem. So, we'll rent more space to please the customer. And as we say to our guys, no, no, no, real estate, no, we'll work off your dock. So, now BeavEx is gone, so those guys that didn't understand that no, no, no, you don't want 5% because don't forget BeavEx $200 million. Those guys are running at like 80 locations. It's completely stupid. I mean we run us about 60 some location right now within our Last Mile in the U.S. which is plenty, and we could add more volume. So, if ever there's another potential acquisition in the last month, for sure, we're going to look at it.

That's helpful. And then just turn to your Specialized TL, I recall maybe a quarter or two ago in terms of conference calls, you had noted this being a focus of growth because you have a little bit more pricing power in that division. I know there's a lot of M&A in there, but it is the one division as you noted that shown a degradation in that OR on a year-to-date basis. Just wondering are you seeing that pricing power – if I were to take out M&A, would those margins be improving your view similar to what we've seen in your other divisions? Are you capturing that pricing power that you've been – you’re talking about a couple of quarters ago into the bottom line within Specialized TL?

What's happening, Kevin is like I said earlier on the call is that our flatbed division in Ontario has been suffering badly in 2019, very bad for all kinds of reasons, the steel tariff is one. The level of uncertainty in the global economy for our customers to invest or not to invest. So, it has been a tough haul for us with the flatbed business mostly in Ontario. I mean, we do flatbed in Quebec, but not so much compared to what we do in Ontario. We feel good. I mean, Steven Brookshaw, that’s his strength. I mean he used to run the flatbed division and he’s highly involved working with Christine the leader we have there. I mean we have a fantastic team. So, we’re going to turn the corner there. Now at the same time, we've got hit with those strike at GM. Okay you say well the strike is only a month old, but it is affecting us because don’t forget when the guys feel that there could be a strike, whoops they slow down, they slow down because they don’t want to get stuck with too much product. So, this strike hopefully will get resolved. So – but it will affect us for the rest of the year and hopefully in 2020 we’ll be back to normal. At the same time, we have those guys at Volvo Mack that decided oh, no we’re going on strike. So, again, it affects our aluminum shipments to the U.S. It affects some of our steel shipments to the U.S. with those strikes. So, those guys are saying no, stop. Don’t send us anything. So, this is why if you look at our specialty truckload, we did very well with our M&A in the U.S., our Schilli and Aulick acquisitions, fantastic. If you look at what we've done in Quebec you know the Bressler [ph] acquisition turned out to be good. We had a little bit of issue with the one that we did on the cement hauling business. So we're working on it now. For sure, we're going to downsize our share of cement hauling in Québec because there's too much pressure and too much investment need. So, we're going to adjust ourselves there. But we have a plan. We know what needs to be done. So, when I look at my OR in my special TLL at 87 and I look at the van division in Canada, let's say 83, there's a disconnect there. I mean, it's not normal that your van guys are doing better than the specialty guys.

Right.

Absolutely. So, this is – what I'm saying is that our van guys are doing fantastically well, okay? Perfect. I'm very happy with that. Now, with – like I said earlier, with this Driver Inc. situation keeps on growing, it's like a cancer that could affect our van division, but at the same time, our special TTL guys are doing a fantastic job. So, what I see probably in 2020 maybe if this Driver Inc. cancer continues, we could have pressure on our OR with our van division, but at the same time, okay, we have so much to do with our specialty TL, that our specialty TL guys have 87, 88 in Q3. This is not normal. We should do better than that. So those guys should be closer to an 84, an 85. And we know where the problem is. The problem is mostly on the Canadian side in Ontario flatbed and into some of our specialty operations in Québec.

Right.

On the cement hauling.

Thank you for the color. Have a great weekend.

Thank you. Likewise, Kevin.

We have no further audio questions at this time. I’ll turn the call back over to Mr. Bedard.

Well, thank you very much, operator, and I appreciate everyone joining us today. We thank you for your ongoing interest in TFI International, and you can rest assure that we will close out the year with a continued focus on our business principle. I should be clear from my remarks today, we will continue to seek opportunity to create value unlocking it for our investors and whenever possible return excess capital to our shoulders. So, we're excited about the opportunities ahead and I look forward to updating you again on our progress. And so, thank you again for your time this morning, and have a great day and a great weekend. Thank you.

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