Q3 2019 Earnings Call
I guess kind of all participants are in listen only mode. Following the presentation. We will conduct a question and answer session and instructions for entry into key will be provided at that time before turning the call over to management fees feed advice that this conference call will compete several statements that are forward looking in nature and are subject.
Your number of risks and uncertainties that could cause actual results could differ materially from does anticipate it. In addition, the company earlier this year adopted the new accounting standards and care I ask our F 16, and I think he felt searching numbers are not directly comparable with past few golf.
Lastly, I would like to remind everyone that this conference call is being recorded on Friday October 20, Fiveth 2019, I will now turn the call over to you I went to guard Chairman President and Chief Executive Officer at TS I International. Please go ahead Sir.
Well, thank you operator, and thank you everyone for joining our call. This morning.
Yesterday after the close of treating will really start third quarter results. If you need a copy of the release please visit our website.
Our continued strong performance out too far international through the first nine months of the year reflects our unwavering focus on the fundamentals of the business regardless of the economy condition that we have continued to fluctuate.
But have continued to it fluctuate.
Always concentrating on the fundamentals of the business, we were able to drive strong and consistent free cash flow in earnings per share, which in turn to provide us the flexibility to optimize our approach to the business and ultimately create shareholder value.
How do we put this philosophy to work during the third quarter, we pursued and that's just like business model or G., Wisconsin Thirdly on to look out for potential operating efficiencies, we maintain a strong balance sheet and we completed two accretive business acquisition adhering to our highly disciplined approach to M&A.
Sounds familiar it's because a tier four international operating philosophy does not change in our quest to generating not just grow what profitable growth.
So this approach is remains our attention to create and unlock shareholder value and whenever possible, we didn't excess capital to our shoulders.
Oh itself to look at our two quarter results [noise].
Revenue was up <unk> percent compared to the prior year third quarter and set an all time third quarter record record 45 at 1.3 billion.
As I mentioned, we'll focus on profitability not revenue growth.
For the sake of revenue girls or operating income was up 3% 232 million and our adjusted EPS on a diluted basis, what dollar for consistent with the prior year.
In terms of art Cashel performance, which is important to us net cash from operating activity of 187 million was up 12% in our free cash flow of 130 million was up 50% compared to 86 million in the prior year third quarter.
Well I think our strong operating and financial results is the continued strength of our four business segment. So starting with the art PNC packaging for you. This segment represents 14% of the total segment revenue and revenue before fuel surcharge slot ethanol and 55 million.
Operating income grew a 1% to 28 million and the operating margin was 18.2, all show up slightly versus 18.1.
In the corresponding period.
This 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 makes and I said 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 billion to buy a year.
Operating income was 26 million up slightly versus 25 million a year earlier in our operating margin was very strong at 12.6.
She is up 140 basis points on the part of your 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 40% 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%.
Let's move to 64 million a year earlier in our operating margin was 13.6 compared favorably to 12.2 last year.
Our adjusted operating ratio was 83.1 for can you didn't truckload 87.14, especial GTL and 90.94, U.S.P.L. operation, reflecting improvements were both Canadian and U.S. truckload.
We're very pleased with the year over year performance of our truckload segment, given given how strong our third quarter was in 2018 and given also the weaker truckload freight markets.
Logistics and lost my represents 20% of total revenue and generated revenue before fuel surcharge of 257 million up 9% relative to 235 in the prior year third quarter.
Operating income was through 2.8.
Million relative to 16.8 million a year earlier.
Within this segment were very actively.
Security on the margin improvement plan.
Following the same strategy that we have many times before as a result, we're confident in our team's ability to deliver.
Turning to capital allocation, our approach remain bounce and discipline.
During the quarter, we need to accretive business acquisition, and we returned 84 million to our shoulders, including $20 million dividend and 64 million of share buybacks.
You'll recall that twice this year, we expanded the size of our buyback observation that commenced in 2018 from 6 million shares originally.
An ending with a total of 8.2 million shares and we repurchased 7.3 million shares on do that program by September two there during the one year period.
More recently on September Thirtyth T. A fine international was granted approval by the Toronto stock exchange to repurchase where cancellation, an additional 7 million common shares.
We presenting 9% of our public float.
Over the 12 months period from October 2nd to October 1st the October 2nd 2019 talked about first 20 Twond.
Going forward, our capital accretion plant is on change.
We plan to buyback additional shares to be our 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 raise our quarterly dividend by 8% to 26 cents per share and now operator.
Your mind opening the lines I'd be pleased to address questions from the audience.
Thank you I reminded you ask a question do you want me to press Star one on your telephone to withdraw your question you press the pound or hash key please standby will be compiled the Q any roster.
Your first question is from Konark Gupta with Scotia Bank. Please go ahead.
Thanks, operator, and good morning Ali.
Hey, good morning.
Morning.
On the free cash flow I'm, a with a pretty decent quarter from free cash flow perspective.
It looks like you you are tracking ahead of a 400 million dollar on on a trailing 12 month basis. Here did you do see any upside to your full time and dollar guidance that you provided before and do you expect anymore asset sales in Q4.
Yeah, well that's a very good question. So yes first of all in terms of asset sales on the real estate side. Yes, you know, we've we've always been able to identify.
Things that we could do so for sure we anticipate that probably one or two properties. Okay that we could sell probably in Q4, one small one in the south shore Montreal.
It's it's a possibility around Montreal, we also watch other areas that we could see some potential so probably like maybe so we did about 20 million. So far I think this you in a real estate sales. So maybe we'll be able job between five and 10, and we see something kind of similar for 22.
Tony.
Probably like 15 to 20 in 2020, but also a were also buying a terminal intermodal the older bunch right well beyond started its really an old terminal, but they D var trend terminal in Toronto, Okay that was a kind of sales leaseback. So we're buying that back for 38 million in Q.
For we've also bought a building in Montreal.
For about 6.5 million, Okay, which is gonna be housing.
Head office because right now.
We rent one floor and we've decided to buy a building next to the airport in Montreal. So those will be a major capex because we'll do in Q4 on the real estate side, but the other side of the point, we saw some real estate age during the first nine months and will be selling more.
Of those excess real estate in Q4 and in 2020 total probably between Q4 in the end of 2020 is in the neighborhood of 15 to 25 million.
Okay. So I'm like that the free cash flow I'm like that might progress more sort of do at 451 at all or you think portfolio then.
Yeah, but don't forget that we're buying this terminal that she's going to cost me 38 million. Then we bought this shut off is that cost me 6.5. So if you put that this is why our guidance is still not because of those real estate deals I was feeling the same kind of as if coal seam neighborhood.
But assuming that you're right I mean, we would do better than that yes.
Perfect. Thank you for that and then on the logistics and the last mile segments. A couple of questions. Here again can you help us with the volume and pricing trends are being the logistics in the last mile. So the other two different entities right, you're going to help us understand the trends on those.
Yeah. So so if you look at that I mean, what we're doing his work can be combining those two because they are really really I said like I mean, we don't owning yes. It but you know in terms of the logistics, what we do we have operation both in U.S. in Canada. So in that sector, we do about 30% of our global revenue 25 to 30.
So the rest is all of our last mile mostly U.S. base and some the also in Canada as you know no. Our gross margin in the only is down okay year over year, not because of Canada. I mean, we inform fantastically in Canada, I mean, a revenue in our OE. He is.
Just outstanding what we do in Canada and this is why you know we've made some changes we basketball our E V. P to help us in the U.S. held the team there we have a very good team in the U.S., but do you need more support and a you know that team was reporting directly to me a until just a few months ago.
Or maybe I was not doing a good job enough. So this is why I Scout 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'll also have opportunity to reduce our cost the problem. We have with our last mine. The U.S. is we're competing with a lot of guys that don't like to make money. So we bought a few them this year.
Like a b VIX like logistics division of die come U.S., and there's more maybe that will happen in the future.
This is a market where a lot of these guys you know if they make one point there really happy. So this is why when we look at a U.S. operation US we're running between 567 points, which is not even for 50% of what we do in Canada. So were far far far but some of it is the markets, but some of it is us too. So this.
As well, we're gonna be working aggressively in the U.S. would the team you know to reduce our costs improve our margin because in some areas maybe our pricing was based on on the fact that don't reflect reality. So we'll be working very aggressively and trying to improve that.
So no I think that you will see some great improvement over the course of the next 12 months.
Okay. That's good color so under logistic side you had these two new tuck ins that just described one in Canada and one dealer in the U.S. any sense on the revenue and margin provide for these things you said, it's accretive or how accretive would they be yeah.
Yeah, well the one in Canada is is really a grades one because it's a it's based out of Montreal I mean, those guys have done a fantastic job. It's a neighborhood right now these guys run logistics and in a few trucks a few assets.
We'll see down the road because normally we don't like those hybrid model, but we'll see I mean, those guys are doing well.
The guys in the U.S. a this is the logistics or the one that I called <unk> talked about this dichotomy.
Those guys were doing oh, okay, not not good but okay, but the purchase price was really you know 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. why there's about was about 50 million, but after you know everything that doesn't make any sense for us will probably down to 30, 530 to 35 million, but making money not not four or five points. You know that's one of the trade that probably will be.
Closer to eight to 10 by the end of Ah.
Oh for months that we run the show there.
Okay. That's perfect. Thanks, so much I'll get back in Q.
Your next question is from Chief and Sito with Cowen and company. Please go ahead.
Yeah, Hi, this is Adam on for Jason maybe just a quick one ecom, calling up there on your on your previous comments I'm, just asking kind of how would the M&A mark it looks like right now and how your M&A pipeline looks.
Do you guys see multiple is coming down in and what specific areas are you focused on an M&A.
[laughter] Yeah. That's a good question I mean, you know if if we think about the U.S. markets were really focused on the last mile. So if we could do more of these are transaction that we then something done so far no two to eliminate some of the players in the market that like I said earlier cannot make money or don't like to make my.
So so that's one focus of ours last by the U.S., if we could do something in Canada that would be great as well.
If you look at the Canadian markets. Our focus has always been India LTL, what can we do too because as you know our revenue the keeps on coming down Okay organically is negative growth for the market. So Ah you know 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, where you know that number one player in Canada, we want to grow our base in the U.S., where the specialty truckload. So we're active in that so we did two.
Interesting acquisition, so far in the U.S.. So we're willing to look out for that as well same thing for Canada and the specialty T L.
In terms of valuation I think guys. A valuation is okay is acceptable or some areas, where you look at the file and the guys is asking for something that we can't afford so we just pass.
But we're a discipline I mean us we you know M&A, it's not an easy business. So you got to be very careful but 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 Tia five size today, we could do it we could do multiple in the 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 either in the fifth also within T. of like he's got to be or maybe a new platforms like a U.S. ER.
Specialty tea out that we've done this year, it's it's a new platform for us for growth in the U.S. So we feel good about that I think 2020, it's going to be again, a good year for us in terms of valuation, it's still acceptable or are they less than they were a year ago well in terms of.
If you say that's five times EBITDA on your EBITDA is down 20%. So maybe the valuation ratio is still at five but maybe the EBIT dies down five or 10 or 15, 20%.
So price moves down accordingly, right.
Got it know that all makes sense and I appreciate the color. There maybe just a quick follow up in switching gears, a little bit obviously, the U.S. trucking market has been soft now for from mature up it's not all of 2019 in all sorts of difficulty.
There and it pretty well publicized I wanted to ask a little bit about the Canadian trucking market and.
How that compares to the U.S. So the current said if U.S. market and what kind of trends are you see I mean Canadian trucking market.
Well, it's it's basically the same I mean, the big difference between Canada and the U.S. is its own one sector, our specialty truckload on the flat bed side has been affected badly okay with the steel tariffs or you know that took effect Oh, the late last year into early into <unk>.
Next year, the steel data between U.S. in 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 it's been a negative effect for us but that should go away in 2020 also the strike at GM or the the strike right now at a viable Mac.
Thanks to our aluminum affects a shipments FX also steel shipments to those guys, sorry, [laughter] bed I've been very unlucky right now no on terms of the van side. If you look at our Q3 numbers for Canadian Bad I mean were 82, you are I mean, it's tough to do better than that right now.
We have pressure on freight for sure free to solve there as well why because a lot of cooperation, though just waiting on the sidelines for investment Okay. In order to understand what are the new rules of international treating because of all of this fight between let's see U.S. and China mist retreat deal between.
In Canada, you asked that has been agreed upon but not signed yet so there's a lot of stand by investment that affects us in Canada as well as it affect us in the U.S.
But still I mean, our guys I've done a fantastic job, but you know adjusting the cost of the reality. We also have another factor in Canada. That's a very negative for US is is the principle of Oh, what they called driver Inc. So this is really unfair competition to us and other.
Companies that operate legally in Canada.
Driving is a model okay that you hire a driver, but you don't pay the driver as an employee you see that they'd rather have no no. We don't know how your company. Okay. And then there's no fringe benefit. So it's it's like a very gray area that slowly will probably be addressed by the.
The.
Local authorities in Canada, a this is really unfair competition to us a those guys are mostly based in Ontario.
It's a it's a big problem, it's been there for a long time, but it's been growing like weeds and Ah. That's that's another issue our guys have really done a fantastic job of fighting a you know these these kinds of unfair competition, so awfully or the the Canadian government.
And the Ontario, Quebec, guys will wake up and smell the coffee and started to address the situation. Because this is really really major unfair competition to us.
Got a really appreciate the color there. Thank you guys.
Your next larger than thinking your next question in Fem care main dark and paying with National Bank financial. Please go ahead.
Very much a good morning.
Why do you Kevin.
So I just want to a maybe a ask a few questions for you just around the the capacity situation that maybe you're seeing a competitive capacity 'cause there's been some I guess, maybe some early indicators that maybe some of the smaller competitors in the U.S., maybe even in Canada or you know in some financial difficulty and maybe a 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, and whether you see a supply demand balance kind of getting a little better for you.
I think that a in the U.S., particularly Cameron or there's some equilibrium. That's 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 truckload 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 eight order for trucks are down big time.
For sure I mean, there's there's going to be less offer down the road versus what it is today I mean, it's it's a it's the nature of the trucking industry 2018 18 was great.
The truckers were able to adjust rates to a more reasonable level.
And then Guy says Oh, let's add trucks and says you know I've been 20, some years in the business and I look at that I keep saying how come we don't understand this basic principle of offer in demand I mean, when the demand is high what you do what do you do I mean, you move your price reasonably okay, but you do.
Add capacity because then in six months or you then you're going to be stuck with the other <unk>, where there's too much capacity then you got to bring the rates down. It's just the stability of our market, but I think things are starting to change in the U.S. things are.
Also improving in Canada, except except like I said earlier for the driving Inc. oaky situation that we haven't 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 is going to get back to more of an equilibrium.
I am probably within the next three to six months faster than Canada.
The problem in Canada is we're adding capacity with those Robertson guys.
Right. Okay. No. That's that's great I just on your specifically looking at your U.S. truckload operation or just maybe an update on.
Some of the operational improvements that you are still implementing there what sort of left to come I know that you see a business is the one that's been kind of underperforming, but maybe you can just talking about that yes.
Yes, absolutely so.
It's a very good question, Kevin So what we've done it with trying to help Pcs, we Vasco Greg or the Guy that run CFO by doing a great job there with his team said, Greg could you help us with TCAM said no problem well do that so we've we've started to implemented some some a principal some keep the.
Hi, guys, there and we're starting to see some improvement because if you look at <unk> or in Q3, a year over year, it's still an improvement and most of the improvement comes from year over year from P.C. eight okay. So we've invested a lot of capital and this year because right now in 2019, my free cash flow coming out of Tc will be.
Why is that because we're investing a lot of dollars in in the end of the capital of the fleet by new trucks, but the beauty of that is that the guy deliberate on that so our maintenance costs now at Ti is comparable to see if I in comparable basically comparable to what we're doing Canada some real.
Are you happy with that so we're starting to see some improvement there.
More improvement has to come from you utilization of the assets. Okay. We have to do a better job on that in globally. It's not easy to do when you have a soft freight environment, okay, but if market. This off then you have to adjust your your level of assets. The other thing also that's you know imports.
And that we do better is owner operators. So we have to try to grow. This redoubling robbery that we have within T. C. N C. I buy if you look at what we do Encanto percentage a company drivers or oil is you don't like 60, 570% versus 30% asset light operation.
Oh and logistics brokerage, we're still far from that in 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.
So we still have some some.
Good stuff to do one other thing also that the I think I said earlier on the on a call. If he was in Q2 is that we're implementing the scene.
ER software for financial purposes, as the one that cfives using so that's gonna be easier for the finance team to keep yard the two companies. So because now we don't have the same finance a software. So by January of 2020, we'll be running on the same sought finance financials.
Software and then part of our plan for 2020 is also to move out of the operation into a different T.N.S., which is the Macleod system, which a lot of the U.S. truckload guys are running on versus what we're using now which is a kind of green screen old technology, So that will.
Be again, a very important process 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 U.S. steel and we compare that to the best Guy, Okay, which you know you could say Knight is.
But he does basle one of the best and we compare ourselves I mean, we're getting closer to those great truckload guys no.
No no freight environment. That's typical yeah, no that's a that's great.
Maybe just find very quick just on the that the P.S. guidance for the full year, I guess I sort of assume here that you're still quite comfortable with the $3. A 90 cents to $4.10 you'd kind of talking about Oh, yes, they're just want to confirm that.
Great. Thanks, very much at all for me.
Thank you Kevin. Your next question is like and then why appreciate from <unk>. Please go ahead.
Good morning ally.
Well anybody <unk>.
Yeah first question, if we look at them logistic in last mile. Obviously, you mentioned that there are some margin improvement with the integration of the latest acquisition. So first could you talk a little bit about the a the contribution of the last two tuck ins I've heard you on a call, saying that'd be a 50 million.
In the U.S. that will come down 35, but were you, suggesting rather as part of the no no no no no no no no no. The 50 million U.S. is the last one that we bought in the U.S. and this is just the U.S. it will come down to 35 million U.S.
Some of that is line all business. Okay. These guys were doing line all for a customer I mean, we're not a line haul kind of company. So so these add to go away. A there was also some logistics kind of business in there. So what we've done small four or $5 million. So we've moved that to our CFO I logistics business. Okay.
That's what these guys do.
So this is why when I talk to my last mile guys from 50, 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 to 25 million that is healthcare related okay. So if you remember when we bought be they actually there was also a nail care.
Being there that's called GML Guardian medical logistics, Okay. So I mean, we have all the cars to do a much better job than what we're doing today, but it will take some time because this is why we ask our Canadian team leadership team to help art U.S. teen Okay. So that we could.
Start you know.
Getting better resolves faster right.
Okay, Okay, perfect I know what about the size of Krongard younger talking with you a made during a quarter of small.
Yeah quality small I mean, it's it's a $27 million company based out of Montreal, but it's a great great asset great team good fit with our you know our other businesslike cavalierly like ER ill try a bar all these guys. It's it's a it's 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 larger sticking last mile closed due due to 5% obviously down versus last year because of the integration acquisition, but longer term weren't do you see the no margin potential foreign logistic in last mile one the those equity.
Solution are a fully integrated on <unk>.
Well you know why guys I think that I haven't seen the plan for 2020, yet, but when I talk to cow and add 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 up the you with something around five or 6% I.
I think that next year, we're gonna be closer to 7% to 8%.
Okay. Okay, that's pretty good 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 Oh really focus in the U.S. I mean, we made some changes a you know that's refocus because those guys were you know two two acquisition now we bring that can even team as the support or to have those guys.
Turning around the the situation because you know.
[laughter] those company like <unk>. The reason they went back up it's not because they are they start management team. So it puts a lot of pressure on a U.S. team.
So this is why and say hey, guys you know what like Canada is running perfectly. Good. So let's have these guys support our U.S. team guys.
Okay, and you'll see you'll see I'm, telling you [laughter], you'll see major improvement in 2020 within our last mile Division logistics and last mile mostly coming from our last month the U.S.
Okay, that's great color on line and when I look at the truckload business in Canada, now you've been able to improve the or by 4%. So from 87 to 83, while when you look at the U.S., Yeah, it's been almost flat quarter over quarter close to 19, 91%.
So I was just wondering what if you could provide more color about why Canada was able to do improve so much and if you still see deal. Fortunately for US you know to reach a kind of the 80, 85% overtime.
Well 80 mm that's that's gonna be a you know quite a challenge what I said Ben was always the same I mean, you have to run a truckload operation with a 90 or over a period of 10 years on average. Okay. So 19 is a difficult year versus let's say 80 was a great year.
Truckload guys. So to me in 18, we should have run between a need to do an 85 war because that was agreed we didn't do that because we we came from 105 why in 2007 days, where a lot of work to do now if you look at 2019 would this kind of freight environment. When you look at the start of the.
U.S. truckload, Okay, and you look under star and those guys are running an 80 something he 786.
And you're running a 91 or 90.9, you say well, we still have some work to do absolutely okay, but when the right track now in Canada. The big differences, we have a solid team that's been there for a long long long time, okay, no that being said, okay. We have fresher.
Now that like we've never seen before with those drivers 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, okay. It could you know put put some.
Pressure on on the possibility of us running at night, and 85 or a 98 or when these guys are running maybe a 95 law, but with 15, 20% less cars than us on labor and.
I see and assuming let's say that U.S.T. O T O finish close to 1991 person 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 <unk> or are we could see let's say a toward the end.
2024, the U.S. Deanna.
It's still hard to say because I haven't seen the plan from a from our guys in the U.S. A you know the guys are working or their 2020 plan, which we're meeting those guys a November 11.
So I'll be in a better position to answer that kinda question, but my feeling is that we still have room to improve our cost okay improve our asset utilization or improve our you know.
Revenue per mile may be that depends a lot about the quality of the markets. So so I wouldn't say anything about that the quality of the revenue, but our cost we see us a moved improves so let's see a the market condition remains basically about the same freight environment a little bit more.
More favorable to truckers, we work on because 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 cost we improve our asset utilization I think it could be done I mean.
We have a great team now running our truckload operation in U.S. 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 that land what would you expect going into 2020.
Well, what we're seeing right now is that what are the reason we have so much treat softness the first nine to 10 months. Even know October is still it's still not in a normal October it what we see so far.
But the reason being is that there was lots of inventory at the level of our shippers Hey, if you look at the inventory level in the U.S. December of 18 and that keeps on falling okay until let's say October of this year, so that bodes well for us and 2020, because freight environment is.
Got to be Safi, if those guys have too much inventory, which is a problem that we went through all of 2019.
No 2020, it's still early in the game.
It will will see better now.
The next.
A few months.
Okay. Okay perfect. That's it for me Alex Thanks for the fine.
But as you're going away.
Your next question.
Baggy salmon with BMO capital markets. Please go ahead.
Thanks, Good morning, Hello.
What anybody foot.
My first question is I wanted to get your thoughts on now that we have seen maybe two or three quarters of a fee and rail kind of becoming a little bit more involved in those last mile operation with the recent acquisition they've been have you seen kind of the market in the competitive environment than kind of other kind of chain.
I love it kinda any additional thoughts on it but now that you're talking maybe two or three quarters to see it play out.
Well I think for you what CNS done it is great I mean de took a transaction. He took also the intermodal division of each in our and it just normal for them I mean, it's it it makes a lot of says those moves now do they want to be truckers well. That's that's the question I think that everything that they do over the road.
Probably will not fit C N 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 us except within our Q a.
Quick XTRAC, Okay. What's your small it's about $40 million to $50 million a business that we do truck load on the rail reefer from east to west Okay with customers like in the dairy industry have come back and summit food industry also out of Ontario into Western Canadian market.
So I mean, I see that very positive because C. N is all about making money and a you know when I see a 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 in the thing that one or 2% is great well I don't like to come.
Be with those kinds of guys.
Okay. That's helpful. My second question on the truckload side. It sounds like you have good management team and the U.S.
But you also always correct arises.
Okay. It was being kind of very competitive and maybe even irrational little bit and and you're still on the smaller size in terms of the U.S. yet. So if this business much bigger and three to five years or is the strategy maybe.
If they make smaller three to five years, how should we think about where do you see the capital deployment going and then after five years, it's going to truckload or or retreating from that business.
Yeah.
That's a very good question for you. So our approach to that is very simple is what we said is we have a great team.
Can run three to 4000 trucks in the U.S.. So we'll never be used 15, or 20000 truck truckload guys in U.S. no way.
Okay. 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 then and specialty tea, we favor the specialty in Canada and right now in the U.S.. It's the complete opposite okay. So right now let's see.
We have about a 3500 trucks on the van Division well, we we don't even have a thousand trucks in our specialty tea out today in the U.S.. So really the focus for us in the U.S. on the truckload side is is specialty truckload. So we made two very interesting acquisition, so far with shelia.
Holic, we're really are very happy about what's going on over there. So the focus to answer your questions, but he is not to grow our van division in the U.S. at least where now.
Is to grow our specialty truck, though it's the same encanto. Okay. So absolutely we're looking at all kinds of.
Opportunities to grow our specialty truckload operation bolt, Ontario, Quebec, not so much out west.
Because our philosophy as you know as we like to be the big fish in a small pawn never the small fish in the big pod.
Okay. Thank you.
Your next question is from Walter Spracklin with RBC capital markets. Please go ahead.
French good morning.
What do you want it.
I'd like to folks a little bit on the your guidance items. It sounds like not not a lot as change, but you have I mean, the world has changed around us you've done a couple acquisition. So just wanted to just check make sure. I know you you mentioned 400 million for free cash flow is still the target, but I think would have been higher if you weren't doing that those real estate purchases.
So so coming back no a EPA fewer it I think three nine either for.
Any reason why that wouldn't change 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 a in Q2 and we said none okay. I mean, yes, Q2 was great, but we were sticking to our guns with between 90 to for 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 died we haven't seen before it's just not a normal October it now don't forget we hadn't election in Canada, and the election always affect the consumer and the things that happen.
You know we have all kinds of situation in the U.S. with this China thing there that hopefully.
You could get some.
Resolve in there or it seems like it's going to go well.
With their phase one kind of deal so that will lead the eight also some.
You know clouds, we there's lots of cloud because of that and not with the consumer weird the corporate world, they're not investing so it's affecting us. So this is why to me is said to our guys listen if we can deliver between 390 and four bucks guys with this kind of freight environment in 2019, Oh it.
It's okay I'm happy 2020, we'll see.
But 20, no we're not increasing our guidance a Walter so 2020, I think though you know most are taking a cautious view I'm certainly that's really that's the I'm told that came out of the rail reports and I think that's where they were cut appointing everyone.
Consensus out there right now for you is in the for 20 425, maybe up to 430 range, implying about 5% growth is that reasonable you think it even in a environment, where we have a sluggish first half, but a back half rebound, which is what the rails. We're kinda intimating can you do 5% in in a cut.
Not a recession, but a sluggish first half and then and improving backup.
You know.
M&A. He is the thing that helps us a bit want are aimed because when you look at organically I mean, we have no growth. It all depends how good our emoney will be you know leach 19 and into 2020. So if we don't do anything Walter Let's say, we don't do any any M&A.
It this is not reasonable I mean for 25, it's a question, but as you know the proof is in the putting saying that we're not gonna do anything never happen.
Right.
So with that we've had in mind just so you have a dollar free cash now as you look into the 2020 or 2020 kind of framework, where do you want to spend a dollar do you want to put it all back into 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.
You know where valuations becoming appealing enough that you're gonna 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.
Yeah, So lets say, there's no big well for us in 2020, a Walter I, we're gonna do about $200 million I've 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 you know to say that we're going to be at four bucks a share or fourth.
20, and he is always out of that equation, but based on what I can see based on a pipeline based on on the market condition I think that a a 200 million dollar investment in 2020 is is reasonable anemone for us and barring any large acquisition the other 200 million.
It goes into a buyback is that right Yep Yep Yep and final on Capex. Then you're you were you were guiding US I think 225 net any change in that in any any indication for 2020 as to what your capex spend to be like.
It's the same Walter it's about this and 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 buyback really stay where it makes sense like the Charnaux terminal for by trend you know, we're trying to work with our U.S. guys to to try to do more with owner ops. If possible tried to do more revenue with a she a fire logistics operation or Cfive, though he's the guy in Mexico.
So that's the focus but basically I would say so far early numbers I'm seeing is that capex is basically going to be the same now maybe just the take less because T.C.. We did the major Porsche T. C. In 2019. So those guys are back if you look at the end DNA.
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 pushing in 2020 . It's gonna be just replacing okay in a normal fashion.
Okay, well is much less.
Okay. That's great. Thank you final question is on pricing or 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 is saying that pricing is just falling off a cliff.
What I would I when I compare that to some of your larger private peers, they're saying that know that the smaller players really Jack prices high in 2018, and now you know to the point of being you know of taking advantage of the shipper and now there are no. It swinging back on them a larger larger carriers did not do that and therefore.
You know you didnt see as much of that swing would you characterize that for your company that yes, there might be some pressure on pricing, but but we're not falling you know it's not a you know the bottoms out falling out like it might be for some other smaller peers.
No absolutely I mean, if you look at our resolved so Walter I mean pricing <unk>. The problem that we have if you talked are you talking truckload LTL or p. and see you.
Oh <unk> this was truckload.
Yes, it was truckload for sure and a a little bit of you know some of the smaller guys. They were a little bit all over the map, but yeah, yeah, well the big problem. We have been truckload Encana is very simple is the driving situation in Ontario, I mean, the freight market has been soft so and those guys keep on bringing a new Canadians and.
To this truckload market a in a and and hiring those guys who are driving model. So this is 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 that's the kind of pressure that we see on rates are right now and.
So I answer is that listen guys. I mean, this is completely unfair competition. So if Mr ship or you want to use these guys well.
Go for it but it maybe not gonna last.
So no we don't see we see pressure on rates, we see more pressure on volume alter the same in the U.S., we see not so much pressure on rates when we see 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 a you know the general economy, you asked where in Canada.
We're confident that this situation probably will resolve in 2020 , but like you said probably for six months is gonna be not so good maybe the back half of 2020 will probably be much better.
Causing.
Appreciate the color as always I'd like thank you.
Well leisure water.
Your next question is lucky that Ross from Stifel. Please go ahead.
Hi, good morning.
Morning, Dave.
Just a quick follow up there on the comments about.
Yeah, the the tone in October and into 2020.
Is that much different than you would've thought a few months ago.
Well you know to to say the true David I'm, a little surprise a about October I thought that October you know, which we would start to see you know back to normal freight environment, but we're not seeing that yet so I mean.
Maybe you know Nov will change the trend.
Or maybe it's gonna have to go into 2020, we don't know yet, but what we're seeing its still a softer environment and if you look at the guys that came out this year. So far in Q3 with the U.S.T. Ella I mean, some of the guys are down 8%, a 5% that 10% volume wise I'm talking about hey, so.
So us were 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 19 versus what it is today consumer confidence is there the only Brahma we face both encana and U.S. is the corporate world No.
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 and talking about the side the weak volumes in the pressure on pricing from customers the rise in insurance costs.
How are you thinking about dealing with insurance at Cfive and T.C.A.
Given all yeah.
Yeah jury rooms.
Other issues yet.
Yeah, absolutely absolutely you're absolutely right and this is a factor for both Canada and the U.S.. Okay. So in Canada, we see a lot of pressure the marine markets for insurance is tightening up so bad I mean, we saw.
A guy that just got a 75% increase in in insurance premium. So the way we service Canada us is different than the we 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 a premium increases is that we said to you guys listen we have to spend more on safety and making sure that those accidents, okay. If they occur.
We have the the reality of what happened. So we've invested in forward facing camera because when we bought see if I. It was all camera on the on their trucks. So by the end of this year a according to what Greg is telling me is that 100% of our fleet will be equipped with those facing a fourth facing camera. So that helps because if you're involving in.
In an accident now you have a clear picture of what happened. It's not just you say or or this is what the guys are seeing so safety is big we've also invested within our new trucks with all the safety like collision avoidance Lane change. This isn't all that so that's been the focus for us.
In 2019.
There again, I mean going to be renewing our policy in U.S., our retention is quite high in the U.S.
But the idea our focus us Dave is okay premium will be what would 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.
You know drivers with little or no experience.
We're trying to focus on drivers with lots of experience because we have better results. So if you look at Cfive, Greg was telling me that we probably have a like six or 701 million miiller within cfive.
So driver with experience help US also the turnover. So we're trying to focus on driver turnover turnover is another factor that is a negative okay. In terms of insurance Lane, because you've got new guys. You got guys that don't know the customary don't know the area well and they make a mistake and it looks.
We're involving an accent.
So I agree with Judy the pressure on on the race on the premium from the insurance company is great and U.S. and the same in Canada.
And that's our focus is guys listen I mean less reduce our claim this 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 at least our government lead that runs the safe.
He department, She's really really working hard in in trying to you know educate a safety and all of 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 then they'll we were doing a great job now we were hit.
We had some some claims a from a 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 to small guys in the medium sized guys. Both in Canada in the U.S. for sure there go.
Getting hit with.
All kinds of.
Insurance rate going up.
And then on LTL quality focused their terrific we've seen in the margin expansion, but when does the growth focused or is there and when do you feel comfortable enough there to.
[laughter] or volume growth.
Yeah, you wrote the problem, we growth organic growth Dave in my mind, it's it's it's very difficult to do right now in Canada, because the market the shrinking and a lot of these or 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 it's a it's a difficult situation. So you should never anticipate seeing typifies 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 to accompany the rights fit but I'm, telling you every LTL.
Companies I look at right now.
They're not they're not highly profitable there's there's some encana 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 you know two 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.
I think emoney is the solution like we've done in the past I mean, if you look at to what we've done we bought Cavalier, we bought norm and then over the last 18 months and it's been fantastic, but in terms of top line, we're back to square one I mean were flat.
Bottom line were flat top line were down.
Excellent. Thank you.
Your next question and found that just yeah fuzzy on Luke I teach you like echelon wealth partners. Please go ahead.
Hi land good morning, Okay. Good morning quickly about the impact ecommerce had on your overall business in Q3 in Canada, and the U.S. and secondly, how your strategy differs and both of those markets pertaining to E Commerce and thank you and then.
That's true so you know the problem, we have with our ecommerce is that one player. Okay, which is the largest later in North America I mean, we basically don't service. This this customer or this or this company.
Because we made the decision that these guys are not part of the solution. So our focus has been well, 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 is a been the success of our ecommerce solution to our customers. So we have some some.
Great brick and mortar guys that have finally, we're able to understand how but the ecommerce 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 you know, it's about making money, it's about just growing market share and hopefully one day, we'll make money no.
It's like this philosophy that comes from a this a large e-commerce guy.
That said as well.
Were there to service customer and are we making money on doing that.
Probably no.
He came up with their numbers or just a day or two ago and.
In terms of liver either costs is just going through the roof. Because you know were 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.
Right. So there's no future for us and 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 think I would say well those guys are running a great company, but you don't make any money.
So I mean, we're we're not in the world of maybe some players that they don't make any money and you know they have a huge market cap, but in the truckers world.
If you look at U.P.S., the one of the best company in the World those guys are all about making money.
Like us.
That's good color. Thanks to line and then just one more question here quickly.
Your overall business in Mexico seem to have shrunk quite considerably, albeit it's a small number but can you just talk about how that market shaping up as we enter 2020 and a your growth strategy down there over the near term. Thank you.
Yeah. So our strategy there is in Mexico.
We have a logistics company. There are revenue are down a little bit with our logistics company by investment or are huge so we see a lot of potential there okay, but so far a you know it's the results are not their 100% well, we keep on investing in our C. I find logistics and see if I Louise.
In terms of people in terms of trying to grow that because our focus is to try to run as much as possible and asset light operation in terms of our truckload operation Oh, we still about 2000 trailers in Mexico everyday with freight coming in in and out of Mexico No.
For sure.
Our focus is always to run they very profitable operation so.
You know if there's no money there for us I mean, we're going to shrink we going to adjust ourselves. So were down were down a little bit like we were down a little bit with our truckload a U.S. in terms of top line.
Because we have to adjust to market condition now if market conditions improved just like we believe it will in 2020 them, we'll see what needs to be done and that just ourselves accordingly.
You know what are the thing that's very important to T. F. <unk> is the return on invested capital I mean, this is Keith Keith Keith to US and you know somebody comes to me and say any it we're going to invest a million dollar and make two points. You know why would I do that I mean, I'm going to take my million dollars.
In you know 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 need 2% taken all kinds of risk that's sort of philosophy <unk> <unk>.
Understood. Thank you, Sir and a enjoy the weekend. Thank you.
Likewise.
Your final question comes from Kevin Chiang Mophie I'd be fee. Please go ahead.
Well I think thanks for taking my question just a just a couple of here just on the logistics front, you've you've talked about the delta between your U.S. and Canadian.
Margin profile <unk> for that U.S. margin profile to improve is it really just cost cutting and maybe repricing. Some some underprice contracts or could you need to be bigger there like M&A part of the strategy to to maybe get skills have a margin profile that's sounds it could be double digit.
Yeah, and it's not necessary to it's not necessary.
You know M&A is not necessary, but is it would be a good plus but really the job I used to be done by us Kevin I mean, we have to do their job in the U.S. like we did in Cana, Hey, So don't forget that when we bought this company dynamics in 2011, those guys were one to two point guys you were happy with.
One 2% bottom line. So it's a huge culture change we had you know we've been.
Doing a better job in Canada, and trying to change is culturally and in Canada, We're running a double digit EBIT company now for the last two three years.
So, but CAD those smaller a smaller so we were faster into changing the culture in Canada, because don't forget we are a big fish in Canada, we have a deep bench in Canada. So it it what is much easier for us to change the culture in the philosophy in Canada. So what we're doing now is through all.
These M&A well give you just don't forget the U.S. excuse is that while we were competing would be backs and those guys don't want to make money and we're competing with Viacom U.S. those guys don't want to make money.
That is true. So those guys are gone now so yeah, but there's others, okay fine, but in the meantime, we have to change a little bit the culture and be more focus about being on greet for making money and five points to me, it's not making money it's no.
So I mean, the guys. They understand that we have to do a better job and the guys are really focused so this is why at a meeting with them last week in Dallas.
And she is so good about now the team that dedication and focus that's why I feel good that I'm convinced that those guys will improve their bottom line, but at least 200 basis points 2020. Now this is a combination of pricing improvement.
Because pricing was price wrong okay.
He said that we're raising prices were just pricing it correctly.
Number one number two is we have to address the cost situation.
It's something that we have to do better job and real estate is a big killer for us in the U.S. right now because as a percentage of revenue we're hovering around 5%.
That's not good we should be closer to two.
So we have to work with our customer they try to work more off dirt dock instead of having our own Doc. Yeah. This is all kinds of changes this culture and when you talk to the customer now don't forget it.
You know when you have be the excise competition and those guys says well we are safe for us is not a problem, so well whoa whoa rent more space, we're pleased that customer and thus we see two I got no no no no. We didn't know real estate not a will work off your Doug. So now be VIX is gone. So those guys that didn't understand that no no no you.
Don't want 5% because don't forget the next 200 million those guys are running it like 80 location. It's it's it's completely stupid I mean, we run us about 60, some location right now within our last night in the U.S.
Which is plenty.
And we could add more volume so if ever there was another no potential acquisition in the last month for sure we're going to look at.
Okay. That's helpful and then.
Just to ensure specialized I'll, let you know if I recall, maybe a quarter or two ago in terms of conference calls you noted this being a focus of growth because you have a little bit more pricing power in that hmm and in that division I know I know, there's a lot of M&A in there, but it is the one division as you noted that that's shown a a degradation in Oh war.
On a year to date basis. Just just wondering are you seeing that pricing power if I heard a ticket M&A, where those margins be improving year over year similar to what we've seen in other divisions or you are capturing that not pricing power that you've been you, but you were talking about a couple of quarters go into the bottom line with a specialized hill.
You know what's happening given is like I said earlier in the call is that the our flatbed division in Ontario has been suffering badly in 2019.
Very bad.
For all kinds of reason the steel tariff is one.
You know the the level of.
Certain the tea in the global economy for our customers to invest or not to invest.
So it's been a tough hole for us with the flat bed business in.
Mostly in Ontario, I mean, we do flatbed and get back but not so much compare to what we do in Ontario.
We feel good.
Mean, Steve Brookside, that's is that just Frank I mean, he used to run the upside but division and these highly involved working with Christine than either we have there I mean.
We have a fantastic team so we're going to turn the corner there.
No. The same time, we got hit with those strike at GM. Okay. You say, while the strike is only a month old, but it's affecting us because don't forget when the guys feel that there could be a strike will they slowed down they slowdowns, because they don't want to get stuck with too much product.
So this right hopefully get resolved so but it will affect us for the rest of the and hopefully in 2020, we'll be back to normal at the same time, we have those guys that Nag Volvo Magna decided on though we're going on strike.
So again that affects our aluminum shipments to.
The U.S.
In effect, so some overseas shipments to U.S.. So those strikes and so those guys are saying no let's 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 Shirley and all the acquisition.
In testing you know if you look at what we've done in Quebec kill the Bresser acquisition it turned out to be good.
We had a little bit of issue with us the one that we did on the cement hauling business. So so we're working on it now Fisher, we're going to downsize our share of cement hauling in Quebec.
Because there's too much a pressure and too much investment needs. So we're going to just ourselves there, but we have a plant we know what needs to be done. So when I look at my all our and by specialty tea other at 87 and I look at the Van Division in Canada, That's 83.
There's a disconnect there I mean, it's not normal.
That you are bad guys are doing better than the specialty guys right. Absolutely. So this is what I'm, saying is that you know our van guys are doing fantastically well.
Okay.
Perfect very happy with that now with like I said earlier with this drive ring situation keeps on growing it's a it's a it's like a cancer.
Got it could affect our you know our van division, but at the same time, our specialty PL guys.
Doing a fantastic job so what I see probably in 2020, maybe if this driver in cancer continues we could have pressure on our along with a van division, but at the same time, Okay. We have so much to do what our specialty T. L that our specialty T O guys at 87 88.
In Q3. This is not normal we should do better than that.
So those guys should be closer to a an 84 and 85 and we know what we know where the problem is the problem is is mostly on the Canadian side.
In Ontario, flatbed and into our some of our specialty operation and get back.
Right understood Mt Holly.
Thank you for the color I'd agree we got.
Thank you likewise Kevin.
We have no further audio questions at this time it cannot come back over to Mr. every day.
Well. Thank you very much operating I appreciate everyone joining us today.
We thank you for your ongoing interest and T.F.I. International and you can rest assured that we will close out you will see continued focus on our business principle.
I should be clear from my remarks today, we will continue to seek opportunities to create value unlocking it for investors and whenever possible returning excess capital to our shoulders. So we're excited about the opportunities Ed and I look forward to updating you again on our progress. So thank you again for your time this morning and have a great date.
A great weekend. Thank you.
This concludes today's conference call you may now disconnect.