Q3 2019 Earnings Call
It's 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 speed of ice that this conference call well contained 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 S. R. F 16, and I've always felt searching numbers are not directly comparable with past feed golf.
Lastly, I would like to remind everyone that this conference call is being recorded on Friday October 25th She has been in 19 I will now turn the call over to Alimta Guard, Chairman, President and Chief Executive Officer S.P.F.I. International. Please go ahead.
Well, thank you operator, and thank you everyone for joining our call. This morning.
Yesterday after the total of treating were really start third quarter results. If you need a copy of the release please visit our website.
Our continued strong performance how do you have for international to 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 fluctuates.
Always concentrating on the fundamentals are the business, we were able to drive strong and consistent free cash flow and earnings per share, which in turn to provide us with 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 maintained a strong balance sheet and we competed to accretive business acquisition adhering to our highly disciplined approach to M&A. It.
Sounds familiar it's because a T.F. our 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 plug shoulders.
Oh, that's sort of look at our two quarter results.
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. However, as I mentioned well focus on possibility not revenue growth for the sake of revenue girls or operating income was up 3% 232 million and are just.
City P.S. on a diluted basis <unk> dollar for consistent with the prior year.
In terms of our cash flow 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 RPM see packaging for you. This segment represents 14% of the total segment revenue and revenue before fuel surcharge slot at the wrong and 55 million.
Operating income grew a 1% to 28 million and the operating margin was 18.2 also up slightly versus 18.1.
And 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 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 220 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, which 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 48, Percentof 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 in our operating margin was 3.6 compared favorably to 12.2 last year.
Our adjusted operating ratio was 83.1 for Canadian Truckload, 87.14, Especial GTL and 90.94, U.S.P.L. operation, reflecting improvements for both Canadian and U.S. truckload.
We're very pleased with a 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 in last mile because that's what he percentof total revenue generated revenue before fuel surcharge of 257 million up 9% relative to 235 any prior year third quarter.
Operating income was through 2.8 million relative to 16.8 million a year earlier.
Within this segment were very activity.
Executing 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 boat, you mean bounce and discipline.
During the quarter, we need to accretive business acquisition, and we returned 84 million to our shoulders, including $20 million of 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 and ending with a total of 8.3 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 approved by the 12 stock exchange <unk>.
We repurchased four cancellation, an additional 7 million common shares.
Representing 9% about public float over the 12 months period from October 2nd to October foolish, but October 2nd 2019 talked about first 20 twond.
Going forward, our capital accretion blinders on change.
We plan to buyback additional shares to be our quarterly dividend and extend our track record of identifying attractive acquisitions opportunity exists cheating 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.
Do you mind opening the lines I'd be pleased to address questions from the audience. Thank you I reminded you ask a question 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, I'm. So early on the free cash flow I'm, a with a pretty a decent quarter from free cash flow perspective looks like you. You are tracking ahead of a 400 million dollar on on a trailing 12 month basis here. So do 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 always been able to identify.
Things that we could do so for sure we anticipate that probably one or two properties. Okay that a 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 jobs between five and 10, and we see something kind of similar for 22.
Tony.
Probably like 15 to 20 in 2020, but also we're also buying a terminal intermodal the older BYOD trend well beyond started really no terminal, but they D var trend terminal in Toronto, Okay that was a kind of sale and leaseback. So we're buying that back for 38 million in Q.
Before we have 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 decided to buy a building next to the airport in Montreal. So those will be a major capex that will do in Q4 on the real estate side, but the other side at this 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 20 to one is in the neighborhood of 15 to 25 million.
Okay. So I'm like that the free cash flow and like we did that might progress more sort of do at 450 minute order your thing for the full year then.
Yeah, but don't forget that we're buying this terminal definitely 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 filled up because of those real estate deals I was feeling the same kind of as if coal seam neighborhood.
But excluding DAC, you're right I mean, we would do better than that yes.
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 between the logistics in the last mile. So they are the 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 yet, 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% up our global revenue, 25% to 30%.
The rest is all of my last mile mostly U.S. base and some of 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 and Oh. He is just outstanding what we do in Canada and this is why.
Well, we've made some changes weve ask our E V P ER 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 and maybe I was not doing a good jumping off. So this is why ascom.
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 could be VIX like the logistics division of Die come U.S., you know and there's more maybe that will happen in the future.
This is a market where a lot of these guys 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 far far far but some of it is the markets, but some of it is us too. So this is.
Well, we're gonna be working aggressively in the U.S. with the team.
You know to reduce our costs improve our margin because in some areas maybe our pricing was based on all the facts that don't reflect reality, so we'll be working very aggressively and trying to improve that.
So no I think that are you you will see some great improvement over the course of the next 12 months.
Okay. That's good color I'm still under logistic side W. you had these two new tuck ins that just described one in Canada and one together in the U.S. any sense on the revenue and margin provide for these things you said, it's accretive 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 I bid 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 I 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 gonna be accretive to us no problem. The revenue of the U.S. One is about was about 15 million, but after you know everything that doesn't make any sense for us well probably down to 30 530 to 35 million.
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.
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 GE fence Ito with Cowen and company. Please go ahead.
Yeah, Hi, this is Adam on for Jason maybe just a quick one income following up there on your on your previous comments I'm, just asking kind of how what the M&A market looks like right now when and how your M&A pipeline looks you guys see multiple it's 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.
To 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 so that's one focus of ours last by the U.S.. If we could do something in Canada that would be read as well.
Then if you look at the Canadian market focus has always been in the LTL what can we do too because as you know our revenue the keeps on coming down okay organically its 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 were.
We've been active in the U.S. market, where you know the number one player in Canada, we want to grow our base in the U.S., where their 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 tea al.
In terms of a 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 once 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 T. Five size today, we could do you 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 and the fifth also within Ts, it's got to be or maybe a new platforms like a U.S. ER.
Specialty T L 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 is gonna be again, a good year for us in terms of valuation it's still acceptable.
They are less than they were a year ago well in terms of you know 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 goes down accordingly, right.
Got it now that they don't make sense and I appreciate the color. There maybe just a quick follow up in switching gears a little bit you know obviously, the U.S. trucking market. It has been soft now for from you know much or after 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 in and you know how that compares to the U.S. So the current said if U.S. market and what kind of trends are you seeing any 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 truck load on the flat bed side has been affected badly okay with the steel tariffs or you know that took effect Oh I think late last year into early into next.
Here the steel data between U.S. in Canada, I know that these disappeared a few months ago, but it takes a long time for that 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 Volvo Mac.
Next our aluminum affects a shipments affects also steel shipments to those guys. So our 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 I.
No we have pressure on freight for sure free to solve there as well why because a lot of cooperation, though just waiting on the sidelined for investment Okay. In order to understand what are the new rules of international treating because of all this fight between let's see U.S. in China. This retreat.
Deal between Canada, and U.S. 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 have 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.
What they call driver Inc. So this is really unfair competition to us and other.
Companies that operate legally in Canada.
Robbery 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.
ER.
Local authorities in Canada, a this is really unfair competition do 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.
Hi, guys have really done a fantastic job fighting a you know these these kinds of unfair competition. So awfully the the Canadian governments and a the Ontario, Quebec, guys will wake up and smell the coffee and started to address this situation. Because this is really really me.
Major unfair competition to us.
Got a really appreciate the color there. Thank you guys.
Your next pleasure other thinking your next question in Fem care main dark and things like National Bank Financial. Please go ahead.
Very much a good morning.
Why don't government.
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 because 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 in 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 and the 2020, whether you see a supply demand balance kind of getting a little better for you.
I think that are 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 2000, <unk> 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 into business and I'm 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 don't.
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 would 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 a 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.
Is there and we're starting to see some improvement because if you look at a war in Q3, a year over year, it's still in the improvement and most of the improvement comes from year over year from PC 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 It will be easy.
Why is that because we're investing a lot of dollars in in the into the capital of the fleet by new trucks, but the beauty of that is that the guy deliberate on that so our maintenance cost now at Ti is comparable to see if I in comparable basically comparable to what we do in Canada. So I'm really.
Are you 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 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 re the owner operators, 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 I think it was in Q2 is that we're implementing the same.
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 <unk> 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.
But you know what I'm really happy with it because when I look at our Q3 numbers for U.S. deal and we compare that to the best Guy, Okay, which you know you could say Knight is probably the basle one of the best that we compare ourselves I mean, we're getting closer to those great truckload guys no.
No the freight environment, that's difficult yeah, no that's a that's great.
Maybe just respond very quickly just on the the the P.S. guidance for the full year, I guess I sort of assume here that you're still quite comfortable with the $3.90 to Ford always in 10 cents you Kinda talk.
Oh, yes, they're just want to confirm that.
Thanks, very much at all for me.
Thank you Kevin. Your next question is great and then why I pray friendly here again. Please go ahead.
Good morning your line.
[noise] funny, but Uh huh.
First question, if we look at the largest thicken 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 U.S., that's won't come down 35, but where are you, including rather as Bob.
One 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 kinda 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 C. F I logistics business Okay.
That's what these guys do.
Oh. 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 teen leadership team to help our 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 the quarter small.
Yeah quality small I mean, it's a 27 million dollar company based out of Montreal, but it's a great great I said great team good fit with our you know our other businesslike cavalierly like a ill try a bar all these guys. It's it's a it's a great acquisition and we're gonna do well those guys are.
Great team lean and mean.
Perfect good fit okay, and when we look at the margin profile for larger stick in the last mile close do do do five person I've used to be down versus last year because of the integration of the acquisition, but longer term weren't do you see the no margin potential foreign logistic in last mile. One the those aquas.
Question are a fully integrated than me.
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 what 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 that are 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 bankrupt is not because they are they start management team. So it puts a lot of pressure in the U.S. team.
So this is why and say hey, guys you know what our Canada is running perfectly good. So let's have these guys support our U.S. teen 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 why when you look at the U.S., Yeah, it's been almost flat quarter over quarter close to 19, 91%.
So what's 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 for.
Truckload guys. So to me they t., 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 hundreds and five or 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 kind of 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 one 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, no that being said, okay. We have pressure.
Now that like we've never seen before with those rubbery like I was saying earlier, okay. So I mean, the guys are working hard but if if we don't have a solution. This on fairness practice, okay. It could you know put put some.
Pressure on on the possibility of us running at night, and 85 or a needy eight or when these guys are running maybe a 95 law, but with 15, 20% less cars. They know us on labor Hey, I.
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 mention what kind of the margin improvement <unk> or are we could see let's say a toward deanna 2024, the U.S. yeah.
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 there guys are working or their 2020 plan would show we're meeting those guys a November 11.
So I'll be in a better positioned to answer that kinda question, but my feeling is that we still have room to improve our cost okay improve our asset utilization a improve 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 move to improve so let's say a the market condition remains basically about the same rate 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 a 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.
And we'll we'll see better now.
The next you too much.
Okay. Okay perfect. That's it for me I like thanks for the fine.
That's your but anyway.
Your next question from baggy salmon with BMO capital markets. Please go ahead.
Thanks, Good morning alone.
What anybody foot.
My first question is I wanted to get your thoughts on now that we have seen maybe two or three quarters a fee on 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 that kind of changed a little bit kind of any additional thoughts on that but now that you're talking maybe two or three quotas to see it play out.
Well I think for you what Cnas done it is great I mean de took a transaction. He took also the intermodal division of H. and our and it just normal for them I mean, it's it it makes a lot of sands 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, which is 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 she N is all about making money and a you know when I see a accompany 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.
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 and the U.S., but you also always correct arises.
Okay with being kind of very competitive and maybe even a rational 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.
The strategy, maybe if that 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 that can run three to 4000 trucks in the U.S.. So we'll never be 15, or 20000 truck truckload guys in U.S. no way, okay. So the size that we have today it.
Is good we could do well with that now 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 say we have about a 3500 trucks.
On the Van Division well, 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.
Very happy about what's going on over there. So the focus to answer your questions that 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 in Canada, Okay. So absolutely we're looking at all kinds of opportunities.
Opportunities to grow our specialty truckload operation, both Ontario, Quebec, not so much out west.
Because I'm philosophy as you know as we like to be the big fish in a small upon 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.
Good morning.
What do you want it.
I'd like to focus a little bit on the your guidance items. It sounds like not let a lot has changed 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 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 are real estate purchases.
So coming back no a U.P.S. your it I think 390 to four.
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 or Walter as we said I mean, the same question was asked a in Q2, and we said and I know guys. 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 no don't forget we had an election in Canada and the election always affect the consumer and 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 eliminate also some.
You know.
Clouds, there's lots of cloud because of that and not where 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.
It's it's okay I'm happy 2020, we'll see.
520, 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 kind of pointing 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 baca.
You know.
M&A. He is the thing that helps us a bit want are aimed because when you look at the 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.
Ah. 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 got in mind, just so you have a dollar free cash now as you look into the 2020 or 2020 Kinda 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.
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 gonna be at four bucks a share or for 20, and he's always out of that equation, but based on what it.
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 goes into a right buyback is that right Yep Yep Yep and final Uncap.
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 about the same Walter it's impossible to say, 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.
We buy back really stay where it makes sense like the total terminal four 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 try 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 push at TCT in 2019. So those guys are back if you look at the end DNA.
You'll see that the average use 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 the normal fashion.
Okay, Yeah, a little bit 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 a interesting dynamic where the smaller peer is saying that pricing is just falling off a cliff.
When I when I when I compare that to some of your larger private peers, they're saying that no. The smaller players really Jack prices high in 2018, and now you know to the point of being you know I'm taking advantage of the shipper now there are no. It swinging back on them a larger larger carriers did not do that and therefore.
You know 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 but we're not falling you know it's not a you know the bottoms up falling out like it might be for some other smaller peers.
No absolutely I mean, if you look at our results Walter I mean pricing <unk>. The problem that we have if you talk are you talking truckload LTL or p. and see you.
Oh <unk> this was truckload.
No. 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 in truckload. Encana is 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.
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.
Right now and also 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, what 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. You know we're confident that this situation probably will resolve in 2020, but like you said probably for six months is gonna be mm not so good maybe the back half of 2020 will probably be much better.
Great color thing.
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.
Good morning, Dave.
Just a quick follow up there on the comments about.
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 other guys are down 8%, a 5% that 10% volume wise I'm talking about.
Hey, 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 none.
Investing okay because of all this on known about these trade wars and different political situation right now.
And then.
Another thing that the truckload guys when talking about the side the weak volumes and 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 rins.
Other issues yet.
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 the 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 set our 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. There was no camera on the on their 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 a fourth facing camera. So that helps because if you're involving 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 saying so safety is big we've also invested within our new trucks with.
All the safety like collision avoidance Lane change Ases and 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 you know, 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 miler within cfive.
So driver with experience helpless 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 this.
Safety 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 there and now we were doing a great job now we were here.
It with 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.
Getting hit with.
All kinds of.
Entrance rate going up.
And then on LTL quality focused their terrific, Louisiana margin expansion, but when do the growth focus or is there and when do you feel comfortable enough there to.
[laughter] or volume growth.
Yeah, you wrote the problem with growth organic growth, Dave or in my mind, It's it's very difficult to do right now in Canada, because the market is shrinking and a lot of these or other truckers don't understand that when that 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 Tia fives 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 can find the right to accompany the rights fit but I'm telling you.
Every LTL accompanied I look at right now.
They're not they're not highly profitable there is there 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 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 M&A 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 Normandy and over the last 18 months and it's been fantastic, but in terms of top line went back to square one I mean were flat.
Bottom line were flat top line were down.
Excellent. Thank you.
Your next question and family Yeah, Fuzzy on Luke I T T I still on wealth partners. Please go ahead.
Hi, ally and good morning, Okay. Good morning, Luckily about the impact ecommerce 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, 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 layer 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 or 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.
I 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.
And your revenue from E Commerce, I'm basically flat.
Reason being is that some of my competition.
The focus is volume.
Well, it's not about making money, it's about just growing market share and hopefully one day, we'll make money though.
It's like this philosophy that comes from a this a large ecommerce guy.
That says well, we're there to service customer and are we making money on doing that and probably you know they came up with their numbers or just a day or two ago and.
In terms of liver either costs are 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 ecommerce 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 that we can't do that because I was 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. You know 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 a 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 it in and out of Mexico No.
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 condition improves like we believe it will then 2020 them we'll see.
The what needs to be done and I just ourselves accordingly.
You know one of 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 in San Antonio, 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 dollar.
And you know invest in Ah 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 our philosophy <unk> <unk> <unk>.
Understood. Thank you, Sir and a enjoy the weekend. Thank you.
Thank you likewise.
Your final question comes from Kevin Chiang, Let's see IB fees. Please go ahead.
Hello, and 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 under price contracts what would you need to be bigger there like is 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 it would be a good plus but really the job as 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.
On 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 sculpturing in 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 wasn't 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 well we have it can be 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 would then last week in Dallas.
And she is so good about now the team the 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 they access competition and those guys says well we're safe for US is not a problem, so well whoa whoa rent more space for it to please the customer and thus we say, though 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 none no no you.
No one 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 I know when in our last mine 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 it.
That's a 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 had 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 to that or.
On a year to date basis. Just just wondering are you seeing up pricing power if I, if vertical M&A with those margins be improving year over year similar to what we've seen in other divisions or you are capturing that not pricing power. The you'd 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 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 in tea in the global economy for 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 it's Frank I mean, he used to run this I'd been division and he is 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.
No. The same time, we got hit with those strike at GM. Okay, you say well 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 slow downs, because they don't want to get stuck with too much fraud.
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 Mag Volvo Magna decided on Oh, we're going on strike.
So again that affects our aluminum shipments to.
The U.S.
In effect, so some of our steel shipments to U.S. So those strikes. So those guys have seen no stuff 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 she'll economic acquisition.
Fantastic No. 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 or our share of cement holding in Quebec.
Because there's too much a pressure and too much investment needs. So we're going to just ourselves there well we have a plant we know what needs to be done. So when I look at my all our and by special TTR that 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 have and 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 range situation keeps on growing it's a it's a it's like a cancer.
That could affect our you know our van division, but at this same time, our specialty P.O. 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 with our specialty T. L that our specialty T. L 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 mostly on the Canadian side.
In Ontario, flatbed and into our some of our specialty operation and get back.
Right well under some Mt Holly.
Thank you for the color how agree we got.
Thank you likewise Kevin.
We have no further audio questions at this time they tend to come back over to Mr. for died.
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 day.
And a great weekend. Thank you.
This concludes today's conference call you may now disconnect.