tfi international inc. (tse: tfii)changed its name to transforce. in february 2016, the company...

Robert Dunn Michael Wolleben

PCS Research Services 100 Wall Street, 20th Floor New York, NY 10005 (212) 233-0100 www.pcsresearchservices.com

Institutional Research Group, LLC (“IRG”) is the author of this report. PCS Research Services (“PCS”) is the exclusive marketer and an authorized distributor of this and other research reports created by IRG. IRG and PCS are affiliates. IRG, PCS and each of their respective employees and affiliates may have positions in the securities of companies mentioned herein. This report is based on information available to the public, and no representation is made with regard to its accuracy or completeness. This document is neither an offer nor a solicitation to buy or sell securities. All expressions of opinion reflect judgment at the date set forth above and are subject to change. All views expressed in this research report accurately reflect the research analysts’ opinion about the subject matter contained herein. No part of the research analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the research report. Reproduction of this report is strictly prohibited. Institutional Research Group, LLC © 2017.

TFI International (TSE: TFII) is a diversified transportation

provider operating four distinct business segments: (1) Truckload

(40% of 2016 sales and 47% of EBITDA); (2) Package & Courier

(34% of sales and 31% of EBITDA); (3) Less-than-Truckload

(20% of sales and 16% of EBITDA); and (4) Logistics (6% of 2016

sales and EBITDA).

In December 2016, TFII acquired Contract Freighters Inc. (CFI),

a U.S. truckload business divested by XPO Logistics (XPO)

following its purchase of Con-way (CNW) in September 2015. In

the near term, the transaction opens the door for TFII to seek a

U.S.-based listing for its stock. As well, the increased scale

presents a range of potential options for its Truckload division,

including a spin-off as a standalone or a merger with a strategic

player, which we estimate could unlock value for shareholders.

Additionally, the asset-light Package & Courier and non-asset-

based Logistics divisions appear undervalued in the current

corporate structure and could be sources of additional optionality.

By our calculation, at less than 7x 2018E EV/EBITDA and a

~12.5% free cash flow yield, TFII trades at a discount to the sum

value of its parts. Considering financial commentary as well as

peer and M&A valuations, value of $28 per share, $16 per share,

$5 per share, and $4 per share can be assigned to TFII’s TL, P&C,

LTL, and Logistics businesses. Accounting for corporate costs

and projected net debt of ~$17 per share yields a sum-of-the-

parts value of roughly $36 per share, implying ~35% upside

potential.

Future potential catalysts include a U.S.-based stock listing for

TFII, the separation of its TL business, the monetization of the

P&C and/or Logistics divisions, earnings leverage to improved

industry fundamentals, additional acquisitions and/or share

repurchases. Potential risks include integration issues, a lack of

execution, accident liability, currency fluctuations, labor issues

and pricing pressure due to deteriorating industry fundamentals.

TFI International Inc.

(TSE: TFII)

Price (6/16/2017) $26.64/share

Market capitalization $2.4B

Truckload (TL): $28/share

Package & Courier (P&C): $16/share

Less-than-Truckload (LTL): $5/share

Logistics: $4/share

Corporate/Net Debt: ($17/share)

SOTP: $36 per share*

*SOTP may not add due to rounding; all

figures in CAD unless otherwise noted

NOTE: This publication could be

considered as advocating for corporate

restructurings. Authors select companies

for this report based on the potential for

a future value-unlocking transaction. In

many cases, these companies have or

could come under activist investor

pressure, media scrutiny, or general

market speculation that a spin-off or

asset sale is possible.

HIDDEN OPPORTUNITIES “Valuing possible breakups by providing sum-of-the-parts analysis.”

P a g e | 2

The Background

TFI International (TSE: TFII; OTCQX: TFIFF), based in Montreal, Quebec, has origins dating

back to 1957 and was known as Cabano until 1992 when it acquired LTL-carrier Kingsway and

was renamed Cabano-Kingsway. In 1996, a new management team, led by current CEO Alain

Bédard, began implementing an acquisition-focused growth strategy. In 1999, the company

changed its name to TransForce. In February 2016, the company completed the sale of its waste

management business to GFL Environmental for $800 million (or ~10x 2016 EBITDA). In

December 2016, the company increased its U.S. exposure via the acquisition of Contract

Freighters (CFI) and adopted the current corporate moniker. Today, TFII operates four distinct

business segments (see Background #1): (1) Truckload (40% of 2016 sales and 47% of EBITDA);

(2) Package & Courier (34% of sales and 31% of EBITDA); (3) Less-than-Truckload (20% of sales

and 16% of EBITDA); and (4) Logistics (6% of 2016 sales and EBITDA).

Background #1 TFI International: Selected Financial Items, 2014-2018E (C$ in millions)

Source: Company reports, Bloomberg, and Institutional Research Group estimates.

2014 2015 2016 2017E 2018E

Total revenue:

Package & Courier $1,303.8 $1,347.8 $1,399.7 $1,434.7 $1,492.1

Less-than-truckload $910.8 $882.9 $808.8 $901.8 $910.8

Truckload $1,062.4 $1,614.2 $1,632.4 $2,211.9 $2,267.2

Logistics $182.4 $254.2 $241.1 $289.4 $296.6

Eliminations ($70.3) ($69.3) ($56.8) ($14.1) ($14.1)

Total $3,389.1 $4,029.9 $4,025.2 $4,823.7 $4,952.6

Adj. operating income:

Package & Courier $91.2 $90.2 $116.8 $134.1 $139.5


Truckload $86.9 $134.1 $105.7 $88.6 $131.2

Logistics $16.9 $27.9 $23.4 $26.9 $27.6

Corporate ($28.4) ($21.4) ($35.9) ($40.0) ($40.0)

Total $227.6 $276.5 $258.2 $268.5 $317.7

Adj. EBITDA:

Package & Courier $126.6 $124.0 $151.3 $170.0 $176.8


Truckload $135.5 $239.5 $229.5 $289.9 $344.3

Logistics $20.0 $31.4 $27.3 $32.7 $33.5

Corporate ($27.0) ($19.5) ($33.8) ($37.5) ($37.5)

Total $349.3 $452.7 $451.3 $545.1 $608.0

Capital expenditures, net

Package & Courier $19.4 $16.6 $11.2 $13.4 $14.0

Less-than-truckload ($48.8) $5.0 $5.4 $5.9 $5.9

Truckload $13.8 $53.9 $35.2 $128.0 $131.2

Logistics ($0.2) ($11.1) ($3.8) $0.3 $0.3

Corporate $0.9 $2.9 $1.5 $2.0 $2.5

Total ($14.9) $67.3 $49.6 $149.5 $153.8


P a g e | 3

For context on the following discussion, TFII’s stock has sold off roughly 25% from its post-CFI

announcement highs after management reduced its initial 2017 guidance by about 7.5% to

$550-$560 million (from ~$600 million; see Background #2) on the 1Q 2017 conference call.

Free cash flow guidance was also reduced to $275 million (from $300 million). Management

indicated that its guidance reduction was largely driven by a weak fundamental backdrop in its

U.S. TL business, which, along with the wider domestic truckload shipping industry, has been

slower to improve than most observers/investors have anticipated (a dynamic that will be

discussed in more detail below). Still, current year guidance, at the midpoint, implies a 7.5x

2017E EV/EBITDA multiple and a free cash flow yield of 11%, which is a level from which we see

upside potential (both from TFII’s varied transactional optionality as well as from prospective

improvements in underlying fundamentals). Based on our 2018 forecasts, TFII trades at less

than 7x 2018E EV/EBITDA and with a free cash flow yield of ~12.5%.

Background #2 TFI International: 2017 Guidance (C$ and US$ in millions)

Source: Company reports.

On a consolidated basis, TFII is among the 10 largest for-hire transportation providers in North

America, with a network of 404 terminals (89 owned & 315 leased) and a fleet of nearly 18,000

tractors (8,000 owned & 10,000 operated by independent contractors) and 25,000 trailers. It

operates with a relatively decentralized (and asset-light) business model and is generally well-

diversified, in terms of both industry and geographic exposure (see Background #3).

Background #3 TFI International: Diversification By Industry and Geography


Initial Current

Total adj. EBITDA $600 million $550 - $560 million

CFI adj. EBITDA US$115 million US$85 - $95 million

Implied purchase price 4.9x 6.2x

Free cash flow $300 million $275 million

E-Commerce 21% U.S 46.5%

Retail 21% Canada 52.7%

Manufactured Goods 12% Mexico 0.8%

Automotive 8% Total 100.0%

Services 7%

Food & Beverage 6%

Forest Products 5%

Energy 5%

Building Materials 4%

Metals & Mining 3%

Chemicals & Explosives 3%

Maritime Containers 2%

Other 3%

Total 100%

By industry By geography


P a g e | 4

Truckload (TL)

The TL segment, which accounted for 40% of sales and 47% of EBITDA in 2016, provides both

conventional dry-van and specialized services, including flatbed, tank, and dump truck

deliveries, in Canada, the U.S. and Mexico. For context, truckload shipping is the primary mode

of freight transportation in North America and involves the movement of a full truckload of

freight (typically more than 10,000 lbs.) for a single customer on a point-to-point basis. The TL

business was built via a series of acquisitions (see Background #4), including Contrans and

Transport America (TCA) in 2014, and, more recently, the purchase of XPO Logistics’ (NYSE:

XPO) U.S. truckload business for US$558 million (or ~6.2x EV/EBITDA) in October 2016.

For some context on the most recent deal, the acquired business was brought under the XPO

umbrella when in October 2015 it purchased Con-way (formerly NYSE: CNW), a diversified

transportation provider that was itself the subject of a Hidden Opportunities report dated

November 2014, for $3 billion (0r 5.7x EV/EBITDA). Prior to its purchase by Con-way for $751

million (or 7.6x EV/EBITDA) in September 2007, the business historically operated as Contract

Freighters Inc. (CFI), which is the moniker that will be re-assumed by TFII. CFI has a cross-

border concentration within the so-called NAFTA corridor (i.e., the U.S., Canada and Mexico)

via a network of 29 terminals and a fleet of about 3,000 tractors (2,500 owned) and 7,500

trailers (7,000 owned). The deal, which brought in US$530 million of revenue and US$90

million of EBITDA, accomplished two strategic goals for TFII, namely increased scale in its

Truckload business and an increased presence in the U.S. Consistent with TFII’s decentralized

strategy, the business will continue to be run by Timothy Staroba and operate as a standalone

entity out of its headquarters in Joplin, MO (although TFII plans to increase CFI’s use of

independent contractors to ~35% from roughly 20% in an effort to mirror its Canadian TL

business over the next 12-18 months.)

Background #4 TFI International: Truckload Segment, Selected M&A (C$ and US$ in millions)


In 2016, TL segment revenue, excluding fuel surcharges, increased 3.5% to $1.5 billion, as

volume declines were offset by the October 2016 acquisition of CFI and by currency. (Excluding

acquisitions, revenue declined 7%, despite a 30% rise in the e-commerce business to $115.7

million.) Adjusted operating income declined 21% to $106 million, as pressure on freight rates

in both the U.S. and Canada drove negative fixed-cost leverage within the segment’s more asset-

heavy operating model, driving a 120-basis-point deterioration in the operating margin to 7.1%.

Adjusted EBITDA declined just 4% to $229.5 million, in part due to higher D&A expense at CFI

(see Background #5).

Closed Target Description

Purchase

Price

Total

Revenue EBITDA EV/EBITDA EV/Sales

Oct-16 XPO Logistics (CFI) N.A. Truckload US$558 US$530 US$90 6.2x 1.1x

Dec-14 Contrans Group (CSS) Flatbed $580 $572 - 1.0x

Jul-14 Transport America Dry-van US$310 US$350 - - 0.9x

Average 6.2x 1.0x


P a g e | 5

In 1Q 2017, segment sales, ex-fuel, jumped 44% to $487 million, wholly driven by the CFI

acquisition; excluding acquisitions, revenue was down about 1%, driven by volume and rate

pressure as well as by currency. Adjusted operating income declined 28% to $15 million, as the

operating margin deteriorated 300 basis points to 3% amid ongoing rate pressure and elevated

integration costs, which were ~$7.5 million. (Excluding acquisitions, the operating margin

would have actually improved 10 basis points to 6.1%.) Adjusted EBITDA increased 32% to $64

million (see Background #5). As mentioned earlier, it was pressure on results in the Truckload

segment, particularly the U.S. operation (i.e., TCA and CFI), that prompted TFII to reduce its

consolidated guidance following 1Q 2017. TFII indicated the expectation that CFI would

generate ~US$85-$95 million of EBITDA in 2017 (down from the initial expectation of ~$115

million), as it expected that industry fundamentals in the TL sector would remain weak

throughout 2017 (versus the prior expectation for some modest improvement in 2H 2017). That

said, management expects fundamentals to improve (i.e., supply and demand to tighten) in

2018 and still thinks that on a more normalized basis the earnings power of the CFI business

remains in the US$100-$125 million range.

Background #5 TFI International: TL Segment, Selected Financial Items (2014-2018E)

(C$ in millions)


It is worth noting the current weakness in the U.S. for-hire truckload market, which is large (i.e.,

~US$400 billion-plus) and highly fragmented, with the top 25 carriers controlling less than 10%

of the market. Clearly, results of transportation providers are “cyclical,” but perhaps the most

relevant “cycle” for investors to consider is the so-called pricing or supply/demand cycle (as

opposed to the interest rate cycle or even the broader economic cycle), which is to say that a 1%

increase in price (or the rate per mile or ton) is far more profitable for a trucker than a

3 mos. 3 mos.

2014 2015 2016 2016 2017 2017E 2018E

Total revenue $1,062.4 $1,614.2 $1,632.4 $366.9 $546.4 $2,211.9 $2,267.2

Fuel surcharge ($151.5) ($175.0) ($143.2) ($29.2) ($59.9) ($243.3) ($249.4)

Revenue $910.8 $1,439.2 $1,489.2 $337.7 $486.6 $1,968.6 $2,017.8

Adj. operating income $86.9 $134.1 $105.7 $20.4 $14.7 $88.6 $131.2

Depreciation of PP&E $40.0 $84.4 $97.7 $21.9 $41.7 $171.4 $181.4

Amortization of intangibles $8.6 $21.1 $26.1 $6.1 $7.4 $29.9 $31.7

Adjusted EBITDA $135.5 $239.5 $229.5 $48.4 $63.7 $289.9 $344.3

EBIT margin, ex-fuel 9.5% 9.3% 7.1% 6.0% 3.0% 4.5% 6.5%

EBITDA margin, ex-fuel 14.9% 16.6% 15.4% 14.3% 13.1% 14.7% 17.1%

EBIT margin, total 8.2% 8.3% 6.5% 5.6% 2.7% 4.0% 5.8%

EBITDA margin, total 12.8% 14.8% 14.1% 13.2% 11.7% 13.1% 15.2%

Capital expenditures, net $13.8 $53.9 $35.2 $7.3 $17.7 $128.0 $131.2


P a g e | 6

corresponding increase in volume. As such, economic expansion, in and of itself, is not generally

sufficient to drive outperformance for trucking stocks; rather, the industry does best during

periods when aggregate demand exceeds overall capacity, to the benefit of the industry’s pricing

power.

In that context, despite sustained (albeit tepid) expansion in freight demand, as measured by the

American Trucking Association’s (ATA) Truck Tonnage Index (see Background #6), over the last

several years the financial results of U.S. truckload carriers, including shippers such as

Heartland Express (NASDAQ: HTLD), JB Hunt (NASDAQ: JBHT), the recently IPO’d Schneider

National (NYSE: SNDR), and Werner Enterprises (NASDAQ: WERN), as well as Swift

Transportation (NYSE: SWFT), which is in the process of merging with Knight Transportation

(NYSE: KNX), have been relatively underwhelming (as indicated by the fact that the group’s

stock prices are broadly below where they were at the beginning of 2015 despite a near 20% gain

the S&P 500).

Background #6 American Trucking Association’s (ATA) Truck Tonnage Index

Source: ATA.

While we think industry fundamentals are likely to remain tepid through the remainder of 2017,

we discern several factors, including expanding government regulations (e.g., HOS, ELD, and

CSA) as well as rising equipment costs, tighter access to credit and a finite supply of qualified

drivers, that are likely to reduce overall industry capacity (or at the very least stymie any

significant expansion). As such, it seems reasonable to assume that, in the context of a modestly

expanding economy (i.e., low-single-digit GDP growth), industry pricing should improve in

2018-2019. The near-term event that is perhaps likely to have the greatest impact on the

industry’s supply/demand balance is the impending mandate requiring commercial trucking

fleets to install electronic logging devices (ELDs) by December 18, 2017. For context, in

December 2015 the Federal Motor Carrier Safety Administration (FMCSA) issued its final rule

on electronic logging devices, which required commercial trucking fleets to implement the new


P a g e | 7

technology by December 2017. ELDs replace manual paper logs to automatically record a

driver’s on-duty hours/mileage to ensure compliance with federal Hours of Service (HOS)

requirements, which are a by-product of the Comprehensive Safety Analysis (CSA) of 2010 and,

among other things, limit the amount of consecutive time a commercial truck driver can operate

a vehicle, with the goal of reducing fatigue-related highway accidents.

In the context of a fragmented industry with thousands of marginally profitable players, the cost

of the implementation of this mandate, which the FMCSA estimates will cost about $495 per

truck per year as well as the negative impact on asset utilization, which precedent suggests could

be in the 3%-5% range, is expected to reduce overall industry capacity; in fact, we have seen

estimates predicting that industry capacity could be reduced by 4%-14%. For large, sophisticated

players, such as TFII, which have already implemented the latest technologies monitoring

factors like miles, speed, idling, hard-braking and fuel consumption in their fleets, the impact on

operations will be negligible, while the potential reduction in industry capacity, assuming a

gradually expanding economy, should result in a better pricing environment (i.e. contract

pricing up ~5% with spot market rates substantially higher) in 2018-2019 (to the benefit of

financial results and stock prices).

For our part, we expect 2017 revenue, excluding fuel surcharges, to increase about 32% to $1.97

billion, but with a roughly 16% decline in operating income to $89 million, driven by a 260-

basis-point deterioration in the operating margin to 4.5%. Adjusted EBITDA is projected to

increase ~26% to $290 million. For 2018, when we expect a better supply/demand balance (as

well as lower integration & maintenance expenses), it could be reasonably projected that TL

segment sales, ex fuel, could improve 2.5% and top $2 billion, with a more normalized operating

margin of 6.5%, which implies a 48% rise in operating income to $131 million. Adjusted EBITDA

could be projected to increase 19% to $344 million (see Background #5).


P a g e | 8

Parcel & Courier (P&C)

The Parcel & Courier segment, which accounted for 34% of revenue in 2016 and 31% of adjusted

EBITDA, offers same-day/last mile as well as next-day delivery services in the U.S. and Canada.

The business was also built via a series of acquisitions, including Dynamex and DHL Express in

2011 (see Background #7), and primarily uses independent contractors (IC), which results in an

“asset-light” operating model that limits the business’s capital intensity (to the benefit of cash

flow and financial returns).

Background #7 TFI International: P&C Segment, Selected M&A (C$ and US$ in millions)


In 2016, revenue, excluding fuel surcharges, increased almost 6% to $1.32 billion; excluding

acquisitions, sales increased about 3%, primarily driven by increased e-commerce shipments,

which were up 41.5% to $315 million (or almost 24% of segment sales) and currency tailwinds.

Adjusted operating income increased 29.5% on a 160-basis-point improvement in the segment

margin to 8.8%, driven by management’s restructuring efforts, which are aimed at reducing

costs and improving productivity with the target of generating a “double-digit EBIT” margin

profile. Adjusted EBITDA improved 22% to $151 million (See Background #8).

In the first three months of 2017, segment sales, ex-fuel, improved 2.6% to $320 million, driven

by the acquisition of World Courier Ground in January 2017; excluding inorganic growth,

quarterly sales fell about 3% due to a 2% decline in volume and a 1% drag from currency. E-

commerce revenue was roughly flat in 1Q 2017, due to Amazon’s (NASDAQ: AMZN) decision to

change providers in the Los Angeles market, which prompted TFII to cap the amount of

business it would do with AMZN at $75 million (down from $100 million). Adjusted operating

income rose 36% to $23 million, as the aforementioned restructuring efforts, which include a

rebranding/consolidation of some divisions under the TForce Final Mile moniker, drove a 180-

basis-point improvement in the operating margin to 7.2%. (Note: 1Q 2017 results include $3.2

million of employee termination costs that will generate estimated annual savings of $2.6

million.) Adjusted EBITDA increased 23% to $31 million (see Background #8).

For full year 2017, we expect segment sales, excluding fuel surcharges, to increase ~1.5% to

$1.34 billion. We expect operating income to improve almost 15% on a 120-basis-point


Purchase

Price

Total


Jan-17 World Courier Ground U.S. Courier - US$35 - - -

Dec-16 Muskoka Delivery Courier - $30 - - -

Jun-15 Hazen Final Mile Same-day - $45 - - -

Jul-14 Ensenda Same-day/Last mile - US$47 - - -

Jan-13 Velocity Express Express parcel - $160 - - -

Jun-11 DHL Express (U.S.) Express parcel $25 $275 - - 0.1x

Feb-11 Dynamex Inc. Same-day US$248 US$418 US$20.9 11.9x 0.6x

Nov-07 ICS Courier Courier $119 $96 - - 1.2x

Average 11.9x 0.6x


P a g e | 9

improvement in the operating margin to 10%, which is in-line with management’s recent

commentary that given its ongoing restructuring efforts, P&C’s operating margin would improve

more than 100 basis points and be in the double-digits for the full-year 2017. Adjusted EBITDA

is projected to improve ~12% to $170 million.

Background #8 TFI International: P&C Segment, Selected Financial Items (2014-2018E) (C$ in millions)

Note: 1Q 2017 operating income excludes a $13.2 million charge for impairment of intangibles but includes $3.2 million of employee termination costs. Source: Company reports, Bloomberg, and Institutional Research Group estimates.

For 2018, considering management’s commentary that global growth for P&C is likely in the 3%-

5% range we think it is reasonable to expect top-line growth, ex fuel, of 4% to $1.395 billion.

Assuming the operating margin remains flat at 10%, which is in-line with management’s double-

digit target, operating income and EBITDA could be projected to grow 4% to $139.5 million and

$177 million, respectively. (Management anecdotally indicates that the longer-term margin

opportunity in the P&C business could be 12%-14%, although it does not see that as achievable

in the next year or two; that said, 11% has been mentioned as a realistic possibility, which could

make our 2018 forecast conservative.)

3 mos. 3 mos.

2014 2015 2016 2016 2017 2017E 2018E

Total revenue $1,303.8 $1,347.8 $1,399.7 $327.6 $342.5 $1,434.7 $1,492.1

Fuel surcharge ($134.8) ($98.0) ($78.8) ($15.7) ($22.5) ($93.3) ($97.0)

Revenue $1,169.0 $1,249.8 $1,320.9 $312.0 $320.0 $1,341.5 $1,395.1




Adjusted EBITDA $126.6 $124.0 $151.3 $25.5 $31.4 $170.0 $176.8





Capital expenditures, net $19.4 $16.6 $11.2 $5.4 $2.7 $13.4 $14.0


P a g e | 10

Less-than-Truckload (LTL)

The Less-than-Truckload segment, which accounted for 20% of revenue and 16% of EBITDA in

2016, was also built via acquisitions, including Quik X in 2012 as well as Clarke and Vitran

Canada in 2014 (see Background #9). The segment offers over-the-road and intermodal freight

delivery services to shippers with less than a full truckload of freight (typically less than 10,000

lbs.) throughout Canada (as well as the U.S. and Mexico via partnership agreements). On the

over-the-road side (63% of LTL segment revenue), goods for multiple customers are moved on a

single truck via a hub-and-spoke model that can be thought of as being almost akin to a postal

service but for heavy freight. On the intermodal side (37% of LTL segment sales), shipments are

put on a railroad, primarily Canadian National (NYSE: CNI), for the line-haul portion of a move,

with the pickup and delivery (P&D) portions being completed by third-party truck drivers (or

IC’s), which limits the segment’s capital intensity.

Background #9 TFI International: LTL Segment, Selected M&A (C$ and US$ in millions)

Note: $30 million of Cavalier’s revenue is included in the LTL segment with $16 being included in Logistics Source: Company reports, Bloomberg, and Institutional Research Group estimates.

In 2016, segment sales, excluding fuel surcharges, declined 6% to $715 million, due to weakness

in both Eastern and Western Canada partially offset by currency. Nevertheless, adjusted

operating income rose ~5.5% to $48.3 million on an 80-basis-point improvement in the

operating margin to 6.8%, as the company continues to implement restructuring initiatives

similar to those in the P&C segment. (Excluding gains on sales, the operating margin improved

150 basis points to 6.1%.) Adjusted EBITDA was essentially flat at $77 million (see Background

#10).


Purchase

Price

Total


Jan-17 Cavalier Transportation LTL & Logistics - $46 - - -

Jan-17 National Fast Freight LTL intermodal - $80 - - -

Mar-14 Vitran Canada LTL $136 $200 - - 0.7x

Apr-14 Clarke Road Transport LTL $88 $190 - - 0.5x

Jan-12 Quik X Transportation LTL expedited - US$200 - - -

Average - 0.6x


P a g e | 11

Background #10 TFI International: LTL Segment, Selected Financial Items (2014-2018E) (C$ in millions)

Note: 2014 capital expenditures include $57.3 million of property sales Source: Company reports, Bloomberg, and Institutional Research Group estimates.

In the first three months of 2017, segment sales, ex-fuel, improved 12% to $199 million,

primarily driven by acquisitions, including National Fast Freight (NFF) and Cavalier in January

2017 (see Background#9). Excluding acquisitions, sales were down roughly 1%, largely due to

currency fluctuations. Adjusted operating income improved 61% to $9 million on a 140 basis

point improvement in the operating margin to 4.4%, driven by management’s aforementioned

restructuring efforts. Adjusted EBITDA improved 30% to $17 million (See Background #10).

Importantly, during the quarter TFII renewed a long-term partnership with its primary rail

partner, Canadian National, Canada’s largest railroad, to support additional growth in its LTL

intermodal offering, which along with acquisitions should help offset declines in over-the-road.

Looking ahead to the remainder of 2017, the Canadian LTL space is suffering from a degree of

overcapacity, similar to the U.S. truckload sector. That said, the problem in the highly energy-

dependent markets in Western Canada (e.g., Alberta and Saskatchewan) is not enough demand,

while in Eastern Canada the issue is more one of supply. In the West, TFII’s is seeing early signs

of a rebound among energy-related customers; in the East, it is likely to pursue additional

consolidation opportunities which could serve to both remove a competitor and add lane

density. Anecdotally, excluding the impact of the NFF and Cavalier acquisitions TFII expects its

existing LTL business to contract ~1% in 2017 with growth in intermodal partially offsetting on-

going declines in the over-the-road business. For our part, we expect segment revenue,

excluding fuel surcharges, to grow ~10% to $785 million, with a ~22% gain in operating income

to $59 million on about a 70-basis-point expansion of the operating margin to 7.5%, driven by

3 mos. 3 mos.

2014 2015 2016 2016 2017 2017E 2018E

Total revenue $910.8 $882.9 $808.8 $198.8 $228.7 $901.8 $910.8

Fuel surcharge ($158.5) ($120.8) ($94.2) ($21.6) ($29.5) ($117.2) ($118.4)

Revenue $752.4 $762.1 $714.6 $177.3 $199.2 $784.6 $792.4




Adjusted EBITDA $94.2 $77.2 $77.0 $12.8 $16.7 $90.0 $90.9





Capital expenditures, net ($48.8) $5.0 $5.4 $2.9 $0.2 $5.9 $5.9


P a g e | 12

management’s ongoing restructuring efforts. Adjusted EBITDA is projected to increase 17% to

$90 million. For 2018, we model revenue growth, ex fuel, of 1% to $792 million along with a flat

margin comparison, implying an about 1% rise in operating income and adjusted EBITDA to

$59 million and $91 million, respectively.

Logistics

The Logistics segment, which accounted for 6% of sales and EBITDA in 2016, provides non-

asset-based truck brokerage, warehousing, and supply chain/transportation management

services to customers in the U.S., Canada, and Mexico. Similar to the rest of TFII, the business

has scaled by acquisition (see Background #11) and broadly serves a market that is large

(US$100+ billion), growing (2x-3x GDP, driven by globalization, just-in-time inventory, and a

trend toward outsourcing), and highly fragmented (10,000 players, of which only ~25 have

more than US$200 million of revenue). As well, given the non-asset-based nature of the

logistics business, it requires minimal incremental capital and generates solid free cash and

financial returns.

Background #11 TFI International: Logistics Segment, Selected M&A (C$ and US$ in millions)


In 2016, Logistics segment sales, excluding fuel surcharges, declined about 5% to $237 million,

as acquisitions partially offset lower volumes and a tough comparison from $13 million of one-

off business performed in 2015. Excluding acquisitions, revenue was down 13%. Adjusted

operating income declined 16% to $23 million, as volume declines and lower gains on sale of

equipment, which were $2 million compared to $5 million in 2015, drove a 130-basis-point

decline in the operating margin to 9.9%. Excluding acquisitions as well as gains on sales, the

operating margin was roughly flat year-over year at 9.3%. Adjusted EBITDA declined 13% to $27

million (see Background #12).


Purchase

Price

Total


Nov-16 Hyphen Logistics Flatbed - $12 - - -

Aug-13 E.L. Farmer & Co. Energy US$33.1 US$70 - - 0.5x

Dec-11 I.E. Miller Services Energy US$110 US$138 - - 0.8x

Aug-10 Speed Heavy Hauling Energy US$32 US$50 - - 0.6x

Nov-09 ATS Retail Solutions Retail - $120 - - -

May-08 Patriot Freight Services Forwarding - $25 - - -

Average - 0.6x


P a g e | 13

Background #12 TFI International: Logistics Segment, Selected Financial Items (2014-2018E)

(C$ in millions)


In the first three months of 2017, Logistics segment sales, ex-fuel, increased more than 24% to

$68 million, boosted both by acquisitions, including Cavalier in January 2017, which included

$16 million of Logistics revenue, Hyphen in November 2016 and the $16 million of annual

Logistics revenue brought on with the CFI acquisition, as well as by organic growth. Adjusted

operating income increased 33% to ~$6 million on a 60-basis-point improvement in the

operating margin to 8.3%. Adjusted EBITDA increased 35% to $7 million. For full year 2017, we

expect revenue to improve 20% to $284 million, with almost 15% growth in operating income to

$27 million on a margin of 9.5%. Adjusted EBITDA is expected to grow 20% to $33 million. For

2018, we think 2.5% top-line growth, ex fuel, to $291 million is reasonable, which, coupled with

a flat margin comparison, implies adjusted operating income and EBITDA growth of ~2.5% to

$28 million and $33.5 million, respectively.

3 mos. 3 mos.

2014 2015 2016 2016 2017 2017E 2018E

Total revenue $182.4 $254.2 $241.1 $55.4 $69.0 $289.4 $296.6

Fuel surcharge ($7.4) ($5.2) ($4.5) ($1.0) ($1.4) ($5.8) ($5.9)

Revenue $175.0 $249.0 $236.6 $54.4 $67.6 $283.6 $290.7




Adjusted EBITDA $20.0 $31.4 $27.3 $5.1 $6.9 $32.7 $33.5





Capital expenditures, net ($0.2) ($11.1) ($3.8) ($0.1) $0.0 $0.3 $0.3


P a g e | 14

Balance Sheet and Cash Flow

At the end of 1Q 2017, TFII had net debt of $1.645 billion and a net leverage ratio of ~3.5x. Per

its credit agreement, the company’s funded debt to EBITDA ratio stood at 2.95x compared with

its 3.5x covenant. TFII’s weighted average cost of capital (WACC) is 3.7% (see Background #13).

Background #13 TFI International: Balance Sheet Snapshot (C$ in millions)


In 2016, TFII generated $288 million in free cash flow (or roughly $3 per share) as well as

realized a pre-tax gain of $559 million ($491 million after-tax) from the $800 million sale of its

waste management business. The company deployed nearly $800 million toward acquisitions

and $151 million toward the repurchase of ~6.4 million shares (at an average price of ~$23.50).

The company also increased its quarterly dividend by 12% to $0.19 per share (from $0.17 per

share); the current yield is ~2.8%. (See Background #14.)

2015 2016 1Q 2017

Cash - $3.7 -

Debt:

Current portion

Conditional sales contracts $24.5 $29.8 $29.8

Finance lease liabilities $15.3 $9.9 $9.9

Long-term debt $5.8 $0.8 $0.8

Term loans $559.1 - -

Total $604.8 $40.5 $40.5

Long-term

Revolver $801.2 $767.0 $830.6

Term loans - $571.7 $572.0

Unsecured debentures $124.3 $124.6 $124.6

Conditional sales contracts $35.0 $42.8 $41.6

Finance lease liabilities $23.1 $12.4 $9.9

Other long-term debt $26.7 $25.9 $25.7

Total $1,010.3 $1,544.3 $1,604.5

Total debt $1,615.1 $1,584.8 $1,645.0

Net debt $1,615.1 $1,581.2 $1,645.0

Net debt to EBITDA 3.6x 3.5x 3.5x

Funded debt to EBITDA 3.2x 2.8x 3.0x

WACC 3.7% 3.6% 3.7%

Operating leases $479.7 $475.5 $465.4

Shareholders equity $1,019.8 $1,458.7 $1,451.9


P a g e | 15

For 2017, management has guided to free cash flow of ~$275 million (or about $2.95 per share,

which implies an about 11% yield) on net capital spending of ~$150 million. (Note: the increase

in capital spending is due to necessary investments in CFI’s aging tractor fleet and, according to

management, is likely to persist in 2018 before normalizing in 2019. The investments will serve

to reduce overall fleet age and bring down maintenance costs from a current level of ~$0.12 per

mile to a more normal $0.05-$0.07 per mile to the benefit of CFI’s profitability and ability to

attract/retain qualified drivers.)

The company indicates that it will continue to pursue acquisitions of well-managed (preferably

asset-light) companies that complement existing strengths or broaden its geographic footprint

and is likely to opportunistically repurchase shares under its 6 million share authorization,

which expires September 29, 2017. In recent commentary, TFII’s CEO indicated that at $25 per

share he would “buy as much as I can.” (For our part, we assume TFII will repurchase about $50

million worth of stock through 2018, at prices ranging from $28-$34 per share.)

Background #14 TFI International: Sources and Uses of Cash Flow (C$ in millions, except per share amounts)


2015 2016 1Q 2017 2017E 2018E

Net income from cont. ops $145.7 $157.1 $14.1 $148.9 $185.8

D&A $176.2 $193.1 $67.4 $276.5 $290.3

Other $36.9 ($12.2) ($31.2) ($5.0) ($5.0)

Net cash from cont. ops $358.8 $337.9 $50.3 $420.4 $471.1

Capital expenditures, net ($67.3) ($49.6) ($20.8) ($149.5) ($153.8)

Free cash flow $291.5 $288.3 $29.5 $270.9 $317.2

FCF per share $2.86 $3.02 $0.31 $2.91 $3.41

Acquisitions ($44.8) ($798.3) ($55.4) ($67.4) -

Dividends ($68.6) ($64.1) ($17.4) ($69.1) ($68.4)

Share repurchases ($121.8) ($151.2) - ($25.0) ($25.0)


P a g e | 16

The Breakup

In our view, TFII’s management team is one focused on capital allocation and shareholder value.

We think the recent CFI purchase opens the door for a range of options, including a U.S.-based

stock listing, which we think would broaden the potential share base and increase overall

investor awareness to the benefit of valuation, as well as the potential for TFII to spin off the

Truckload business as a standalone or merge it with a strategic competitor. As well, the company

could potentially unlock value from its asset-light Package & Courier business and/or its non-

asset-based Logistics business, which, based on recent M&A and peer multiples, look to be

undervalued in the current corporate structure. We note that TFII’s decision to divest its waste

management division, Matrec, for ~10x in early 2016 was primarily driven by its contention that

the business was not being correctly valued within TFII. So, while we think the company likes

each of its businesses (and premier companies, such as FedEx and UPS, successfully operate a

similar P&C, LTL, and Logistics model), the company has noted that with competitors willing to

pay ~10x EBITDA and ~25x cash flow for transactions in the P&C sector, as was the case in the

recent sale of Golden State Overnight (GSO) by the Halifax Group to General Logistics Systems

(GLS), a subsidiary of Royal Mail plc (RMG LN), it could be hard to compete for deals/growth

(see Breakdown #5). Similarly, deals in the Logistics space averaged around 10x EBITDA (in a

range of 8.0x-12.5x; see Breakdown #9.)


P a g e | 17

The Breakdown

Based on the guidance, commentary and the forecasts discussed throughout this report, it can

be reasonably projected that TFII could generate adjusted EBITDA of $545 million in 2017 and

$608 million in 2018 (see Breakdown #1). As illustrated on the next page, TFII currently trades

at a substantial discount to all relevant peer groups on an EV/EBITDA, P/E and free cash flow

basis (see Breakdown #2).

Breakdown #1 TFI International: Adjusted 2014-2016 Results and 2017E-2018E Forecasts (C$ in millions)


2014 2015 2016 2017E 2018E

Total revenue:

Package & Courier $1,303.8 $1,347.8 $1,399.7 $1,434.7 $1,492.1


Truckload $1,062.4 $1,614.2 $1,632.4 $2,211.9 $2,267.2

Logistics $182.4 $254.2 $241.1 $289.4 $296.6

Eliminations ($70.3) ($69.3) ($56.8) ($14.1) ($14.1)

Total $3,389.1 $4,029.9 $4,025.2 $4,823.7 $4,952.6

Fuel surcharge $452.1 $399.0 $320.7 $459.6 $470.7

Revenue, ex-fuel $2,936.9 $3,630.9 $3,704.5 $4,364.1 $4,481.9

Adj. operating income:

Package & Courier $91.2 $90.2 $116.8 $134.1 $139.5


Truckload $86.9 $134.1 $105.7 $88.6 $131.2

Logistics $16.9 $27.9 $23.4 $26.9 $27.6

Corporate ($28.4) ($21.4) ($35.9) ($40.0) ($40.0)

Total $227.6 $276.5 $258.2 $268.5 $317.7

Adj. EBITDA:

Package & Courier $126.6 $124.0 $151.3 $170.0 $176.8


Truckload $135.5 $239.5 $229.5 $289.9 $344.3

Logistics $20.0 $31.4 $27.3 $32.7 $33.5

Corporate ($27.0) ($19.5) ($33.8) ($37.5) ($37.5)

Total $349.3 $452.7 $451.3 $545.1 $608.0

Capital expenditures, net

Package & Courier $19.4 $16.6 $11.2 $13.4 $14.0

Less-than-truckload ($48.8) $5.0 $5.4 $5.9 $5.9

Truckload $13.8 $53.9 $35.2 $128.0 $131.2

Logistics ($0.2) ($11.1) ($3.8) $0.3 $0.3

Corporate $0.9 $2.9 $1.5 $2.0 $2.5

Total ($14.9) $67.3 $49.6 $149.5 $153.8

HIDDEN OPPORTUNITIES

P a g e | 18

Breakdown #2 TFI International: Public Comparables (currency in millions, except per share amounts)


Parcel & Courier (P&C)

TFI

International

Inc.

Heartland

Express Inc.

JB Hunt

Transport

Services Inc.

Knight

Transportation

Inc.

Mullen

Group Ltd.

Swift

Transportation

Co.

Schneider

National Inc.

Werner

Enterprises

Inc.

Deutsche

Post AG FedEx Corp.

United

Parcel

Service Inc.

ArcBest

Corp.

Old

Dominion

Freight Line

Inc.

Roadrunner

Transportation

Systems Inc. Saia Inc.

YRC

Worldwide

Inc.

CH

Robinson

Worldwide

Inc.

Echo Global

Logistics

Inc.

Forward Air

Corp.

Expeditors

International

of

Washington

Landstar

System Inc.

Radiant

Logistics

Inc.

XPO

Logistics

Inc.

Ticker TFII HTLD JBHT KNX MTL CN SWFT SNDR WERN DPW GR FDX UPS ARCB ODFL RRTS SAIA YRCW CHRW ECHO FWRD EXPD LSTR RLGT XPO

Price (as of 6/16/17 close) $26.64 $20.71 $89.58 $35.55 $15.46 $25.54 $21.17 $29.00 $32.40 $210.50 $110.59 $19.90 $94.70 $6.90 $49.75 $10.35 $70.04 $20.40 $53.01 $57.02 $87.75 $5.20 $61.52

Market Capitalization 2,441.1 1,725.0 9,852.3 2,858.9 1,602.5 3,404.0 3,743.7 2,094.4 39,321.9 56,282.4 95,965.9 514.1 7,807.2 264.5 1,266.0 347.0 9,870.7 594.6 1,601.7 10,273.0 3,678.9 254.2 6,872.1

Net Debt (Cash) 1,662.6 (159.2) 938.3 (42.8) 448.7 941.1 474.8 99.2 3,334.0 11,585.0 13,547.0 87.8 47.4 399.3 156.2 807.8 1,010.2 181.1 (0.5) (1,153.2) (122.3) 40.8 5,022.1

EV 4,103.7 1,565.9 10,790.6 2,816.2 2,051.2 4,345.1 4,218.5 2,193.6 42,655.9 67,867.4 109,512.9 602.0 7,854.7 663.9 1,422.2 1,154.8 10,880.9 775.7 1,601.2 9,119.8 3,556.7 295.0 11,894.2

Revenue 2017E 4,823.7 566.0 7,099.4 1,149.7 1,147.2 4,121.1 4,342.2 2,098.5 60,313.4 60,152.5 64,255.3 2,848.2 3,235.5 2,016.8 1,332.4 4,907.7 14,228.6 1,873.2 1,068.4 6,561.8 3,408.6 763.7 14,918.3

Revenue 2018E 4,952.6 600.2 7,761.0 1,238.5 1,300.4 4,327.6 4,663.1 2,205.6 62,442.7 63,187.2 67,254.9 3,008.7 3,516.0 2,100.3 1,436.7 5,128.7 14,978.8 2,114.9 1,146.4 6,936.2 3,669.5 807.3 15,822.2

2017E Net Income 166.8 58.3 438.9 81.7 59.0 124.3 164.4 82.2 2,704.7 3,204.1 5,192.7 30.2 324.6 24.7 55.6 18.8 502.1 24.2 70.5 427.0 147.2 4.1 249.1

2018E Net Income 207.4 65.2 492.8 100.5 94.6 169.4 193.7 100.1 2,891.9 3,619.6 5,593.9 41.0 370.4 33.6 65.8 52.5 529.5 33.7 79.4 458.0 162.4 13.0 375.5

2017E Net Income Margin 3.5% 10.3% 6.2% 7.1% 5.1% 3.0% 3.8% 3.9% 4.5% 5.3% 8.1% 1.1% 10.0% 1.2% 4.2% 0.4% 3.5% 1.3% 6.6% 6.5% 4.3% 0.5% 1.7%

2018E Net Income Margin 4.2% 10.9% 6.4% 8.1% 7.3% 3.9% 4.2% 4.5% 4.6% 5.7% 8.3% 1.4% 10.5% 1.6% 4.6% 1.0% 3.5% 1.6% 6.9% 6.6% 4.4% 1.6% 2.4%

2017E EBITDA 545.1 186.1 1,086.0 250.2 191.6 503.6 578.4 353.9 5,188.9 8,454.7 10,562.9 152.0 740.4 109.5 175.3 283.3 900.5 63.3 155.8 716.7 281.6 29.1 1,355.4

2018E EBITDA 608.0 198.7 1,212.4 288.4 242.1 591.3 652.3 390.6 5,544.4 9,236.2 11,273.1 176.4 828.3 123.3 199.6 329.5 955.3 81.1 172.8 766.7 308.4 33.4 1,580.2

2017E EBITDA Margin 11.3% 32.9% 15.3% 21.8% 16.7% 12.2% 13.3% 16.9% 8.6% 14.1% 16.4% 5.3% 22.9% 5.4% 13.2% 5.8% 6.3% 3.4% 14.6% 10.9% 8.3% 3.8% 9.1%

2018E EBITDA Margin 12.3% 33.1% 15.6% 23.3% 18.6% 13.7% 14.0% 17.7% 8.9% 14.6% 16.8% 5.9% 23.6% 5.9% 13.9% 6.4% 6.4% 3.8% 15.1% 11.1% 8.4% 4.1% 10.0%

2017E EV/EBITDA 7.5x 8.4x 9.9x 11.3x 10.7x 8.6x 7.3x 6.2x 8.2x 8.0x 10.4x 4.0x 10.6x 6.1x 8.1x 4.1x 12.1x 12.2x 10.3x 12.7x 12.6x 10.1x 8.8x

2018E EV/EBITDA 6.7x 7.9x 8.9x 9.8x 8.5x 7.3x 6.5x 5.6x 7.7x 7.3x 9.7x 3.4x 9.5x 5.4x 7.1x 3.5x 11.4x 9.6x 9.3x 11.9x 11.5x 8.8x 7.5x

Average, ex. TFII 7.8x 8.3x 5.8x 10.0x

2017E EPS $1.94 $0.70 $3.94 $1.01 $0.56 $0.96 $0.96 $1.14 $2.23 $11.91 $5.95 $1.20 $3.97 $0.73 $2.14 $0.70 $3.56 $0.86 $2.32 $2.39 $3.53 $0.26 $1.97

2018E EPS $2.39 $0.79 $4.52 $1.26 $0.92 $1.35 $1.10 $1.39 $2.40 $13.60 $6.48 $1.60 $4.54 $0.90 $2.55 $1.67 $3.81 $1.17 $2.62 $2.59 $3.98 $0.33 $2.92

2017E P/E 13.7x 29.5x 22.7x 35.1x 27.4x 26.7x 22.1x 25.4x 14.5x 17.7x 18.6x 16.7x 23.9x 9.5x 23.2x 14.8x 19.7x 23.6x 22.8x 23.8x 24.9x 19.8x 31.2x

2018E P/E 11.2x 26.2x 19.8x 28.2x 16.9x 18.9x 19.2x 20.9x 13.5x 15.5x 17.1x 12.4x 20.9x 7.6x 19.5x 6.2x 18.4x 17.4x 20.2x 22.0x 22.1x 16.0x 21.1x


2017E FCF Yield 10.9% 5.8% 3.8% 3.1% 4.0% 6.2% 5.0% 2.5% 3.9% 0.6% 3.8% 6.4% 1.5% 9.8% - - 5.5% 6.5% 3.7% 4.4% 4.2% - 2.1%

2018E FCF Yield 12.8% 4.1% 3.9% 2.9% 8.2% 7.3% 3.9% 2.2% 4.9% 2.3% 4.8% 8.0% 2.8% 13.6% - - 5.7% 5.2% 4.9% 4.4% 4.8% - 2.1%

2018E Free Cash Flow 317.2 70.0 387.8 84.3 131.4 247.2 129.2 46.3 1,930.2 1,293.6 4,595.4 40.8 218.6 36.1 - - 563.4 32.1 77.3 455.9 176.2 - 575.5

2018E FCF Per Share $3.41 $0.84 $3.53 $1.05 $1.27 $1.86 $0.83 $0.64 $1.60 $4.84 $5.29 $1.59 $2.65 $0.94 - - $3.99 $1.05 $2.58 $2.53 $4.20 - $5.16

2018E P/FCF 7.8x 24.6x 25.4x 33.9x 12.2x 13.8x 25.6x 45.2x 20.3x 43.5x 20.9x 12.5x 35.7x 7.3x - - 17.5x 19.4x 20.6x 22.5x 20.9x - 11.9x


Truckload (TL) Less-than-Truckload (LTL) Logistics


P a g e | 19

Truckload (TL) Segment

The TL segment could be compared to a group of primarily asset-based truckload providers,

including Heartland Express (NASDAQ: HTLD), JB Hunt (NASDAQ: JBHT), Knight

Transportation (NYSE: KNX), Mullen Group (TSE: MTL), Swift Transportation (NYSE: SWFT),

Schneider National (NYSE: SNDR), and Werner Enterprises (NASDAQ: WERN), which, on

average, trade at 7.8x 2018E EBITDA (see Breakdown #2). Relevant industry M&A multiples

have averaged 7x (see Breakdown #3).

Breakdown #3 TFI International: Recent M&A Activity in TL Sector, Selected Items (US$ in millions)


Applying a blended 7.5x multiple to 2018E EBITDA of ~$344 million yields a segment value of

almost $2.6 billion, or $28 per share (see Breakdown #4).

Breakdown #4 TFI International: Estimated Value of TL Segment Based on 2018E EBITDA (C$ in millions, except per share amounts; shares in millions)


Closed Target Buyer

Purchase

Price Sales EBITDA EV/EBITDA EV/Sales

Oct-16 XPO Truckload (CFI) TFI International US$558 US$530 US$90 6.2x 1.1x

Sep-14 Barr-Nunn Knight (KNX) US$112.4 US$119.8 US$14.9 7.5x 0.9x

- USA Truck Knight (KNX) US$242 US$555 US$36.3 6.7x 0.4x

Sep-07 Contract Freighters (CFI) Con-way (CNW) US$751 US$435 US$99 7.6x 1.7x

Average 7.0x 1.0x

TL

2017E Total revenue $2,211.9

Revenue growth est. 2.5%


Operating margin, total 5.8%

Operating income $131.2

EBITDA margin, total 15.2%

2018E EBITDA $344.3

Applied multiple 6.5x 7.5x 8.5x

Enterprise value $2,237.8 $2,582.0 $2,926.3

Diluted shares 93.0 93.0 93.0

Per share basis $24.07 $27.77 $31.47


P a g e | 20

Parcel & Courier (PC) Segment

The P&C segment, despite the obvious size differential, could be compared with Deutsche Post

(DPW GR), FedEx Corp. (NYSE: FDX) and United Parcel Service Inc. (NYSE: UPS), which

trade, on average, at almost 8.3x 2018E EBITDA (see Breakdown #2). The recent purchase of

GSO by a subsidiary of Royal Mail was reportedly at ~10x EBITDA and ~25x cash flow, while

FDX’s purchase of TNT Express was at ~8.5x EBITDA (see Background #5).

Breakdown #5 TFI International: Recent M&A Activity in P&C Sector, Selected Items (US$ millions)


Applying an 8.5x multiple to 2018E P&C segment EBITDA of $177 million yields a segment

value of roughly $1.5 billion, or ~$16 per share (see Breakdown #6).

Breakdown #6 TFI International: Estimated Value of P&C Segment Based on 2018E EBITDA (C$ in millions, except per share amounts; shares in millions)


We note that our current EBITDA-based valuation construct implies a ~12x cash flow multiple,

which could be viewed as conservative compared with recent M&A multiples (see Breakdown

#7).

Closed Target Buyer

Purchase

Price

Total


Oct-16 Golden State Overnight Royal Mail plc US$90 US$114 - ~10x 0.8x

Jul-16 TNT Express Fed Ex (FDX) US$4,800 US$7,951.8 US$574.7 8.4x 0.6x

P & C




Operating margin, total 9.4%


EBITDA margin, total 11.9%

2018E EBITDA $176.8




Per share basis $14.26 $16.16 $18.07


P a g e | 21

Breakdown #7 TFI International: Potential Value of P&C Segment Based on 2018E Cash Flow (C$ in millions, except per share amounts; shares in millions)


2018E EBIT $139.5

less taxes @ 28% ($39.1)

2018E EBIT (tax-effected) $100.4

plus D&A $37.3

2018E EBITDA (tax-effected) $137.8

less capital expenditures ($14.0)

Simple cash flow $123.8




Per share basis $13.31 $19.97 $26.63


P a g e | 22

Less-than-Truckload (LTL) Segment

The LTL business could, despite differing geographic exposures and asset-intensities, could be

compared to a group of less-than-truckload concerns, including ArcBest Corp. (NASDAQ:

ARCB), Old Dominion Freight Line (NASDAQ: ODFL), RoadRunner Transportation Systems

(NYSE: RRTS), Saia Inc. (NASDAQ: SAIA) and YRC Worldwide (NASDAQ: YRCW), which, on

average, trade at 5.8x 2018E EBITDA (but in a wide range of ~3.5x for the long-haul unionized

concerns to 9.4x for the best-in-class non-union carrier; see Breakdown #2). In terms of

relevant M&A activity, in October 2015 XPO (NYSE: XPO) purchased Con-way (formerly NYSE:

CNW), which was primarily an asset-based LTL carrier, for 5.7x (see Breakdown #8).

Breakdown #8 TFI International: Recent M&A Activity in LTL Sector, Selected Items (US$ in millions)


Applying a rough M&A multiple of 5.5x to 2018E EBITDA of ~$91 million yields a segment

value of almost $500 million, or roughly $5 per share (see Breakdown #9).

Breakdown #9 TFI International: Estimated Value of LTL Segment Based on 2018E EBITDA (C$ in millions, except per share amounts; shares in millions)


Closed Target Buyer

Purchase

Price

Total


Oct-15 Con-way Inc. XPO Logistics US$3,000 US$5,700 US$528 5.7x 0.5x

LTL

2017E Revenue $901.8



Operating margin 6.5%


EBITDA margin 10.0%

2018E EBITDA $90.9


Enterprise value $408.8 $499.7 $590.5


Per share basis $4.40 $5.37 $6.35


P a g e | 23

Logistics Segment

The Logistics segment could be compared to other non-asset-based companies, including C.H.

Robinson (NASDAQ: CHRW), Echo Global Logistics (NASDAQ: ECHO), Forward Air

(NASDAQ: FWRD), Expeditors International (NASDAQ: EXPD), Landstar Systems (NASDAQ:

LSTR), Radiant Logistics (NASDAQ: RLGT) and XPO Logistics (NYSE: XPO), which, on

average, trade at 10.0x 2018E EBITDA (see Breakdown #2). Relevant industry M&A multiples

have averaged roughly 10x (in a range of 8x-12.5x; see Breakdown #10).

Breakdown #10 TFI International: Recent M&A Activity in Logistics Sector, Selected Items (US$ millions)


Applying a 10x multiple to 2018E EBITDA of $33.5 million yields a segment value of almost

$333.5 million, or ~$4 per share (see Breakdown #11).

Breakdown #11 TFI International: Estimated Value of Logistics Segment Based on 2018E EBITDA (C$ in millions, except per share amounts; shares in millions)


We note that similar to the P&C segment our current EBITDA-based valuation method implies

an about 13x cash flow multiple, which also could be conservative in a take-out situation (see

Breakdown #12).

Closed Target Buyer

Purchase

Price

Total


Jun-15 Norbert Dentressangle XPO Logistics US$3,530 US$5,500 $388 9.1x 0.6x

Sep-14 New Breed XPO Logistics US$615 US$597 US$77 8.0x 1.0x

Jun-14 Pacer Logistics XPO Logistics US$296 US$1,000 US$26.1 11.4x 0.3x

Aug-13 3PD XPO Logistics US$365 US$319 US$36 10.1x 1.1x

Sep-12 Phoenix C.H. Robinson US$635 US$807 US$51 12.5x 0.8x

Sep-12 Turbo Logistics XPO Logistics US$50 US$124 US$6 8.3x 0.4x

Average 9.9x 0.7x

Logistics




Operating margin 9.3%


EBITDA margin 11.3%

2018E EBITDA $33.5




Per share basis $3.25 $3.61 $3.97


P a g e | 24

Breakdown #12 TFI International: Potential Value of Logistics Segment Based on 2018E Cash Flow (C$ in millions, except per share amounts; shares in millions)


Accounting for corporate costs of $37.5 million capitalized at 7.6x, or the weighted average

segment multiple, as well as projected net debt of roughly $1.3 billion, yields a sum-of-the-parts

valuation of almost $3.3 billion, or about $36 per share (Breakdown #13).

Breakdown #13 TFI International: Sum-of-the-Parts Fair Value Estimate

(C$ in millions, except per share amounts; shares in millions)


2018E EBIT $27.6

less taxes @ 28% ($7.7)

2018E EBIT (tax-effected) $19.9

plus D&A $5.9

2018E EBITDA (tax-effected) $25.8

less capital expenditures ($0.3)

Simple cash flow $25.5




Per share basis $2.75 $4.12 $5.49

TL P & C LTL Logistics Corporate

Enterprise

Value Net Debt

Market

Cap

2018E Total revenue $2,267.2 $1,492.1 $910.8 $296.6

Operating margin, total 5.8% 9.4% 6.5% 9.3%

Operating income $131.2 $139.5 $59.4 $27.6

EBITDA margin, total 15.2% 11.9% 10.0% 11.3%

2018E EBITDA $344.3 $176.8 $90.9 $33.5 ($37.5) ($1,311.8)

Applied multiple 7.5x 8.5x 5.5x 10.0x 7.6x 1.0x

Enterprise value $2,582.0 $1,502.9 $499.7 $335.5 ($285.8) $4,634.3 ($1,311.8) $3,322.5

Diluted shares 93.0 93.0 93.0 93.0 93.0 93.0 93.0

Per share basis $27.77 $16.16 $5.37 $3.61 ($3.07) ($14.11) $35.73

Bull (8.6x) $31.47 $18.07 $6.35 $3.97 ($2.67) ($14.11) $43.08

Base (7.6x) $27.77 $16.16 $5.37 $3.61 ($3.07) ($14.11) $35.73

Bear (6.6x) $24.07 $14.26 $4.40 $3.25 ($3.48) ($14.11) $28.39


P a g e | 25

The Wrap-Up

In our view, TFII’s December 2016 purchase of Contract Freighters (CFI) opens the door for the

company to seek a U.S.-based listing for its stock. As well, the increased scale presents a range of

potential options for its Truckload division, including a spin-off as a standalone or a merger with

a strategic player, which we estimate could unlock additional value for shareholders.

Additionally, the asset-light Package & Courier and non-asset-based Logistics divisions appear

undervalued in the current corporate structure and could be a source of additional optionality.

By our calculation, at less than 7x 2018E EV/EBITDA and a ~12.5% free cash flow yield, TFII

trades at a discount to the sum value of its parts. Considering financial commentary and peer

and M&A valuations, value of $28 per share, $16 per share, $5 per share, and $4 per share can

be assigned to TFII’s TL, P&C, LTL, and Logistics businesses. Accounting for corporate costs

and projected net debt of ~$17 per share yields a sum-of-the-parts value of roughly $36 per

share, which implies potential upside of ~35%.

Future potential catalysts include a U.S.-based stock listing for TFII, the separation of its all or

part (i.e. U.S.) of its TL business, the monetization of either the P&C or Logistics division,

earnings leverage to improved industry fundamentals, additional acquisitions and/or share

repurchases. Potential risks include integration issues, a lack of management execution,

insurance liability, currency fluctuations, labor issues and pricing pressure due to deteriorating

industry fundamentals.

Robert Dunn Michael Wolleben

PCS Research Services 100 Wall Street, 20th Floor New York, NY 10005 (212) 233-0100 www.pcsresearchservices.com

Institutional Research Group, LLC (“IRG”) is the author of this report. PCS Research Services (“PCS”) is the exclusive marketer and an authorized distributor of this and other research reports created by IRG. IRG and PCS are affiliates. IRG, PCS and each of their respective employees and affiliates may have positions in the securities of companies mentioned herein. This report is based on information available to the public, and no representation is made with regard to its accuracy or completeness. This document is neither an offer nor a solicitation to buy or sell securities. All expressions of opinion reflect judgment at the date set forth above and are subject to change. All views expressed in this research report accurately reflect the research analysts’ opinion about the subject matter contained herein. No part of the research analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the research report. Reproduction of this report is strictly prohibited. Institutional Research Group, LLC © 2017.

Commentary at a truckload industry forum and the

rejection of efforts to delay the impending ELD

implementation support our bullish stance on TFII;

myriad transactional optionality remains

Comments from several of TFII’s U.S. truckload competitors at

a conference this week were supportive of our contention that

underlying industry fundamentals have improved in recent

months. In fact, carriers almost universally indicated better

than seasonally normal demand trends since May, which have

had a positive inflationary impact on industry pricing. (Also,

storm-related capacity dislocations are expected to provide an

additional tailwind to near-term spot pricing.)

As well, we see this week’s rejection by U.S. House of

Representatives of an effort to delay the December 2017

implementation of the electronic logging devices (ELDs)

mandate as offering further support to our view that truckload

pricing is likely to see continued improvement in 2018-2019

amid a tighter industry supply/demand balance. (Note: While

the ELD mandate is primarily a safety initiative we expect its

tangential impact will be an overall reduction in industry

capacity. To that end, conference commentary this week from

Werner (NASDAQ: WERN) suggested ELDs could have a 2.5%-

5% negative impact on overall industry utilization/mileage as

well as drive market share gains for larger, more sophisticated

players where network disruptions will be minimal.)

All told, it is our view that improving fundamentals in the U.S.

truckload sector support further upside for TFII in addition to

the company’s myriad transactional optionality. Moreover,

while shares have appreciated roughly 15% since our initial

recommendation in June 2017 (versus a 1.25% gain in the S&P

500) we think that at 7.5x 2018E EBITDA and with a free cash

flow yield of 11% the shares remain attractive.

Our current $36 fair value estimate reflects a blended multiple

of 7.6x on 2018E EBITDA of $608 million and implies roughly

20% of additional potential upside.

UPDATE

TFI International Inc.

(TSE: TFII)

Price (9/8/2017) $30.50/share

Market capitalization: $2.75B

Truckload (TL): $28/share

Package & Courier (P&C): $16/share

Less-than-Truckload (LTL): $5 per share

Logistics: $4/share

Corporate/ Net Debt: ($17 per share)

SOTP: $36 per share*

*SOTP may not add due to rounding; all figures in CAD unless otherwise note

(See the report dated 6/26/2017 for more info.)

NOTE: This publication could be considered as

advocating for corporate restructurings. Authors

select companies for this report based on the

potential for a future value-unlocking

transaction. In many cases, these companies

have or could come under activist investor

pressure, media scrutiny, or general market

speculation that a spin-off or asset sale is

possible.


Page 2 of 2

Exhibit #1 TFI International: Sum-of-the-Parts Fair Value ($ in millions, except per share figures)


TL P & C LTL Logistics Corporate

Enterprise

Value Net Debt

Market

Cap

2018E Total revenue $2,267.2 $1,492.1 $910.8 $296.6

Operating margin, total 5.8% 9.4% 6.5% 9.3%

Operating income $131.2 $139.5 $59.4 $27.6

EBITDA margin, total 15.2% 11.9% 10.0% 11.3%

2018E EBITDA $344.3 $176.8 $90.9 $33.5 ($37.5) ($1,311.4)

Applied multiple 7.5x 8.5x 5.5x 10.0x 7.6x 1.0x

Enterprise value $2,582.0 $1,502.9 $499.7 $335.5 ($285.8) $4,634.3 ($1,311.4) $3,322.9

Diluted shares 92.2 92.2 92.2 92.2 92.2 92.2 92.2

Per share basis $28.01 $16.30 $5.42 $3.64 ($3.10) ($14.23) $36.05

Bull (8.6x) $31.74 $18.22 $6.41 $4.00 ($3.51) ($14.23) $42.64

Base (7.6x) $28.01 $16.30 $5.42 $3.64 ($3.10) ($14.23) $36.05

Bear (6.6x) $24.27 $14.39 $4.43 $3.28 ($2.69) ($14.23) $29.45

tfi international inc. (tse: tfii)changed its name to transforce. in february 2016, the company...

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