There are two major (ground, not rail) transportation companies publicly traded on the TSX.
One is Transforce, now TFII (TSX: TFII) and the other is Mullen Group (TSX: MTL).
TFII used to be mostly domestic and focused in eastern Canada, but now they are about 70% USA in revenues, with their masterstroke being the acquisition of UPS’s Freight operations in January 2021.
Mullen Group has been western Canada-centric and aside from a relatively small non-asset based logistics operation in the USA which they acquired a few years ago, they are primarily domestic Canada. Their initial evolution stemmed from the service of oilfield industries (pipelines, drilling and the like) to a very credible and profitable freight, LTL (less than truckload) and warehousing operation, with the original oil and gas logistics business being continually de-emphasized over time.
Both companies have excellent CEOs that are able to articulate, evolve and have good crystal balls to see where the future is headed.
Unfortunately, for Canada, it is very apparent from both companies they view Canada as a zero-growth market.
In TFII’s most recently quarterly report and conference call, in addition to reporting under expectations (the market swiftly took the stock down about 25%) they announced that they were going to move their corporate headquarters to the USA. The relevant snippet in the conference call:
====================
Ken Hoexter (analyst)
Okay. And then just to re-domicile. Any tax implications on that? Is that just moving headquarters? Where are you going to be moving? Is there any follow-on implications for that?
Alain Bedard (CEO)
Ken, I think this is an evolution of TFI. So if you look at 5 years ago, we listed TFI into the New York Stock Exchange. And we were able to do that through what they call an NGDS, okay, exception, right? But this exception will disappear the minute that our shares that are owned by U.S. shareholders okay, the minute that we go above 50%, then this is not going to work. So we have to go to the SEC and then we have also to be U.S. GAAP.
So it’s part of an evolution, okay? But at the end of the day, if you look at TFI today, okay, for head office. We have people working in Canada. We have also people working in the U.S. We have people in Montreal, in Toronto, Calgary, we have people in Chicago. We have people in Minneapolis.
So we are all over the place in North America with our head office crew. So to me, it’s just like an evolution, okay? Because our business is now today about 70% U.S. domestic 25% Canadian domestic and about 3% or 4% or 5% transborder. So it’s just — and with the next M&A, okay, we just announced a small transaction in our MD&A with that and with the possibility of us doing some more M&A in the U.S., like we said at one point, we will invest $3 billion to $4 billion. It’s going to be in the U.S. It’s not going to be in Canada.
So our revenue will creep up to about 80% to 85%. So it’s just an evolution, but we’re not moving head office. We’re not moving people from, let’s say, Toronto to, I don’t know, Chicago. Every member of the TFI head office is staying where they’re at. So that’s what we call TFI, TFI International. It’s because we’re a Canadian and U.S.
=====================
We look at Mullen Group’s conference call and the relevant snippets are here:
=====================
Walter Spracklin (analyst)
Okay. No, I appreciate that color. On — in your outlook this year, you put $150 million in there for M&A that you’re going to allocate toward M&A. I don’t think you’ve done that before, Murray. And is this because you’re more — like is this something you see imminent, or is it just something that you’re kind of plugging in there because you’ve done it in the past? I’m just curious as to why you elected to include that? And do we assume it’s spread out across the year?
I’m trying to gauge your $350 million because if $350 million in EBITDA is $150 million in M&A investment, then that could be maybe $30 million of your EBITDA forecast for this year is associated with M&A. And if you do a deal at the end of the year versus at the beginning of the year, obviously that $30 million is going to vary. So I’m just trying to get a better sense of — do we look at your guide as being kind of more $320 million and then anywhere from $0 million to $30 million in acquisitions, depending on when you deploy it. Is that the right way to look at your guide for this year?
Murray Mullen (CEO)
Well, I think if you assumed — I think the reason we put in the $150 million is because the auditor told us we had to. So it’s just full disclosure is that it had to do. The auditors are all panicked because of tariffs. Oh, my God, the world’s going to end. No, it’s not going to end, but the auditors — I think that all came from them and then said, well, how do you get to that? Well, we’re not changing our outlook because we said, look, if we’re going to get — we think we’ll get to $350 million, but we got to do acquisitions to get there because we don’t think the market will give us $350 million. We think the market will be about the same as last year.
Just like we — I highlighted, for 3 years we’ve been $2 billion, $2 billion and $2 billion. Well, it might be 4 years because I don’t see any growth in demand. So let’s assume that we’re about the same on same-store sales. And that’s about $330 million. That’s about what we did. Of course. $330 million, $335 million, pick your number and then we do acquisitions. And I said, well, we’ll probably get to [ $23 million ] and $350 million. But we didn’t do any acquisitions out of the gate, it’s just the timing. So, but to get to $350 million, most likely we got to deploy $150 million of all that dry powder that we’ve got.
So, yes, I mean, if you’re doing acquisitions, you got to deploy capital. And if we’re going to add $300 million of revenue or $200 million, you got to spend some money. So that’s the math on it. That — that’s our — no, I think the question is, where are we going to spend it? Where are we going to invest shareholders’ money? Well, most likely it’s not S&I, or we’ve always said we love the LTL business and if we can find tuck-in acquisitions, we’re doing them because that’s how you drive margin improvement as you get more critical mass and you put your technology in play.
But I’d tell you, depending, I’m being coy right now, but it really depends on Canada’s response to how we’re going to be competitive with the Americans. If Canada doesn’t get its act together, and by this I mean the politicians and Canadians to say, we’ve got to invest and get capital coming into Canada, we’re going to turn our attention to the U.S., which implies our U.S. segment, U.S. 3 business.
So I don’t know for sure, but I can tell you, Canada, get your act together or on behalf of our shareholders, I’m going to put our money to work in the U.S. where we think if they’re going to win, we got to follow the money. So I think a lot has to do with public policy, Walter and they better start — they better bringing getting capital employed in Canada again if we want to get this economy to grow. That has nothing to do with me. I’m just pointing out the obvious.
=====================
David Ocampo (analyst)
Murray, I just want to circle back on one of your last comments there on capital deployment. If you guys would start to direct that more to the U.S. If Canada doesn’t get their act together. If I look at your strategy so far, it’s mostly just been asset light through the 3PL business that you guys do have. So are you thinking something more of the same in terms of capital deployment if you do start to deploy more assets down in the U.S. or are you thinking something on the asset side, which would probably require a lot more scale than you’ve deployed in the past?
Murray Mullen
Well, I think David, that’s all under discussion right now, and we’re going to present our thesis to the Board. I’ve been reluctant on it, but when things change, you got to change. And it’s pretty evident with the Trump administration that — well, there’s 2 things. Number one, it’s pretty evident Canada’s losing the capital investment game already. Just look at our Canadian dollar, it’s worth nothing. And then if the Trump administration accomplishes what they want, which is they win and we lose, well, we got to follow the money. So we’re looking at that very, very closely David, I don’t know for sure yet, but I have to change my thought.
If Canada is not a place to deploy capital, I’m not going to deploy it here. It’s no different than in 2012 from a strategic standpoint. The rules changed in the energy space. We were once dominant in the energy business, S&I, oilfield service. Okay, well it changed and we pivoted away from it. I hope I don’t have to pivot away from Canada, but I got to do what’s best for our shareholders. And if pivoting away is required, our shareholders should know I’m going to do what’s best for them.
=====================
There were other lines in the call, but you get the idea – when CEOs of companies that are major leading indicators of economic activity (freight transportation is one of them) are basically saying that they’re not going to be dumping any more capital into the country, you know there is a huge problem.
TFII’s corporate HQ move to the USA is an evolution and part of their strategy they likely foresaw a decade ago, and now Mullen Group is slowly getting into this game as well. As productive capital drains away from Canada, it makes the Canadian bargaining position continually weaker. Please note when I say “productive capital”, I mean capital in the form of machinery, manufacturing and most importantly human innovation – what I do not mean is capital in the form of real estate development, something we already have in huge excess!
I believe the Harper administration saw the big picture when it came to negotiating position and the necessity of attracting productive capital investment (e.g. at one point our corporate tax rate was significantly lower than that in the USA) – and indeed there was one point where we had US entities parking capital into Canada. With the growth of taxes and regulatory compliance costs (both soft and hard), needless to say the only entrants of any scale that come here are done so with the explicit backing of government (e.g. green energy project subsidies, or significant tax credits for film companies) as in most cases this is the only way that such investment is economically viable.
The net result of this is that unless if you are being assisted by the tailwinds of government, it will be difficult to make money. As governments are not known to be efficient capital allocators and are very susceptible to influence, this makes society less efficient and poorer as a result. Initially, the degradation is not noticed, but over time the economic neglect is increasingly more noticeable – post-Covid it became really obvious and this disparity will continue to get worse and worse. Brace yourselves!