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b2ap3_thumbnail_dreamstime_xl_36296918.jpgIt was sad to read that Meyers Transport, a Canadian motor carrier that has served the needs of shippers in Ontario for 90 years, closed its doors on January 20. Meyer’s Transport has been one of those “salt of the earth” family run businesses that has been a part of the Canadian trucking scene for almost a century. This news caused me to reflect on the changes taking place in the Canadian freight industry.

The Meyers closing comes very shortly after the news that TFI (TransForce International) had acquired National Fast Freight in late December. TFI has been consolidating Canada’s east-west intermodal business through the acquisitions of Clarke Transport, Vitran and the Quiktrax division of QuikX. It should be noted that Clarke Transport and Vitran were the product of various consolidations over the years (i.e. TNT Railfast, CSR and Cottrell Transport in the case of Clarke). While there have been a few new entrants to this segment of the industry over the past 20 years (i.e. Quiktrax, M0 Freightworks), the number of independent players has been shrinking.

If one steps back and looks at the entire LTL sector of the Canadian freight industry, it is clear how much consolidation has taken place during this period. TFI now owns TST Overland Express, Kingsway Transport, QuikX Transportation, Concord, Tripar Transportation in addition to Clarke Transport, NFF, Vitran, Quiktrax and a host of smaller players. In Western Canada, the Mullen Group has acquired the Gardewine Group, Grimshaw Trucking, the Highway 9 Group of Companies, Jay’s Transportation, the Kleysen Group and other smaller companies, each of which has LTL operations. The Manitoulin Group has also been active in acquiring LTL carriers. Over the past few years, it has purchased the LTL business of Penner International, Smooth Freight, Jomac Transport, the LTL division of Highway 13 and Ridsdale Transport.

Of course, there has been consolidation in other segments of the Canadian transportation industry. TFI made big news a few years ago, by acquiring the Contrans Group that it added to its diverse portfolio of purchased truckload carriers. More recently it acquired the truckload operations of XPO logistics. Canada’s other major transportation companies have also been active in acquiring truckload carriers. In the small parcel sector, TFI owns Canpar, Dynamex and Loomis.

There have also been some big changes in Canada’s logistics service provider industry. Radiant Logistics of Bellevue Washington purchased the Wheels Group last year and in December of 2016, Transplace of Dallas Texas acquired Lakeside Logistics. Two of Canada’s leading freight management companies are now under American ownership. Clearly there has been much consolidation in the traditional sectors of Canada’s freight industry - - - small parcel, LTL, truckload and third party logistics.

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This is the sixth and final blog in this series on surface freight transportation within Canada and between Canada and the United States. In this blog I will focus on tips for carriers to help achieve success in the Canadian freight market.

Is the Canadian Freight Market Worth the Investment?

As outlined in the first blog in this series, Canada is a large country, from a geographic perspective, with a population about the size of the state of California. The first question that any American carrier should ask is whether or not Canada is worth the investment in time and resources. As outlined through this series of blogs, when dealing with Canada, there is much to learn about Canadian laws, customs clearance, exchange rates and a host of other issues. Is serving the Canadian market of strategic importance to your company or would another US market (or foreign market) be more profitable? If there is value in the Canadian market, there are a series of steps that need to be undertaken.

Educate yourself on your Canadian freight activity and Canadian carriers

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The 2015 Surface Transportation Summit (www.surfacetransportationsummit.com) will be held at the Mississauga Convention Centre on October 14. We are delighted to report that the event has a new partner, the Freight Management Association of Canada. Here is an overview of the day.

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The 2015 Surface Transportation Summit (www.surfacetransportationsummit.com) will be held at the Mississauga Convention Centre on October 14. Dan Goodwill & Associates and Newcom Business Media are delighted to report that the event has a new partner, the Freight Management Association of Canada. FMA will bolster shipper participation at the event. This year’s Summit will feature more shippers as speakers as compared to previous years. The Summit is now open for registration with a lineup of high quality speakers and a new networking feature. Here is an overview of the day.

The one day event will be kicked off with a discussion of what happened to the economy in 2015 and where it is going in 2016. Carlos Gomes, Senior Economist with the Bank of Nova Scotia will provide his annual overview. He will be followed by Walter Spracklin, Managing Director, Capital Markets, RBC Capital Markets who will provide an investor’s perspective, on what is going on in the freight industry in Canada. Lou Smyrlis, Publisher and Editorial Director, Transportation Media, Newcom Business Media will lead a panel discussion with Wes Armour, President & CEO, Armour Transportation Systems and Mark Bylsma, President, Spring Creek Carriers Inc. on how they see the economy playing out in the trucking industry in 2016.

This track will be followed by an Executives Perspective panel. This year we will hear from six leaders, each from a different sector of the freight industry, who will share their perspectives on where they see their businesses going in 2016. The panel will include David Zavitz, Senior Vice President, Sales & Marketing, Canada Cartage, Mark Lerner, AVP, Intermodal, CN Rail, Joe Lombardo, Director of Transportation Processes, Purolator Inc., John Ferguson, President, SCI Logistics, Anne McKee, EVP, Trailer Wizards and Silvy Wright, President & CEO, Northbridge Financial Corporation.

Shipper-Carrier Collaboration will be the theme of the next panel discussion. This track will include three prominent shippers, the leaders of three trucking companies and the head of a 3PL. Dan Einwechter, Chairman & CEO, Challenger Group, Jason Dubois, President, Len Dubois Trucking, Doug Munro, President, Maritime-Ontario Freight Lines, Kelli Saunders, President, Morai Logistics, Ginnie Veslovaitis, Director, Transportation Operations, Hudson’s Bay Company, Alex Boxhorn, Logistics Manager, Loewen Windows and Kim Wildenmann, Traffic Coordinator, Lantic Inc. will engage in a panel discussion on how can shippers and carriers work together more effectively. This is a session not to be missed.

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For many years, industry experts have been predicting a consolidation in the Canadian freight industry. During and after the Great Recession, the decibel level of these warnings increased as most trucking companies faced the challenges of reduced freight volumes, sinking rates and the difficulty of managing a business during recessionary times. In fact, the industry did shrink by an estimated fifteen percent during the downturn, not through acquisition, but through companies closing their doors or parking equipment.

As one looks back over the past five years, the Canadian economy has been recovering, albeit painfully slowly. There has been some growth in GDP and in jobs, largely in the west. During this same period, the Canadian freight industry has been consolidating and continues to consolidate. This has been driven by a host of factors.

There were and still are willing sellers. Many trucking company owners, particularly those in the baby boomer generation, without a succession plan, or with poor prospects for survival, saw the sale of their business as the most logical business option. For some, the challenge of hanging on during the Great Recession, took some of the appeal out of the business. That coupled with the option of creating a retirement fund was a desirable route to follow.

The post-recession business climate brought a host of challenges. Just as trucking company owners are getting older, so are truck drivers. Young men and women are not interested in becoming long haul truck drivers, dealing with crossing the Canada – US border, spending weeks away from their families, for $40,000 to $50,000 per year. The driver shortage, coupled with rising costs of fuel and equipment, low margins, increasing technological sophistication and regulatory changes, have made life much more difficult, particularly for small fleets with limited access to capital.

In addition, there were and still are willing buyers. Some of the larger trucking companies and conglomerates have been active buyers. Take a look at the websites of the large truckers to see the list of companies that have been acquired. The larger fleets have seized the opportunity to increase market share, to enter new markets, and/or to acquire new drivers, equipment and management talent. With TransForce’s acquisition of Contrans, we are now seeing a very large conglomerate devour a large conglomerate. What does this all mean for the Canadian freight industry?

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Two developments over the past five years have reshaped the Canadian Freight Industry. The Great Recession in the late 2000s caused many Canadian trucking companies to shrink in size or leave the freight industry. During the past couple of years, there has been considerable consolidation in the small parcel, domestic LTL over the road and Intermodal segments of the Canadian freight industry. Shippers looking for a national courier or LTL carrier now see many familiar brands in the hands of a small group of companies.

Shippers worrying about whether there will full and fair competition in the Canadian freight industry in the years ahead can take solace from what is happening south of the border. Our American friends experienced the same economic downturn in 2007. Some experts believe that as much as fifteen percent of the freight capacity in the United States left the market during the Great Recession.

The good news is that as this capacity left the market, several emerging trends suggest that new strategies and business models are providing increased competition in the LTL sector.

Build a Carrier Partnership Network

Some significant carrier partnerships and alliances have been formed to provide more competition on the national and regional level. In an effort to compete with the national LTL players (e.g. YRCW, FedEx Freight, Old Dominion etc.), The Reliance Network was formed. It brings together:

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If your trucking company hasn’t been purchased or doesn’t get purchased by TransForce, will it be in business in five years?  That is the question that came up in a recent discussion with a long time industry colleague.  The response I received was that he didn’t think his company would survive.  I was a bit surprised by the response and asked him for an explanation.  This led to an interesting discussion on what it is going to take to make it in the trucking industry in 2014 and beyond.

We both agreed that while the trucking industry has changed in some ways over the past decade (e.g. more use of technology, better cost controls after the Great Recession, LNG vehicles, greater use of 3PLs as customers), the industry is not that much different from ten years ago.  The slow economic turnaround since 2008 has created a challenging environment and there is little reason to expect a major improvement in the short term.  Rate increases are hard to come by, even with a tight driver situation.  Even more of a concern is the lack of innovation in the industry and the threat that such changes could wreak on so many complacent companies.

The warning signs are there.  As a Canadian, you don’t have to look much further than Nortel and Blackberry to see what can happen to industry leaders that were not able to keep up with changing consumer needs and quality competitors.  At the same time, one can observe what companies such as Amazon and Apple have been able to do to change the paradigm of some long established industries. 

Some of the large trucking industry players are making investments in technology and people.  They are integrating back offices and focusing on achieving economies of scale.  They are thoughtfully expanding their service portfolios and geographic footprints. 

Some of the small players are offering solutions that are very tailored to certain industry verticals and geographic areas.  Companies that are focused on same day delivery, refrigerated intermodal service, pooled LTL service, energy distribution and other emerging capabilities are creating a space for themselves in the industry.

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At a recent Driving for Profit Seminar in Toronto, Lou Smyrlis, Editorial Director of Canadian Transportation & Logistics Magazine, led two trucking company investment advisors, Doug Nix, Vice Chairman of Corporate Finance Associates and Doug Davis, Independent Director, Pro-Trans Ventures Inc. through a discussion of how to buy and sell trucking companies in 2012.  Here is what they had to say.

From a buyer perspective, they encouraged companies to be proactive in seeking out prospective acquisition candidates.  Since so much about buying is timing, it always important to plant the seed and remain in contact.  While a trucking company’s leaders may not be ready to sell their enterprise in the second quarter of 2012, it is at least important as a purchaser to express your interest. One should also keep in mind that the purchase process itself can take six to nine months or more complete.

The buyer should carefully think through some key questions such as “why” make this purchase, what are the underlying business risks of a potential acquisition, do they have the investment advisor team in place to guide them through the process and do they have the “bandwidth” (management team) to manage the acquisition? In other words, can the company manage its current base of business while it is trying to assimilate new customers, new employees and possibly fit two cultures together?

The two advisors mentioned that they use a valuation multiple for an asset-based business of 3.75 X normalized EBITDA.  The word “normalized” is an important concept since this refers to what the earnings will look like when certain expenses or withdrawals that are taken out of the company by the current owners are removed from the income statement to better reflect what the business will look like on a going forward basis.

The purchaser must look at a number of variables in determining how to pay for the company.  The advisers related it to buying a home. The purchaser looks at what they can make in terms of a down payment and the level of mortgage they wish to carry.   Similarly, when buying a trucking company, one needs to consider the financial structure of their offer.  This involves an evaluation of cask payment, business loan and earn-out.  The latter is a common term that refers to principle of paying the seller part of the purchase price from monies earned by the business over a period of years.  If the sellers remain with the business after implementation and help maintain the income flow, they are rewarded with a business retention bonus for their efforts. 

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Two experts in trucking company acquisitions predicted this week that we are in store for an upswing in industry consolidation in 2012.  This was one of the highlights of the Driving for Profit event that was held in Mississauga this past week.   Lou Smyrlis, Editorial Director of Canadian Transportation & Logistics interviewed two gentlemen who play significant roles in these types of activities, Doug Nix, Vice Chairman of Corporate Finance Associates and Doug Davis, Independent Director, Pro-Trans Ventures Inc.

In the initial stages of the interview, Lou asked these gentlemen about why we did not see more consolidation during the recent recession. The key takeaway from this discussion was that during this difficult period, trucking companies hunkered down into a “survival mode.”   The recession created devaluations of trucking company businesses.  Most truckers decided to tough it out until valuations improved.  Lenders, who saw trucking as a core industry, chose to support the industry until economic conditions improved.

The two investment advisors now believe that M & A activity will now increase.  They base this conclusion on the fact that after a 3 year hiatus, there is a pent-up demand.  There is a “ton of cash” waiting to be invested.  Balance sheets are healthy again.  During the recession, many trucking companies right-sized their businesses.  Investors will now see more efficient, stable businesses. 

Demographics will also play a part as many baby boomers who are seeking an exit strategy are three years older and their timetable for leaving the industry is now shorter.  We now have willing buyers, sellers and bankers.  While the two gentlemen do not predict a “feeding frenzy,” they do expect to see a doubling in the volume of trucking company acquisitions as compared to what we saw the last three years.

Lou then asked these advisors about the types of deals we are likely to see.  They expressed the view that there will likely be more “bolt-ons” where companies seek to expand a core business.  These types of deals allow companies to “improve overheads, bring margins into line” and “reduce dependence: on certain “key customers.”  When asked a question about whether we can expect to see a blockbuster deal like the Yellow-Roadway merger in the U.S., Doug Nix made the observation that the money would be there if the right plans with the right people are put in place.  However he opined that he does not think Canadians have the “chutzpah” to make a deal of this nature.

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