The Canadian Investor - Will Couche-Tard’s $65B Bid for 7-Eleven Succeed?

Episode Date: October 24, 2024

In this episode of The Canadian Investor Podcast, we begin with ASML’s Q3 earnings, breaking down their net sales growth, concerning 50% drop in bookings, and how China’s shifting demand could impact future performance. Next, we explore Couche-Tard’s increased bid to acquire Seven & i. We also cover Amex’s latest earnings with rising revenues and increased card fees. We contrast that with Goeasy’s debt offering and discuss TFI International’s struggles with a weakening economy.  Tickers of Stocks & ETF discussed: ASML, ATD.TO, 3382, AXP, GSY.TO, TFII.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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Any one particular you're really excited to talk about, including Canadian and US businesses. Any one particular you're really excited to talk about that? I would say the go easy. Go easy thing. Okay. Yeah, yeah, definitely. That's going to be an interesting topic just because we've been hammering it for like three quarters now. We've been going over the results.

And yeah, that's definitely going to be an interesting one because they made a big, big debt offering and the market does not like it. Yeah, exactly. I was just checking my phone yesterday. I'm like, did they report or something? And then you had a look and you're like, no, no, they just did a big debt offering. So we'll try to unpack that. But first, last week, I think for listeners of this podcast, what probably made a lot of headlines, at, it made headlines a lot, at least in financial headlines was ASML's earnings. First of all, they actually reported early by accident

because of technical issues. So they, you know, it's not great, especially when you're probably trying to massage the messaging, if you'd like, or make sure that people understand or investors understand what was not great about the quarter. So we'll talk, we'll unpack that and feel free to ask me some questions, Dan. I know you're not super familiar with ASML. So before I get started, all the numbers are in euros, so keep that in mind. So the earnings were released, like I said, a day early. Again, not a huge deal. Stuff like that happens. But as you'll see, it wasn't a great quarter, especially when it came to the guidance. So it's probably something they would have liked to control the messaging a bit better with. Net sales were 7.5 billion euro, which was 2% more than the top end of the guidance they had

provided the previous quarter, which clearly is good. Net system sales were $5.9 billion, $2.1 billion, which came from EUV sales. So that's extreme ultraviolet. So these are the most top end systems that they sell and $3.8 billion from DUV sales. It was driven by more sales, but also installbased management. That's maintenance but also system upgrades for existing system. So their total sell kind of includes both not only the system sales but also the install-based management. Gross margins came in within the guidance they had provided so that's good but like I mentioned what really hurt the company was the net booking. So what tends to happen well what happens with ASML is these systems are very expensive. Like you're talking, especially EUVs, like in the, you know, two,

300 million range, if not more for the most recent ones. So when companies are making capital expenditures, so companies like Taiwan Semiconductors, for example, which is a large client of ASML, I mean, they have to really be sure that it will be worthwhile. So when they put in these orders, obviously, it does take some time to build these very complex system. So what happened is the net bookings came in at that 2.6 billion. But analysts were projecting about double that. And that's a drop of more than 50% from the previous quarter. And $1.4 billion was EUV bookings and $1.2 billion was non-EUV bookings, which is Deep Ultraviolet, DUV.

Those are the less advanced systems. They're not the only ones that make those, but the EUV, the most advanced ASML, essentially has a monopoly on those. Net bookings, like I said, are orders that they receive for its equipment minus cancellation. So it's definitely an indicator of future demand. So they said that the low net bookings was because of softness in the traditional end of the market with customers remaining cautious in the current environment. So traditional would not be like AI would be, for example, like memory chips. That would be an example of more traditional or CPUs that are in your computers, whereas AI is predominantly GPUs, so the graphic units. China is definitely a big part of why it was slower.

So they mentioned during the call that they had a lot of their backlog in 2023 and 2024 was from China, which resulted in higher sales going to China as they were working through the backlog. They also said that China is now normalizing and their uncertainty regarding export control, which, you know, makes them more cautious about Chinese sale. They even said during the call, I'm kind of using that verbatim, but they're like, we're aware that you're seeing all the headlines. We see them too about the US potentially imposing more restrictions.

And so they really address that on. So it's not like, you know, it's not the elephant in the room. Clearly, they are aware of it. They know that investors are aware of that. So they definitely address that during the call. And of course, in something they can't really control, China sales are expected to be around 20% next year, which is a big draw from the close to 50% that it was for several quarters. Now, they expect DUV orders to go down overall next year, and they expect EUV part of the business to grow. So clearly, you know, there's more and more demand for the EUV system. They mentioned that customers are not necessarily canceling their plans to build

new fabs and fabs are just these basically factories where they'll actually make the chips. So, for example, you know, TSMC, Taiwan Semiconductor, has tons of fabs, but they said they are instead pushing them into the future. So customers are being cautious, is what they're saying. For Q4, ASML expects total net sales between 8.8 billion euros and 9.2 billion. For the full year, they expect revenues for 2024 to be around 28 billion, which is in line with their previous guidance. They did not buy back shares during the quarter, which is actually something that's nice to see. Nothing annoys me more when a company is facing headwinds. And clearly they are facing headwinds. Let's not sugarcoat things. And then they continue

the buyback program. So I think it just shows that management is being more prudent here. And that's something I like to see. Any comments on ASML? I know you don't know it as well, but I'm happy. No, I knew the news that they reported accidentally early. Like, did they just report the report and then they didn't have the MD&A up and people probably started freaking out at the results or- I'm not sure. I'm not sure if they were able to explain it. I think it may have been, yeah, like kind of the news release went up and then they

had to like scramble. That would be my assumption, but I'm not sure. I didn't see it that like when it happened. I just saw it after the fact. So I know this isn't ASML related, but back but I remember back in the pandemic, Suncor did this. So they hadn't released results yet, but if you went to their previous quarter and just changed, say it was Q2 and you just changed the two to a three, it would pop up their third quarter report before it was published.

Oh, okay. And that was a big deal too. Like they accident, well, I don't think it was even an accident. They just didn't really think of it. They uploaded it to their website and you could get it like a full day early so i mean this stuff is pretty common yeah yeah yeah and that was a big freak out too because i was during the the pandemic i think when they they they were not doing too well but yeah i mean i don't i've wanted to look into asml over the last while especially because it's drawn down so much but i

just haven't really got the time semiconductor stocks are definitely not my forte i've anybody who comes along and kind of asks me about them i generally tend to just guide them towards a etf yeah because i mean a lot of them are a lot of them are so expensive right now i mean price to perfection i think just buying like a broad-based ETF might be the better option, depending. I mean, you obviously know, you own it, don't you? Yeah, I actually bought it back. So that's what I was going to add. So I bought it after the day after the drop. It continued dropping. So I restarted a position because I had sold them around $1,000 a share when I had them in hindsight was a pretty

good move yeah I mean like obviously I make a lot of mistakes too so I'm like I think people should take that with a grain of salt but the reason why I had sold is mainly because you know this is not news what I said for the 2024 guidance like this has been known for a while that sales would be flat for this year so like they didn't change the guidance this is not new and the way i was looking at it is it was trading so expensively and it was like investors were also disregarding like almost all the risk which they were kind of doing when you think about it for nvidia and even tsmc right like i there you know when you look at the valuation

of these companies, it's like, you feel like investors are just looking at the upside and not really the downside. And that's what I felt then with the valuation. So I decided to sell, but I still liked the business longer term. And I figured if there was a pullback in valuation, I would restart a position.

That's what happened. Clearly they are facing headwinds. It could trade sideways. It could trade down in the coming years. That's very possible, especially if there's more U.S. sanctions that affect ASML, like export controls. Again, you know, I think I'm a long-term investor. So I think just the fact that they're the only one producing UVv machines to me it's very attractive when you have a really you know a monopoly let's be honest um in these type of machines so that's why i bought back in so it's not a huge position about 1.5 percent right now well and that's a monopoly in a crazy fast growing industry as well i mean it's a little different than say you know a canadian

telecom monopoly or oligopoly i guess which is which is, you know, a little bit more mature. But I mean, in terms of valuation, yeah, like look at Supermicro Computer. I mean, they're down from 120 bucks a share down to like $45. And that's like in a span of, what was that? They hit highs in March. So like these stocks, they're crazy expensive. I mean, there's a lot of risk when you're buying stocks at that high evaluations. Yeah, exactly. So I think to me, that's it. Like I said, it could go very much sideways or down in the short term. I mean, even long term, no investment is guaranteed, but I think long term, there's some good prospects there. but I think long-term there are some good prospects there.

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So I guess the CouchTard 7NI saga continues. Yep. Yeah, there was a little more news. I think it was actually this morning or yesterday, but they have, I know you had said like the Quebec, the CDPQ was backing them. They've actually got, they had another backer as well that came out and told Seven and I that they shouldTard's first offer, many thought the aggressive attempt of CouchTard to acquire them was dead in the water. But I mean, the way we discussed this and the way management was talking, and I mean, the CDPQ backing the company, I had a good feeling that the bumped up offer was going

to happen. And it wasn't really a tiny increase either. So I believe it was last week or maybe the week before, like late a couple of weeks ago, they bumped their offer by 20%. So it sits at around $64.7 billion Canadian dollars. So this is around 90% of the size of Custard as a company. And if this deal goes through, it will be the largest foreign buyout in Japanese history and Custard's largest acquisition by a long shot. And I would actually say that, and I couldn't really find anything else. It's got to be the largest acquisition ever by a Canadian company. I mean, $65 billion. I kind of looked up, you know, like the Enbridge Spectre Energy, but even that was only, you know, $28 billion. I may be way off base here but i i would have to think it's got to be pretty close to the largest if not the largest uh seven and i holdings is

trading at a pretty big discount to the offer price kind of highlighting just overall the pessimism from the markets overall in terms of the deal actually going through and i mean it looks to be trading at a near 20 discount to. And apparently, so in an attempt for Seven and I to kind of hold off Krustard's bid, they're going to, or at least they want to, they want to split out the business. So- Yeah, I saw that.

Yeah. Yeah, what a lot of people think, like Seven and I, it's not just 7-Eleven gas stations. Like they have supermarkets, they have financial companies, things like that. So- And don't forget their other segment. That's always the powerful- Yeah, their other segment, whatever that is. stations like they have supermarkets they have financial companies things like that so and don't forget their other segment that's all yeah their other segment whatever that is it's bigger than the financial segment so i don't know what is mixed into the

the other segment revenue but i mean it's uh they want to take all of those businesses because typically like when you have a conglomerate like a whole bunch of businesses mashed together it doesn't really reflect the true value of like kind of trading for smaller than the sum of its parts essentially so what they want to do is they want to take all of these non-gas station businesses the majority of them they've kind of said are not you know all that well performing and they want to form a holding company called York Holdings and split them off. The gas station end of the business would be renamed 7-Eleven Corporation. And it effectively wants to do this so that it will unlock value for shareholders by effectively, if you split that gas station segment of the business off, you should see

an increase in valuation from that because now it's effectively a CouchTard and it's not being weighed down by the supermarkets, the financial institutions, and whatever else, like you said, is lumped into that other business segment. And I mean, when you look at the company's overall operations, I think you're showing the chart right now. I mean, this is effectively a gas station company, 10 billion of the company's $12 billion in trailing 12 month revenue comes from either international gas stations or domestic, which I believe would just be, you know, gas stations in Japan. And you know, that's if they do split out the smaller segment of the business, if it really

is weighing down that valuation. I mean, it should help quite a bit. So I do actually see the spinoff making sense, whether or not it's enough to deter people, deter investors from being attracted to this end of the deal, the CouchTard offer, it's difficult to say. And as I said, it's being done to effectively show its shareholders that can increase the value of the company far and beyond what Crestart is offering at this point in time. However, the one thing that they did say, and I would imagine it's led to further discussions,

is initially they had said that the offer was nowhere close when they were at like 44 billion Canadian, but they now say that the valuation hurdle has been cleared. So I would say there's a bit of discussion going on there right now. And as I said this morning, they had, or as I said earlier in the segment, they had this morning, they had another backer come in and say, you know, that they should strongly urge, you know, consider the deal.

So I would imagine that if they want to go through with this, they're going to be able to finance it somehow. And I did read somewhere, I actually don't have the article, but they do say that they're going to try and do this without much equity issuances. So a ton of it's going to come from debt. I don't know, they didn't really say how much, but they don't plan to utilize much equity. It's all going to be debt. And when you consider the fact like Krishnath has about 1313 billion in debt right now. So, I mean, where does that level have to go with a $65 billion acquisition? It seems pretty crazy, but it's not dead. I would imagine we're going to see more news in the coming weeks. It's far from dead.

Yeah, I guess money talks. I mean, if they give them a nice enough premium, I think 7-Eleven or 7 and I shareholders will actually decide to take it. Because even if they break up the company and they don't go with the takeover, like there is there's no guarantee that they'll get more value out of it. Right. No, you typically you do. But again, if you have a good offer on the table and from the Kushtal perspective, I mean, yeah, I mean, I admire Couchel as a business. Obviously, I'm French-Canadian. I grew up in Quebec, so it's a great story. But at the same time, happy to watch on the sidelines this one.

I just kind of worry tackling so much debt. Yeah, I just, yeah, I just worry as an investor. I just don't really want to own something with so much debt, no matter how good of a track record they are. Because, yeah, it really depends how much like what kind of debt they'll get, what interest rates they get when they refinance that debt down the line. There's all these different issues that could pop up, especially if they don't end up getting, you know, as much revenue as they thought out of these convenience store and as much kind of, you know, money or to the bottom line as they think or yeah, profitability out of them. Yeah, the one thing about Cush Tard, their operating margins are about double Seven and I's like gas stations. So there is a lot of potential there if you can you know

make it work well but i feel like i still don't think so i believe uh in terms of yen like the i believe the offer was around 2800 and they're currently seven and eyes trading at 2220 so i mean it's a pretty big discount to the acquisition price which effectively means the market is they don't think this deal is going to go through. And I mean, even if you get through the value end of things, like do regulators really want a Canadian company stepping in and buying those assets? You know what I mean? From a regulatory standpoint, like I said, it would be the largest foreign takeover in history. So I mean, there's other elements in that regard too i mean i

still don't think that this deal will go through but there's a lot more i mean basis for it to go through like there's a lot you know it it's a lot more possible now than it was say even three four weeks ago when they pretty much just shut it down and said we're not going to talk anymore yeah no it'll be i mean obviously i'm sure there's going to be more development. It's like every week there's something new coming up. So I'm sure we will be talking again on that. Now we'll shift gears here. Look at, I guess, credit related companies, two of them. First, I'll talk about American Express that had their earnings. And then you'll talk about, like you mentioned in the intro, Go Easy debt offerings. So American Express, ticker AXP, revenues were up 8% to $16 billion versus the same quarter last year. However, total expenses were up 9% for the quarter versus last year.

So something to keep in mind. You never like to see expenses going up faster than revenues. Clearly, it's not a big deal here, but definitely something to keep an eye on. Net income was up 2%. Earnings per share was up 6% to $3.49. So obviously, when you see a discrepancy like that between net income and EPS, just means that they actually bought back shares. And that's what they did they decreased the share count by three percent a card member spend increased six percent and i'll show something here for our joint tci listeners which is um very interesting for american express is you have their average fee per card over uh you know quite a little bit and i'll try to use it on an annual basis

because it's more impressive. So, yeah, since twenty twenty twelve, the average fee for a card. So when you're looking for a credit card, right, some credit cards will be like a hundred dollar annual fee. Sometimes they'll give you like a rebate for the first year. Typically, there are more premium cards that you can get a lot of like different kind of rewards, whether it's travel rewards, cash back. If you're looking for a higher percentage, you'll typically have to pay a fee for it. So that average fee was from 2012 to 2015 was $39 or $40 per card. And then since 2016, so starting 2016, it started at $44,000. And then in the most recent year, it's at $92,000 per card. So they've done a pretty good job.

I was kind of thinking, oh, that's almost a Costco model here. Not quite, but just getting a big share of their revenue coming from the average credit card fee that they get from issuing those cards. Yeah, I'm pretty surprised to see that actually, because there's a lot of cards coming out with cashback that pretty much have no annual fees. You'd think the competition would be pretty crazy in that regard. I mean, I used to have an Avion card that I think was $120 a year. But the only other thing is I could always just kind of get a hold of Royal Bank and say that I'm not interested anymore. And they would just waive the annual fee.

Oh, really? Oh, yeah. I never really had to pay that annual fee all that much. But I mean, I canceled that card and now I have the Costco one, which is effectively just your membership is ultimately the fee. But I mean, I'm surprised to see that they've been able to grow fees i mean maybe people just don't really care all that much about credit card fees no ultimately it does it eats into your cash back quite a bit yeah i mean i think it's just an approach that they've been taking is that i think they're targeting more like kind of targeting the perks that their new users want. And, you know, just for context here, 80% of the new accounts are actually millennials and Gen Z consumers. So they're really trying to shift

their offering to meet those. They mentioned on the call a lot that these consumers are looking really like restaurants are big thing, so dining out. So they're trying to tailor their offering regarding that. And to get back at the net card fees, they were up a whopping 18% year over year at $2.2 billion. So that's what they're definitely generating a good chunk of their revenues from that. Not, you know, like the majority, but still a really good chunk. And discount revenue, which are the fees collected from merchants

when Amex users use their cards, that was up 4% to 8.8 billion. So really that, you know, that credit card fee that they're charging their customer is really the one that's been growing quite nicely. Net interest income, because they are as well, we were talking before we started recording, Amex is kind of a hybrid between kind of a Visa,

MasterCard, and a bank, and a traditional bank. So they are a chartered bank in the US. What they do is they will issue their own cards, but as you may have seen in Canada, like a Scotiabank may have some American Express branded cards cards which go on the american express network but they are being offered by scotia bank so the lander is actually scotia bank so it's a bit of an hybrid when it comes to that in terms of write-off rate it's always interesting looking at credit card companies and especially those who well the issuer is not a visa and mastercard because they're not the ones issuing the credit. But, you know, something like a Canadian Tire, for example.

And I will talk about them just to provide some context here. So their charge of freight was down 20 basis point from Q2 2024. They were up 10 basis point from 1.8% to 1.9% year over year. When I noticed that, I decided to go and see what happened last year from Q2 to Q3, and it was unchanged during that same time period, but that was after years of steadily increasing write-off rates from the pandemic lows because of all the money that was handed out essentially by governments. Let's be honest, in the US, everyone got stimulus checks.

In Canada, it was, I guess, a little more constrained, but a lot of people also got money from governments. The write-off rates are still below Q4 2019, which was 2.2%. So that is encouraging there. And I think it just goes with the type of client that they have there. From everything I've seen, it seems like it's a more higher income clientele than other competitors. So for context, Canadian Tires net write-off rate for their credit card, their latest quarter was 6.7%. So that's compared to, let's just say, rounded up 2% here for American Express. So it's definitely not bad. It's definitely manageable for an American Express, considering the interest that they get on those credit cards, too. And

obviously, they're completely different kind of customer base. So keep that in mind. Different geographies. I'm well aware of that. But I just wanted to provide some context because depending on who issues a credit card and what demographic they actually cater to, you'll have very different charge off rates for, you know, for credit cards. So it's the same products. But, you know, if you your customers are typically lower income, then, you know, chances are that the net write off rate will be higher. But if you have really affluent clients, then the charge off rates will likely be lower. They added a total of 1.4 billion provision for credit losses. That was down 5% versus last year, but it was still up 7% quarter over quarter.

So something to keep an eye on. Obviously, if you own a bank or interest in any banks or any financial company, you know, credit losses is something you should always be checking. If that's something you're not checking, not keeping an eye on, then you don't know what you own. I hate to be blunt, but that's what it is. If you're not keeping an eye, at least on that and a few other important metrics for financial institutions, you just simply don't know what you own. They also raise their guidance slightly for a full year earning per share. So I think overall, pretty good quarter. I mean, it's interesting to look at them and then contrast with other types of financial companies that will

be obviously will be doing the big banks when they come up and probably I think it's maybe in a month or so. But we'll also be looking at, you know, buy now, pay later, how those are faring. So all different kind of financial companies. And I'm sure we will see very different results depending on what type of products they offer and to who. Yeah. And I would imagine, like, I wonder if this, the credit card fees, how they've been able to grow that so much is definitely an impact of the demographic they're targeting as well. I mean, you probably think like a higher income individual would be more than willing to pay an annual fee, whereas somebody who's just looking for a credit

card, you know, just to, you know, get by is probably not. And like, if we look at Canadian Tire, they have no annual fee on their card and their charge off rates are that much higher. I mean, maybe there's something there. Yeah. Yeah yeah because i'm looking at their cards right now and they do have cards that have no annual fees so that's not new but if you go i think they're reserve card so i'm gonna show my screen oh yeah that's the most expensive one oh like a big yeah like and you need a particular amount i think it used to be like their black card right like um so it still looks black so the reserve card so i'm looking at it so it has an annual fee of six hundred dollars and if you want additional card on that same account it's $200 extra but you get 60,000 aerial aeroplane points and the potential to get

another 25,000 so yeah I mean I think you probably accumulate pretty quickly uh yeah so it's like you earn three times the points on Air Canada two times on dining and food delivery and 1.25 times everything else I'm not sure the value of points, but it must be pretty good because American Express is not accepted everywhere. And you're still paying $600 for the annual fee here. Yeah. I mean, it's pretty crazy. That is a huge annual fee. You must be spending a lot on that card to have a net benefit. Yeah, that's crazy. Yeah, zero arrow plan cards. If you're like, you know, if you make a,

you're pretty high earner and you travel a lot, I think it's probably like worth it. Like someone who travels a whole lot, you probably rack up a whole lot of points and you make up for the annual fee and then some. Yeah, I mean, clearly it's working. Like you said, they've, what have they more than doubled their fee over the last fall? mean clearly it's working like you said they've what have they more than doubled their fee over the last while so clearly people are people are paying it i mean i would

imagine for the most part people paying annual fees on credit cards it's probably not a net benefit but that depends that's just just my guess yeah so we pay so we have a shared credit card my wife and i and um so we pay I think it's 120 bucks for the fee. And we typically get in cash back. Like we put most of our expenses on there, like 1500 bucks a year. So it's a pretty good trade-off. We've looked at some, you know, less expensive ones. And that one was the one that made the most sense for us.

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more information. So I guess let's switch gears here and go with GoEasy, that offering that you were mentioning, and then we'll finish this off with TFII International. Yeah. So the confusing thing with GoEasy and the reason you thought they reported results is they made a pretty big debt offering and because of the size of the offering,

it had to release some prelim Q3 results to the possible buyers of that debt. And as a result, they had to release them publicly. So they made, because I've never seen GoEasy report prelim quarterly results. Like some companies will do it, but it's pretty rare. So in this situation, it was just because of this offering. So they offered $350 million US dollars in senior unsecured notes and $150 million Canadian

in senior unsecured notes. unsecured notes and 150 million Canadian and senior unsecured notes. So a senior unsecured note is effectively a debenture that is higher up on the totem pole in terms of repayment priority. Typically, they refer to them as notes when they have shorter maturity dates. So a bond and debenture are very similar debt instruments, but a bond is often backed. Actually, it's backed by collateral from the company, whereas a debenture,. Actually, it's backed by collateral from the company, whereas a debenture, you're simply relying on the company's reputation to pay it back. So debentures often carry higher rates of interest because they have no collateral backing, there's higher risk. So pretty much all debentures are bonds, but not all bonds are debentures.

It's pretty much the way you can look at it. So those senior unsecured notes effectively say they're high on the priority list in terms of repayment, but they're not secured by any assets that the company owns. And because they're a note, they typically have maturity dates of, I believe it's anywhere from one to five years. These ones are maturing in 2030. So we're talking about six years. And in terms of the, I'll talk a bit about like the pricing of it because they issued the pricing earlier this morning. I had a quick chance to look over it. I will talk about the details because again, we talked about this before. It's a tad confusing, but in terms of the prelim results, which I'll get to first. So they said that portfolio loan growth will be around 235 million to 260 million.

So last quarter, the company reported loan growth of around 286 million so this is a this is a bit of a decline it could come in ahead again these are prelim results but it's a bit of a dip on a quarter over quarter basis it expects the total yield on their loans to come in at 33 to 34 percent and this would again be yeah i always like every time we look at this name i'm like oh my God, like the yields on it. It's insane. You wonder why they can keep charge off rates as high as they are. And you look to this and it's because the loans that keep getting paid are at ridiculous prices.

So, and this again, this was, this is after the government came in and put in regulations on APRs. So this number was much higher. And just to add to that, so people like they may find this really high, but at the end of the day, right in a free market, which obviously there is a cap on what they can charge. But at the end of the day, these companies are offering these loans because there is a demand for them. The rate has to be high because they realize that a higher than normal portion of these loans will have to be charged off. They won't be paid back. And that's how they are able to become to be profitable is the difference between what they collect in interest and what they end up charging you know, charging off. And obviously there are other expenses, you know, they're still able to be profitable.

So I think you have to be careful thinking that the government should always lower that lower and lower and lower, because at some point it will just not make sense for these businesses. If the cap is so low that, you know, the charge off just doesn't make sense, it's not profitable, then they'll just stop, you know, offering these services. I'm not saying it's not, you know, it's not a little bit of a predatory aspect to it. But at the end of the day, it is something that is used by consumers. Sometimes it may be a last resort type of deal. So I just wanted to, to provide this additional context, because sometimes

people will see like those aprs and they'll think like oh my god this is criminal but you have to think about you know the the business case behind it too yeah and i'll say i'm pretty sure that the apr regulations in the united states are not as stringent here so they can they can charge even more i'm pretty sure i think it varies from state to state in the u.s yeah yeah yeah and i you said, like, there's a lot of people who go to these companies because they're in a terrible position financially to like no fault of their own. Like they just can't really get by. But there's also a lot of people who go to these companies who've completely mismanaged

their finances, like on their own doing. And like these companies need to accommodate for that risk which is and like you said i mean if you keep lowering regulations there might not be a market for it and then that ultimately you know people can't access money like this which i mean some people would not mind at all if companies like this disappeared i mean it i it just depends really on your your overall outlook on that and uh you know like you, a lot of people view these companies as predatory. Yeah. I wouldn't mind that those companies disappear. Also, people that would never need those services. I think that has a high correlation. I'm not trying to say whether

it's right or wrong, but I just want to mention that yes, or is the reason why they charge these high rates is because they know that there's going to be a higher proportion of loans that won't be paid back. Yeah, like you don't tap into the subprime market unless you need to. Like if you can get a bank from a loan from like a reasonable institution at a reasonable rate of interest, you're not just going to go to the subprime market where the rates are much higher. But so in terms of this is actually what really kind of alarmed me on the quarter. And I think when they made the dead offering yesterday, they fell

around 3% or 4%. And then today, once the, again, I'll talk about it in a bit, once the actual offering of the price came out, they're down like 8% or 9% as I'm talking about this, they expect charge off rates to come in at 8.75% to 9.75%. So again, this one is a bit alarming to me. For the most part, you'd think they'd have a better idea as to where charge off rates are coming in at. They've been increasing over the last three, four quarters, nothing drastic, but small increases taking up five basis points, 10 basis points, 15 basis points a quarter. So last quarter was 9.3%. So to me, I would say absolutely shocked if this number came in anywhere close to 8.75%. But I imagine they'd still believe it can get there if it's included in the bottom end of their range. But if we go to the top end of the range, that is no doubt concerning as well, because if they're listing 9.75 as the top end of their

charge-off range, they obviously think that it could get to that point. And this is a company that typically targets a 9% to 10% charge-off rate. They've maintained that sort of charge-off rate for a very long time. So I mean, although that would be in line with guidance, that 45 basis point jump would be one of the larger jumps in quite some time. And I do believe it spooked the market a bit in that regard. And yesterday it fell a bit. And then this morning, they announced the actual pricing of the new notes that they're issuing. So effectively, they're issuing US debt and they're issuing Canadian debt. The US debt will be at 6.875% and the Canadian debt will be at 6%. But then they're getting into some currency swaps and things like this that is effectively

going to reduce the cost of that US debt down to 6%. But the thing is, is they said they're going to use these proceeds to purchase all of its outstanding senior unsecured notes due in 2026 that are at 4.375%. The only thing is it didn't really list the dollar amount of how much those unsecured notes are. I would imagine like we spoke about before, like they have to be getting additional financing here because if it's just a repayment for repayment, it just doesn't really make sense. It's up 2.7%. And again, I didn't really get to dig into this very closely because it came out this morning, but that's a pretty costly increase on the debt, which I think is why the market did not like it much at all. And I would imagine like the company would only really do this if they're getting access to more financing.

Yeah, they probably I think I mean, my I don't know my speculation. And that's what we're talking about. Like you just mentioned is that it might be a sign that they need to buff up their liquidity a little bit. So it could be a sign, you know, that especially if you combine that with them being, you know, there's a good chance that they may be towards a higher range of those charge off rates as well. You know, maybe they're just being prudent, but we've talked about this company time and time again, that it's great, you know, like it's the kind of company you want to invest in when, you know, things start getting pretty bad.

Yeah, that's when you want to invest in, not when revenues are booming, profits are booming, because that's usually when more and more distressed consumers access these subprime services. And while they still have a job, while they can still make the payments, yes, everything looks great. But when things start turning around, that's when, you know, it's not great, obviously, for earnings. Things start going sideways. And to me, that's when you should start looking at these kind of companies as an investor is when, yes, it starts getting pretty ugly. That's when you should look at investing in them. I know it's counterintuitive,

but that's when you're going to be able to get the company at a much more reasonable price than when revenues are just booming and net income is just booming as well. Yeah, because obviously, I mean, like I've said a couple of times before, this company does very well when the economy is poor, but there's a very fine line there. It needs to be poor enough that more and more people are tapping the subprime market, which is the case. In their last quarter, they reported the highest credit rating ever among their consumers, which is not like they'll kind of say it's a good thing, but really that just means more high quality buyers are having to tap into the subprime market, which'll kind of say it's a good thing but really that just means you know more high quality buyers are having to tap into the subprime market which can kind of give you an indicator on

just the cost of living crisis here like just you know the people are struggling to get by so ultimately that i don't really see that as a good thing but again like you got that fine line where the economy has to be bad which it has been for a while, and which is why GoEasy is just reporting crazy results. But it can't get so bad. The biggest wildcard for them or the biggest issue for them would be like if unemployment starts rising pretty quickly. That would be a pretty terrible outcome for them because then you know that there's a decent cohort of their customers that have lost their job and they were

probably struggling to make the payments to begin with. And then if you have no income, clearly, the chances are that it becomes a write-off or increasing pretty rapidly. Yeah. I mean, if you tap into these, like I said, you really don't tap into these markets unless you need to. So I mean, if you're a consumer that's in a boatload of debt and you have a whole bunch of loans, which ones are you going to prioritize? I would say these types of loans are probably going to be the ones like if you got a mortgage, you have a vehicle payment, you're making those payments before you ever pay this loan, whatever you have it taken out for. But yeah, it's the charge off rate rate like that one percent range in charge off

rate expectations considering the fact that they report earnings in probably a month that's a really wide range for me which yeah yeah i think it just shows they don't really know that's yeah wider the range the more and the shorter the time period just means that they yeah they realize there is a lot of variance that could be possible there yeah like if they were report say they just reported earnings two weeks ago and it's like two and a half months until they report again but it's not it's like it's a month and that like you know a one percent difference in charge off rate is when you have a loan portfolio that big is a big difference. Yeah.

No, I think that's kind of a good overview of what happened there. We'll keep an eye out when they report to see, yeah, definitely that charge-off rate, what happens. Now, we'll move on to the last name on the list. You're up again, Dan, so you know this name pretty well. I know Braden owns that as well, so he's been a big believer in TFII International. to the last name on the list uh you're up again dan so you know this name pretty well i know braden owns that as well so he's been a big believer in tfii international so do you want to go over that uh to finish off the podcast we have about 10 minutes left because i have a hard stop you know at 2 p.m recording today so yeah yeah i mean this one will be pretty quick it

wasn't really a good quarter for TFI. I think it was like a, it was an expected quarter. I don't even think the stock is down all that much right now, but they missed expectations, both revenue and earnings. And it's pretty clear that the economy is starting to hit operations. I mean, it's been hitting operations for a while, but we're starting to see that kind of increase. So if we look to year over year shipping levels, they've pretty much declined across the board. So package and courier shipments decreased by 0.27%. US less than truckload by 7.38%. And Canadian less than truckload is effectively flat. US less than truckload revenue fell by 4.7%. And Canadian less than truckload

fell by two. But it's pretty important to note that the majority of the business, I ran the calculations, is around 480 million of 617 million of less than truckload revenue does come from the United States. So this is a company that banks a lot on the United States. That top line dip is going to have much more of an impact. The company's truckload segment saw an 80% increase in revenue, but the bulk of it was just acquisitions. They said that the acquisitions in the truckload segment contributed around $450 million to revenue. So when we factor that out, it actually had a decline in that segment. Logistics, much the same story. So revenue increased, but if we strip out acquisitions, it declined. Free cashflow generation remains pretty strong coming in at 272 million. This is actually a pretty notable increase from quarter over quarter from third quarter of 2023,

but it remains below 2022 levels. And they took a pretty prudent approach with this cashflow. I actually didn't get to look at how many shares they bought back because you had mentioned the share buybacks when the stock is facing headwinds. I don't know how many shares they did buy back, but they paid back out of that free cashflow generation. They took about 130 million of it and paid down some debt related to a acquisition they made, which is like a specialty truckload company. So operating ratios, they've continued to creep up over the years as well. Not by anything crazy, but it's certainly noteworthy. I mean, if you're not aware, operating ratios are used by quite a few companies, but they're more prevalent in the transportation industry. So they compare a company's revenue to its operating

expenses. So TFI came in at 89.6%. That's 1.1% higher year over year and about 3.5% since 2022. So ultimately, the lower the operating ratio the better so an operating ratio of 89.6 effectively says that tfi spends around 89.60 to generate 100 in revenue in terms of outlook the it's like the opposite of the operating and operating margin yeah yeah pretty much yeah and they uh like the rails use it too, but the rails have much better operating ratios. I think they're in like the 60% range around there. So in terms of outlook, the company is pretty muted, but they've been muted for quite some time. So their entire outlook is pretty much just a warning of how bad the economy can get and really hammer home that, you know, it's going to be management's ability to navigate the current environment that should help drive stronger results over the long term. But overall, there's not much to read inside of their outlook, except the fact that they pretty much tell you that it could get worse.

And again, these results aren't really all that surprising. We're seeing it pretty much across the board for all transportation and logistics companies, including the railways. And I mean, cyclical stocks, they're going to be cyclical. Yeah, I think we talked about FedEx not too long ago. I can't remember. I think it was FedEx or UPS, but one of those. And yeah, they're facing headwinds. I mean, it's not surprising at this point. I was looking at the total share outstanding. So they haven't, I mean, it's possible if there has been stock-based compensation that would affect this a little bit, but from the looks of it, they haven't really

bought back much shares since pretty much all year, since last year. So you can really see the share count going down up until pretty much December of like December of last year was kind of last quarter where it was down versus the previous quarter. And then it just, yeah, it's been kind of flat, I would say increasing ever so slightly ever since. So they're either not buying back a lot, at least not enough to compensate for stock based compensation if that's what they're doing. So I would probably agree with you that they're being prudent here. Yeah. If you look at their shares outstanding in 2020, they were 93 million. And then at the start of 2024, they were 84 million. So they were buying back and now they're 84 million again. So it's effectively been flat. And I know they do issue

shares for acquisitions quite a bit. So their count is, it kind of jumps all over the place a bit, but I mean, it does make sense. It'd be weird if they issued the outlook that they did about how harsh the economy could get, and they were sitting there buying back shares because it could get worse, right? And I mean, this is just the way it works with cyclical stocks that are heavily reliant on the economy. And TFI is definitely one of those. Yeah, or you can do the airline way and you buy back shares before the pandemic. And then when the pandemic hits, you're completely screwed and dependent on government

bailouts. Yeah, exactly. Yeah, especially when it comes to cyclical businesses. To me, management should always err on the side of caution, just because you never know what's going to happen. Obviously, the pandemic was, like you can call it Black Swan event, it was not predicted, right, that came out of the blue for, I would say most people. So you have to keep that in mind. But whenever you're a cyclical company, I think you have to be careful buying back too much dog because you know you gotta use

cash to do that ideally and some use dead but uh you have to use cash to do that and it's cash that you don't have in case things you know take a turn for the worse so i think it's it's really good to be proven there yeah i mean we've seen it with and this is a company i own and i actually still do like it but but brp like bombardier recreationalreational, the one thing I'll say about Bombardier is they have consistently, throughout their entire history, bought back shares. But even in the midst of 2022, 2023, they're revising guidance downwards every single quarter. They really have no idea where the environment is going. And they're still, even over the last couple of years've still bought back over 10 of their shares and that like obviously i think

over the long term those buybacks will be they'll be fine but over the short term like they've paid a pretty big price scooping back those shares when ultimately you know they could they might be able to get them for way cheaper in the future depending how bad it gets so yeah it's share buybacks especially yeah for me it's more the lack of flexibility right like you end up putting yourself like hoping for the best like i'm not saying brp is a well-managed company overall but it's just yeah when you do that and there is a low probability event that happens or something that doesn't go as planned you just you just kind of take out some flexibility and then you have to resort to, you know, if you need money desperately, then that's

never a good situation either. So it's, yeah, I just, I'd rather companies be more on the side of caution when it comes to that. Yeah, definitely. Especially when you are, when you just like, as an operator, these companies, you know, there's going to be poor times. That's just the way cyclicals work. I mean, there's going to be, you know, a lot of peaks and a lot of bottoms in terms of their stock price. Yeah, no, definitely. So I think that's a great point to, uh, to end it on because yes, I do have to go have some commitments, uh, soon. I, we appreciate all the support, everyone listening. We will be doing a mailbag episode soon.

I got tons of questions. We do get a whole lot of emails. We try to respond to most of them. You know, we do appreciate all the comments, the feedback. And, you know, sorry to those that we're not able to respond to. We do try our best. Just sometimes, you know, there's only 24 hours in a day. So you can just do so much.

So we'll be doing that soon because we'll be traveling, both of us, in the first week of November. So look out for that. So if you've sent us some email with questions, your question might be in there. So just be on the lookout. You can find both of us on Twitter. Our handles are in the show notes. So feel free to look us up if you haven't done a review recently or I've never done a review for the podcast.

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