Forward Air Corp (Delaware) (FWRD) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first quarter earnings teleconference call. At this time all participants are in a listen-only mode. Later we will have a question-and-answer session and I will give you instructions at that time.

Should you require assistance while you're on the call, simply press zero, then star, and an operator will come on to your line to assist you. This conference will also be simulcast on the following Web site as well as the replay will be available on this Web site beginning immediately after the call and extending for about two weeks. That Web site is ww. - excuse me, www.forwardair.com; that's www.forwardair.com.

I would now like to turn the conference over to our first speaker, Ms. .

Please go ahead.

Thank you.

Good morning, everyone, and thank you for joining us. With me today are Bruce Campbell, President and Chief Operating Officer; and Andy Clarke, Chief Financial Officer.

By now you should have received our press release which crossed the wire this morning regarding first quarter results.

Before we begin let me remind you that our discussion this morning will include forward-looking statements and as such are subject to the risks and uncertainties, including those discussed in the company's Form 10-K for the year ended December 31, 2001. Our actual results may vary materially from those discussed today and we do not undertake any obligation to update those forward-looking statements.

With that caveat, I'll now turn the call over to Bruce Campbell, President and COO.

Thank you, .

On behalf of the over 1,500 employees of Forward Air, we extend to you a good morning and a thank you for joining us today.

First, as we've done in the past, let me review the revenue side of the quarter on a month-by-month sequential basis. January, as anticipated, began soft but did show week-to-week improvement. February maintained January's levels but showed little improvement. March began much as February but then began steadily improving with a very good end of the month. Based off of the first two-and-a-half weeks of April we have experienced, it would appear revenue growth is continuing.

Allow me to switch to the operating side. As I stated earlier, we had anticipated and subsequently planned for a soft first quarter. We had implemented many cost controls and efficiency initiatives to assure us of maintaining our industry-leading operating results. Thanks to all the efforts of the Forward Air people, we once again validated the strength of our operating model by producing an operating ratio for the quarter of 85.3. Truly, an outstanding effort on the part of our people.

Allow me to touch on a few of the highlights of the first quarter. From a revenue standpoint, our single-source logistics provider program continued to show strength, validated by the acquisition of the KLM business, which began in May - or March, excuse me. We are confident this program will continue to expand in the near-term future. We continue in spite of a less than good economy to expand our sales force with three additions in the first quarter, plus continuing emphasis on our national account selling process.

And finally, on the revenue side, we actually were able to improve our yield per pound on year-over-year basis, accomplishing this in spite of dealing with new competitors who believe in gutter-level pricing. The efforts of our sales professionals to improve yield was and is a great accomplishment during a tough period.

Switching to the operating side, our real emphasis during the first quarter, in addition to controlling discretionary costs, was to improve load average while maintaining our high levels of service. We were able to accomplish this through the use of our new technology, which constantly evaluates freight movement and makes recommendation for improvement. Again, a solid performance by all our people in this area.

And with that I turn it over to Andrew Clarke to review the financial side of the quarter.

Thank you, Bruce, and thank you all for joining us this morning. We will open the lines for questions after my comments.

In the first quarter operating revenue decreased 7.8 million from the first quarter of 2001 to 52.9 million. Average weekly line haul tonnage was down 11-and-a-half percent in the first quarter of this year versus last. As a result, traditional line haul revenue decreased 8.2 million over last year's 45.6 million.

The company, however, as Bruce indicated, continues to make positive strides in growing its non-traditional business. Logistics revenue increased .4 million from 2001 to 4.0 million. Other revenue increased .1 million from 2001 to 3.4 million. Income from operations decreased 2 million to 7.8 million in the first quarter of 2002. Fully diluted earnings per share decreased 6 cents from 2001 to 22 cents a share.

Operating income and earnings were effected during the quarter in the following manner. Purchased transportation increased 60 basis points to 42.3 percent. As a result of the continued optimization of the network, we were able to decrease the number of total miles driven to support the system as well as the number of miles driven by third-party brokers.

The company ended the first quarter with 447 owner/operator power units, which was down from 487 over the same period last year. Salaries, wages and benefits decreased 70 basis points to 22.6 percent. Overall headcount reductions, as well as the decrease in incentives during the first quarter of 2002 versus last year were the primary contributors.

Operating leases increased 135 basis points to 5.7 percent. On a dollar amount, however, the amount paid is only up 400,000 versus the same period last year.

Depreciation and amortization increased 60 basis points to 3.6 percent. This is the last quarter-over-quarter comparison where the previous quarter did not have the depreciation of the fast computer system in it.

Insurance and claims increased 50 basis points to 2.5 percent. While insurance premiums are up year-over-year, the company had a better auto and cargo claims experience during the first quarter.

And finally, other operating expenses increased 30 basis points to 8.6 percent. On a dollar basis, however, other operating expenses decreased by nearly half a million dollars.

Some of the other relevant statistics for the first quarter are: Total assets grew to 142 million at March 31, 2002, from 137 million at the end of last year. The company's cash and investment position grew to 49.3 million from 43 million at the end of the year. The company's low asset base, fixed variable cost operating model produced pre-tax returns on assets and return on equity of 21.6 percent and 17 percent - 17 percent, respectively, over the last 12 months.

Accounts receivable days were 45 during the first quarter and allowance for doubtful accounts remains flat at 1.1 million. Average line haul pounds per week, as discussed earlier, decreased to 22.9 million from 25.9 million. And the company's first quarter - and the company ended the first quarter with operating terminals in 76 cities, up from the end of last year.

I thank you all for joining us this morning and I will now turn it back over to the operator for your questions.

Ladies and gentlemen, if you which to ask a question please depress the one on your touch-tone phone. You'll hear a tone then indicating you've been placed in queue. And you may remove yourself from queue at any time by depressing the pound key.

If you are on a speakerphone, for sound quality please pick up your handset before you speak and then you can return it to the speakerphone mode if you have others in the room.

Our first question is coming from Bear Stearns. We go to the line of .

Please go ahead.

Good morning, Bruce. Good morning, Andy.

Morning.

Morning.

Bruce, did you say that revenue was actually up year-over-year in March and in April?

No. What I said was we experienced, on a sequential basis, improvement. The first up we've had year-over-year was last week.

OK. Is there any kind of guidance going forward, whether it's for the quarter or for the year, on, you know, how you see revenue assuming the economy sort of continues to show this kind of modest improvement? If we're at minus 9 percent on the top line, should it be improving, is it stabilizing, what should we be thinking in terms of our models?

I think we've stabilized the revenue. We're comfortable that we can say that. And we think on a cautiously optimistic basis that - that's the way to preface it, that we're going to see growth again.

OK. Growth meaning, again, getting better or positive types of numbers?

Yes.

Both. And, OK. Any sense of - or can you give us some guidance on cap ex going forward? Is there a point where you're going to need to start to ramp up again or where are you - what do you think in there?

Cap ex for the year will be right around $5 million.

And that's basically add trailers and computer investment - software investment, better said. We have not backed off buying new equipment, again, following our normal cycle. And we have not quit developing software to help us and our customers even during the slow times. Now will we expand that as it gets better.

OK. And you stated that yields were up. I'm assuming that's revenue per pounds per week?

Correct.

What's the number there?

Yeah. Went to 16 and I believe it came from 15.7.

Sixteen is what? I was looking at I thought revenue per pounds per week. I'm at a number of 2.2. What am I looking at this wrong here?

We measure yield in terms of price per pound or yield per pound. That's how we measure that. Year-over-year basis it was 15.7 a year ago, it's 16.0 cents per pound this year, which, considering, as I said in the statement, the gutter-level competition that we've had that is truly a great accomplishment.

Who is the new competition that you're seeing out there? Is it regional or is it national?

Well, we have - we always have regionals that, you know, a year ago we both the startup of CRST and the startup of - dedicated to U.S. Express.

OK. Thanks for the time, guys.

Thank you.

Thanks, .

And next we go to U.S. Bancorp and the line of .

Please go ahead.

Could you talk about pricing a little bit? Just by looking at the numbers, it looks as if though your volume was down about 11.5 percent and revenues were down about 15.3 percent on a year-over-year basis for line haul. So that leads me to believe that pricing was down a little bit. Can you kind of highlight that a little bit as to what's going on there?

As we said, pricing remains firm. If you look at the revenue per pound per system - and I can send you that data - it's - it was 16 cents for the first quarter versus 15.7 last quarter.

OK. So basically you're saying that even though your competitors are lowering their prices you have been able to maintain your prices and you continue to do that with your strategy going forward?

Correct.

OK. And how about as far as for insurance premiums for this next year, what are kind of your expectations on that? Have you had a chance to kind of finalize?

We did. We finalized it. It is actually in place. If you look at - on a normal quarter on the insurance and premiums line - insurance and claims, essentially half of that is your premium. And in this past renewal cycle we saw our premiums for all the different types of insurance that we buy increase just less than 20 percent. And so I think that's a good gauge going forward ...

OK. So basically ...

... first quarter of this year for the next three quarters of the year.

You're saying they should be up roughly about a little less than 20 percent from what we just saw here I the first quarter?

Correct. And again, premiums represent about 50 percent of that insurance and claims. And that, obviously, fluctuates depending upon whether or not you have occurrences. But in a normal quote/unquote "quarter" that's what you see.

OK. And how about as far as the other 50 percent that's in there?

That primarily deals with claims.

OK.

The basic change in our policy, , which became effective April 1, was we took on additional retention. We now have a half million dollars worth of retention. And basically we're able to hold our premium costs fairly comparable. We were very pleased with that from the standpoint of comparison to other carriers who we're hearing everywhere from a hundred to 200 percent increases.

And part of what brought that to the table was what we feel is a strength in our safety program, number one, and number two, the strength of our balance sheet. We were able to take on more risk.

But as we go forward it will truly be an all-out effort on the part of all our people to keep that cost in line.

OK. And also, too, can you just give us what the headcounts were for the end of this quarter and what that compares with for the end of fourth quarter and a year ago?

Could you repeat your question, I didn't hear?

What is the headcount that you have right now for number of employees?

Headcount.

Oh. It's - from the fourth quarter of last year it's essentially flat.

OK. And how about year-over-year?

It's down roughly 100.

OK. All right, thank you.

Thank you.

Next we go to the line of at J.P. Morgan.

Please go ahead.

Hi, Bruce. Just a couple quick follow-ups on what you're seeing out there. Is there - Bruce, is there any area of weakness or strength relative to your overall business trend, East Coast, West Coast, airlines versus small forwarders? Can you - can you sort of describe where - what part of your business may be a little stronger and what parts are a little weaker right now?

From a regional standpoint probably the biggest thing that we see in terms of almost a daily change is on the West Coast. It's both up and down pretty - I mean, one day it's great and the next day it's bad. We're assuming a lot of that is driven by both port activity. And then also the East - the Asian into the U.S. import is still sporadic. It's better and on some days it's great. But it's not always, you know, positive.

Overall, throughout the company, we're pretty pleased with where the revenue levels are now. We think it really bodes well for the future. We still have a lot of work to do, obviously, to continue that, but it's much - we see much more activity than we've seen in the past, especially if you compare it to the third and fourth quarters.

Bruce, just looking at your customer base, are there any forwarders that are - that could go under at this point or anyone - any of your customers like that that are facing financial difficulties or do you think you're past that issue at this point?

Well, actually, we had anticipated, you know, in the second half of last year, , and really through the first quarter. And we thought the first quarter would be the worst that we would, in fact, experience some failures. And we have not - knocking on wood - experienced that yet other than a very few small ones, which is normal.

So far everything in that area has been very good. I give that credit to our AR and credit management people because they have really stayed on top of that. You can see our AR did not grow in terms of days outstanding. So overall we're really pleased with our customer base and how they have survived this very difficult period.

Great. And then just one final question on the - make sure I got it right, on the insurance retention. You are increasing your per-incident deductible so that essentially it there were to be no change in your accident behavior we might expect somewhat more quarterly earnings volatility? Is that a fair read?

If you had - if in fact you had a lot of accidents, that is a fair read.

OK. Thank you.

Thank you.

And next we go to the line of David Campbell at Branch Cabell.

Please go ahead.

Yeah, hi, thanks. Good morning, everybody. The KLM business started in March. Is that in line haul or logistics or both?

Both, depending upon the type shipment tendered to us, David, it could be in logistics or it could be in our normal system.

And, is it really fair to compare - is it fair to compare your yields, your revenue per pound, by the system or isn't it better to - isn't it better to look at it on a pounds per line haul rather than per line haul pound?

Actually, we look at it on a lane-by-lane basis so, you know, it is revenue per line haul. We do not look at the yield, if it's tendered to us on the logistics side, as a truckload or as dock handling, if you will, loading and unloading.

Right. So that means that you've experienced better revenue per pound in recent weeks than you've had earlier in the quarter?

That's fair - that is a fair statement.

All right. That's been one of the reasons for the improved revenues year-to-year in April?

Yes, sir.

And do you think that the change in revenue in April will be - you will have to add a lot of expenses to carry that?

Not if I will be in this conference call in July.

OK. Thank you very much.

Thank you.

Our next question comes from at Credit Suisse First Boston.

Please go ahead.

Hi, guys, how are you?

Good, thank you.

Just have a few quickly here. The ratio of the trailers and tractors I noticed that the year-over-year the tractor count went down principally because of the owner/operators the trailer count went up a bit. What's the - what's the right spot for you guy? And if you could just refresh our memory, do you own any of these trailers?

, we own all the trailers ...

Right.

... and basically very few of the tractors. The majority of the tractors are owner/operators.

OK.

We did, in fact, adjust our owner/operator fleet through the last half and the first part of this year for two reason. One, obviously, we anticipated a slower time and not needing as many as in the past for that specific time period. We are actively growing that fleet as we speak. The other reason we did it was we thought it was a great time to get back to the best of the best. And we - if we had a borderline O/O from the standpoint of his safety - his or her safety qualifications we did not tolerate that. So we really feel comfortable with where we have our fleet at today. We're actively growing it. We have a lot of interest in coming to - owner/operators coming to our company, but again, maintaining the best of the best fleet.

When you look at the trailer to tractor ratio, is there something that's better about the ratio being higher? Usually we'd want to see that ratio going lower. Is there something you're doing that says 2.0 is better than 1.7 or something like that?

It really depends on, you know, the operations that we're running. One of the things, , that's kind of skewing is that as we get into more and more of this logistics business. Where in a normal LTL business you can run a 2-to-1 trailer ratio, when you throw in truckloads in there it starts skewing that number. So when you look at in total it won't always follow common logic.

Right. OK. On the LPL pricing front, the LPL carriers are doing a pretty good job of beating each other up. Can you take advantage of that and have you been able to?

Actually, you know, we're pushing our customers to take advantage of it. I wish we could go out and take advantage of it. But, hopefully, that will occur.

You haven't seen much of it yet?

Not yet.

And just finally on doubtful accounts, the allowance is very low. You remain as comfortable as you've been with that?

Yeah, we - somewhat surprised. Like to take credit for it, but overall we're very happy with where that's at.

OK. Thank you.

Thank you.

Our next question comes from at Bear Stearns.

Please go ahead.

Go ahead, sir, your line is open. We can't hear you.

I'm sorry about that. Just a couple follow-ups. Can you break out roughly where the revenue breaks out between domestic forwarders, international forwarders, and airlines, right now?

It remains comparably where it was at the end of - at the end of the year, which is 72 percent domestic forwarders, 12 percent international forwarders, 8 percent international airlines, 5 percent domestic airlines. And then integrators and ocean carriers would make up the balance.

Where do you see that going over the next year and five years, let's say?

We think we're going - well, first of all, the international and domestic forwarders are probably going to blend into one. We think we will - we will have a great opportunity to improve the international forwarder side of the business and then the airline side of the business. Not making light of the domestic side of the business, it's just that that's where we've always been and we think the domestic side has, you know, fewer opportunities to grow just because we already have a bigger presence there.

What do you mean by blend the two, the international and the domestic?

As a good example would be Eagle used to be a domestic forwarder, now they are both a domestic and international forwarder. So it's becoming very difficult to separate that. You can look at some of the international forwarders who, in the past were purely international players, are now getting into some domestic programs. So it's becoming harder and harder for us to break that apart.

From where you sit it's seamless. You can't tell when an Eagle shipment was an old Eagle or a new Circle shipment, in other words?

Not always. Sometimes we can but most times we cannot.

OK. One other question - I don't mean to beat this into a dead horse, but just on the revenue per pound, I mean, if I just take the average pounds per week that you guys reported, which is 22.9 this question versus 25.9 a year ago, and I run, you know, line haul revenue divided by those pounds per week, I get a year-over-year you're about down about 4 percent. What am I looking at wrong there?

In the first quarter of 2001 you had a fuel surcharge in the line haul number - line haul revenue number, that was rolled into the rate increase in the - at the end of the first quarter-beginning of the second quarter of 2001.

And none of that fuel surcharge was in the current quarter?

No.

No, it's a rate increase.

Oh, I see. I understand that. What was the percentage?

We ended up you had 4 percent a year - this is a year ago, .

Was how much?

It was six. I apologize. It's been a year. I can't remember that far.

About 4 percent?

No. I've been corrected. It is actually six - it was 6 percent that was rolled in a year ago.

You're just customer friendly, Bruce.

Thank you, sir.

Thank you.

Our next question comes from at Deutsche Bank Securities.

Please go ahead.

Thanks.

Good morning, guys.

Morning.

Good morning, .

Andy, you mentioned earlier salaries were down during the quarter due to lower incentive payments made during the quarter. Can you just clarify for us, are you accruing bonuses at this point with the hope of meeting plan, beating plan, or should we see that if you begin to trend that direction you'll have to take a large accrual later in the year?

For the majority of our people, , they're paid on a quarterly basis based upon the goals and the like of the company. And so we did not accrue nor did we pay in the first quarter incentives.

OK.

Bruce, you guys have done a great job at managing the size of the network - your owner/operator network, flexing it down with the down volumes. Are you getting close to that line where further reductions are going to be difficult without sacrificing some of your service capabilities?

We don't think so and actually had spent some time developing a plan if we had to go further, . We think we can do that. We - but we also think we're not going to have to, and I think that's an important point.

OK. And could you just describe for us briefly what you're seeing the recruitment environment for new owner/operators? I know you've been taking out the under-performers and there hasn't been a big push to add a lot. But if you - if you had to flip the switch and go out and hire a hundred of these guys or women tomorrow, what's the recruiting environment looking like right now for owner/operators?

So far it's been pretty good. A few areas of the country where it's not good, but that's always been the case. Overall we're very pleased with that environment today.

OK. No need to incent with, you know ...

No.

... higher than historical rates or anything like that?

No.

OK. Thanks for your time, guys.

Thank you.

Thanks, .

And next we go to David Campbell at Branch Cabell.

Please go ahead.

Yeah, back to asked about the blending of international and domestic forwarding, is that - wouldn't that be a negative in your case if say European forwarders increased their domestic business enough that they could function with their own trucks?

Well, I - that is a continuous and ongoing issue for us, David. I mean, anybody could get big enough where they would have density to do that. The question is can they, in fact, get that much density? What we have found in the past is that they can't. As so as a result we tend to be a viable partner to them to help them grow their market and not become a competitor, if you will.

The other - Scott's pointing out to me, David, and I should have brought this up earlier, what we try to do when we get into those situations - a good example is USF Worldwide. They had grown their network to a point where they thought they had enough density to run their own network. And what we attempted to do at that point is move them along the food chain, if you will. And so what we did was develop their dedicated system for them. So we moved the freight - if you - if you - consider this. We moved the freight from our LTL network to a dedicated network for them. We still participate in the business and they get what they want.

And that becomes a logistics revenue for you or does that become line haul revenue?

Becomes a logistics revenue for us.

Right. And do you think that that will be an increasing trend then over the next three to four years?

You know, I'm not sure I can answer that. I think there will be some companies who will have enough strength that, in fact, they could move it over to a limited dedicated operation. And I emphasize limited because you only want to do it where you have enough density and can, in fact, save money. And there will be a few that are able to move over there. I don't think the vast majority of them will have that type of overall density to make it work for them individually.

And you haven't said anything about acquisitions. Is that unlikely to happen now or are you still seeing a lot of potential acquisitions?

We - you know, we continue - I mean we get opportunities on a weekly basis. For the most part, we have not shown a lot of interest in any of them because we don't think they bring us a lot of value. And in most cases, David, we would just as soon slug it out with them on the - and - because we think we'll end up with the business in the long run.

Having said all that, somebody may walk in my office when we're done with this call and we may decide at that point this is a great opportunity. So is that a good round-about answer to your question?

I guess. I mean, you don't go out - you must know who your competitors are. You don't go out seeking the - going to them with the bids to see if they'll sell to you?

It's very rare that we do that or have done that, I should say. We did that in the past on one or two occasions where there was a specific need that we needed to address and we thought the value in buying and addressing that need was greater than us trying to do it on our own.

And in terms of industries types of shipments, where do you see - where do you see the recent strength? Do you have any - enough information on that?

We really don't be comfortable publicizing it. As you know, most forwarders tender to us without that type of information. So the information that we give you typically is what we see as opposed to being anything quantitative basis.

Right. OK, thank you.

Thank you.

OK. And the next question comes from at T. Rowe Price.

Please go ahead.

Hey, guys.

Hi, .

Morning.

Andy, what was your operating cash flow in the quarter?

We'll pull that together by the end of the day and have it out.

OK. Out in the queue?

Yes. It will be in the queue.

The - OK.

It will come out within the next two weeks.

OK. Is your sense that it was up or down from year ago?

Essentially flat.

OK. And then secondly, you answered that bonus question kind of interesting saying that you didn't accrue or pay bonuses to the majority of the - of the people in the network. I'm just curious, given that you made your earnings number, understanding that the top line was a little weaker, what exactly are the quote/unquote, "majority" of the people based on on a quarterly basis?

Well, they're - in most cases it's two criteria, . First is revenue attainment, which we did not make, and secondly is operating results - internal operating results, which are not what you see externally.

We - our bonus or incentive program is based on gain sharing, you've got to get better. It's not based on maintaining or, you know, anything - or even our external numbers. So it is possible - and it's not - I should back up and maybe correct what Andy said, it's not a majority of the people didn't get paid for first quarter, none of us got paid for the first quarter. So I take that personally.

OK. Thanks, guys.

So that's why the difference.

OK. Thanks.

Are there any more calls, moderator?

We have no other persons in queue so we'll close Mr. line. And if there's any other questions now's the time to press one.

OK. We're not getting anyone queue up. Please continue.

If he'd please just repeat the replay on the Web site for the listeners, and then we'll conclude.

Did you have any closing comments before I give that information?

No, no.

OK. This conference will be available for replay at the following Web site for approximately two weeks, www.forwardair.com. That will be available for two weeks beginning right after this conference.

Now that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.