Forward Air Corp (Delaware) (FWRD) 2002 Q4 法說會逐字稿

Good morning. Please stand by. Your meeting is about to begin. Please be advised that this call is being recorded. Good morning, and welcome to the fourth-quarter and year-end earnings conference call for February 12th, 2003. Please be advised that there will be a playback for this call available at www.ForwardAir.com beginning at the end of this conference call, to end -- to go straight through to February 26th. Your host for today is Lira Doherty. Ms. Doherty, please go ahead.

Thank you, operator. 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 concerning fourth-quarter and year-end 2002 results which crossed the wire this morning. Before we begin, let me remind you that our discussion today 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, and Form 10-Q for the period ended September 30, 2002.

Our actual results may vary materially from those discussed today, and we do not undertake any obligation to update these forward-looking statements. With that caveat, I'll now turn the call over to Bruce Campbell, President and Chief Operating Officer.

Thank you, Lira, and good morning to each of you joining our call. As I've done in the past, allow me to give you the sequential month-to-month revenue for the quarter. We experienced a very good October, followed by a good November, and in a most unusual December, which was good the first three weeks only to have the final 10 days of the month impacted more severely than we would generally expect. We assume with the holidays falling mid week this caused more disruption than normal. Nevertheless, while not experiencing double-digit growth, we did manage to grow the company for the second quarter in a row despite what is, at best, a challenging environment.

From the operating perspective, our efforts over the past year-and-a-half to make Forward Air one of the safest companies began to pay dividends, as even prior to the one-time adjustment we were able to bring insurance costs in under 2% of the revenue. We will continue to stress this area, along with other cost improvement initiatives, as we enter the year 2003.

As we look forward, we are pleased with the business levels experienced so far, but still remain somewhat cautious for obvious environmental reasons. However, we are excited about two new projects coming to fruition in the first quarter.

First, we have reached agreement with kitty hawk to provide them handling services and dedicated trucking services in 14 cities. This is a first step in what we hope will become a long-term strategic relationship.

Secondly, we anticipate opening our first specific-purpose free trade zone site in Dallas, Texas, which we believe will further expand our product offerings and help enhance our value to each of our customers.

One last comment.

We have said over the past year-and-a-half our primary goal was to strategically position Forward Air for the future by generating cash, in turn, conserve that cash, and rid ourselves of debt. With the conclusion of the fourth quarter, we are now debt-free. We have cash in the bank. We continue to generate cash. And regardless of the world situation, well-positioned to take advantage of any opportunity.

I'd like to introduce Andrew Clarke, our CFO, at this point.

Thank you, Bruce, and thank you all for joining us this morning. After I've concluded the financial review portion of the call, we'll open the line for your questions. As Bruce said, we're pleased to report both positive revenue and earnings growth in this quarter, as we did in the last quarter. All our employees and independent contractors have contributed to these results. As has been in the case in the past, all our efforts will continue to be on growing revenues and increasing operating income to further validate the Forward Air business model. For the year, our return on average equity was over 19%, and our pretax return on average assets was over 24%. In our space, these continue to be some of the best results. In the fourth quarter, operating revenue increased 5.2% to $59.4 million. Traditional line haul revenue was $50.6 million, an increase of 4.6%. Average weekly line haul tonnage increased 6.7% to 25.9 million pounds versus last year, and up 2.8% from the third quarter of this year. Average revenue per pound was down 1.9% versus last year, driven in part to a shorter average shipment distance and gutter-level pricing. As was the case in the last quarter, we experienced better yields as the quarter progressed. Logistics revenue increased 32.8%, driven by strong truckload brokerage, and other revenue decreased 15.6%, as a result of decreased accessorial business. For the fourth quarter, income from operations, after adjusting for all unusual items, increased 12.5% to $8.2 million, and the company's operating margin expanded by 90 basis points to 13.8%. For the year, and again excluding all unusual items, operating margin expanded to 14.1% from 13.9%.

Purchased transportation costs increased to 45.2% of revenue versus 43% in the same period last year. As discussed in previous calls, the company is experiencing greater growth in its logistics services, which has a higher purchased transportation cost component than our traditional airport-to-airport business. When using outside brothers, which we do for a majority of the logistics business, the company pays a higher rate per mile for transportation than when using Forward Air owner-operators. Purchased transportation for the airport-to-airport network was 42% of revenue, down from 42.7% last year. Purchased transportation for the logistics business was 79.3% of revenue versus 61.6% last year. Salaries, wages, and benefits were down 40 basis points sequentially, and up 40 basis points versus last year. Increases in healthcare costs and the costs associated with operating the airport-to-airport network, including the growth of our sales force, are the primary contributors to the year-over-year increase. Operating leases increased 10 basis points to 5.5%. Included in this amount is 300,000 in exit costs associated with the leased facility. Excluding those costs, operating leases would have been 5% of revenue, which is down 40 basis points from last year. Depreciation and amortization decreased 80 basis points to 3.1%. As discussed in our press release, this figure was positively affected by nearly 300,000 from the discontinuation of amortization expense associated with acquisition goodwill.

Including the $1.3 million favorable premium adjustment from 2001, insurance and claims were 1.1 million, or 1.8% of operating revenue. To put this figure in perspective, the last time insurance is and claims as a percent of revenue was below 2% was in the fourth quarter of 2000. As Bruce said, we're pleased with this figure, in light of ever-increasing insurance costs. Finally, other operating expenses increased a hundred basis points to 8.9%, an increase in franchise taxes and other mouse expenses were the primary drivers. Other income, net, was positively impacted during the quarter by unusual items, which in total equal 830,000. The company's effective tax rate during the fourth quarter was 33.7%, which was caused, in part, by favorable treatment from the disqualification disposition of stock options, as well as better tax planning at the state level. During 2003, the company expects that its effective tax rate will be approximately 37-and-a-half percent. Some other statistics for the year, total assets grew to 145.5 million from 137 million at the end of last year. As Bruce said, the company's cash and total investment position grew 10.9 million during the year, even after accounting for the purchase of nearly $12.1 million of the company's common stock. Since inception, we have repurchased 629,000 shares of the company's stock at an average purchase price of $19.20 a share. Accounts receivable remain flat at 28.8 million from the end of last year, and accounts receivable days were 46 for both periods. Allowance for doubtful accounts was at $1.2 million. As we have done in the past, and especially in 2003, we will continue to monitor all of our customer accounts closely. Cash provided from operations for the year were $29.8 million. Capital expenditures were 3.9 million.

Free cash flow net of capex was $1.20 a share. Cash flow used in investing activities was 800,000 for the year, and cash flow used in financing activities was 14.8 million for the year, which includes the stock buyback and the pay-down of debt associated with our Columbus, Ohio facility. The company ended the year with operating terminals in 80 cities. For the first quarter of 2003, the company expects revenue to grow between 4 and 8% versus last year, and earnings per share to be between 22 and 26 cents a share. These estimates depend on a number of variables, many of which are outside the company's control. That concludes the financial review portion of the call, and on behalf of all Forward Air employees and independent contractors, thank you for joining us this morning, and I will now turn it back to the operator for your questions.

Very good. We will now begin the question-and-answer session. To place yourself into the question queue, please press star 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset and then press star 1. To withdraw your request, press star 2. Please go ahead if you have any questions. Your first question comes from Ed Wolfe. Mr. Wolfe, please go ahead.

Yeah. Hey, Bruce. Hey, Andy.

Good morning.

Good morning.

Can you talk a little bit about the impact that the west coast ports might or might not have had? We've seen some very strong volume numbers of imports into the U.S. from the international forwarders. I know that's not your primary business, but it feels like the domestic ATA data has been improving as well. You know, I was surprised the revenue wasn't a little higher, given all those things. Can you talk about that a little bit?

Most of that business that moves in, Ed, is truckload quantity because it would have originally been on a container, and then is, you know, moved inland, if you will on a truckload basis, and I don't think you'll see -- I mean, obviously there was probably some bleed-over on an LTL basis that we were fortunate enough to get, but that was not an impact on us at all in the fourth quarter.

: And I'm guessing that there was nothing you could quantify on con freight going under? That would have been stuff that you would have taken from that?

I think most of the con freight went to the other three survivors because obviously they would have been in best position to know where that freight was and -- since they'd been competing for it previously, and take it at that point. Our forwarder customer base tells us that had little or no impact on them.

Your next question comes from Alex Brand. Mr. Brand, please go ahead.

Thanks. I'm just guessing that Ed had more questions to ask, though. Maybe we can get more than one in at a time. I am curious about the two announcements you made. I'm not sure what a free trade zone would mean to your business, and any clarification there would be helpful. And also, your agreement with kitty hawk, to the extent you could elaborate on what that might mean, but also can we assume that those 14 cities are places where you already operate, so even if you're not going to give us any kind of revenue guidance, it would be, you know, no real investment on your part?

Yeah. Traditionally, we -- we do not announce revenue guidance, as you pointed out, Alex. The kitty hawk business is 14 cities primarily in the Midwest, although in other locations, too. And in each case, that business joins ours, or it's truly a shared facility. We are not going out and buying new facilities, we're not going out and hiring great numbers of new people to establish a new facility. So for us, handling business is what we consider almost to be true incremental. And I don't like that word, but, in fact, in many cases, it's incremental to our existing facilities and operations. The dedicated side of the business, which is the trucking side, is -- is new business and is not incremental from the standpoint it's -- they buy the truck, they pay for the truck to move into Fort Wayne and then to move back, so it's additional revenue, and hopefully additional income for us. To go to your question on the FTZ, hoping I answered the kitty hawk question adequately, the FTZ -- FTZs serve the primary purpose of allowing an importer to set freight in the U.S. without having to immediately pay a duty. That's not to say they avoid the duty, because if that product is eventually put in use in the U.S. territories, then at that point, duty is paid. Traditionally, most free trade zones are specific to a company, although there are other free trade zones located throughout the U.S. that allow anybody access -- not -- "anybody" is a stretch but allow access to other people. In our case, what we're attempting to do is establish what we call a specific-purpose free trade zone which allows smaller customers who can't, on their own, establish their own free trade zone, the opportunity to take advantage of the benefits of an FTZ. That's one issue. The second thing it allows to happen is a customer who is in process of getting a free trade zone but has not yet worked through all the regulatory issues to come in and take advantage of a free trade zone, even though they, at that point, do not have their specific zone up and running. So the benefits to us are, number one, it, you know, gives us an opportunity to enhance our value to the customer because our customers can take advantage of this situation immediately. Secondly, it allows us to extend our product offerings not only in the FTZ, but hopefully, if the product comes out of the FTZ and has further transportation either to a different gateway or to a destination inland point, we will get the transportation from our forwarder customer. So that -- that project has been in the works for quite a period of time. It will take a period of time to get it up and running to everyone's satisfaction, but we think long-term, it's a great opportunity not only for us, but for our customers.

Your next question comes from Ken (inaudible). Mr. (inaudible), please go ahead.

Hi. Good morning. Just one clarification first, and then a question on any impact from the U.S. freight ways. The-- you said 629,000 shares were repurchased, Andy. I think that was for the full year, so was that 263,000 then purchased in the quarter, and does that mean you still have 1.37 million remaining?

It still -- yes.

Okay. And --

On both of them, yes.

And your authorization. Yeah.

Yes.

And can you talk about any impact from the U.S. freightways sale of worldwide? Any kind of business impact that you've seen to date?

Actually, if anything, that relationship, Ken, has been enhanced. The people who purchased it were -- two of them were existing franchise holders, if that's the proper way to term that. The third was the former CFO of SEC O prior to being purchased by USF, so we had good relationships with all of them, and were able to quickly position Forward Air to continue to serve them, and enhance their product offerings.

Your next question comes from David Mack (ph). Mr. Mack, please go ahead.

Hi. Could you guys just explain to me one more time why the tax rate was -- was a bit lower than normal? And then I have -- I have a couple other ones.

Yeah. The -- the tax rate had to do with the favorable tax treatment of disqualifying dispositions. When -- you pick up a tax benefit for that, as well as better tax planning toe state level going in, and, you know, we operate in a lot of different states and just manage that -- that tax exposure a lot better.

Okay. And also, did you say that purchased transportation for logistics came in seventy nine three versus -- what was it last year, again?

Fifty one six.

Sixty one six?

Yes.

What was the big swing there?

The big swing was the fact that we used, in the fourth quarter of 2002 versus the fourth quarter of 2001, we went to the outside for third-party brothers to move that -- move that business. When we go to the outside carrier, we -- we pay one rate, and they bring their dispatch, their insurance, their trailers, they bring everything to it. When we use our owner-operator, that owner-operator is providing a power unit and the driver.

I see. And then otherwise, you guys get -- I mean, you take care of all of those other cost centers?

That is correct.

Okay. Is there any way you guys could talk a little bit about the competitive environment and pricing and, you know, any competitors eastbounding or flowing? .

Yeah, let me do this carefully. As you guys have published, you know, dominion came into the market. We're happy to have quality carriers come into the market because especially LTL carriers, because they understand LTL pricing. So, you know, that's not a huge issue to us and has not had a big impact on us, that we -- we have identified anywhere. But I would again stress, you know, they're a quality carrier, so this is in no way of putting that down. On the other hand, when you have truckload carriers come in and participate in the market, what they do is try to atry truckload pricing to the -- an LTL cost environment, and then you get what we now refer to repeatedly as "gutter-level pricing." We simply do not compete on that level. We are not going to take our company down to that pricing level. And we have backed away from business, candidly, that we could have taken if we'd wanted it, but we chose not to, because we do believe in generating cash and making profits. Having all that, the other issue that we push very, very hard on the competitive front is the quality issue, so, you know, revenue has both a quantity factor and a quality factor -- quantity and a quality factor, and what we push hard is making sure we provide the service levels that we commit to on a day-to-day basis, number one. Number two, not tearing up and/or losing the freight. And we have found benefits over the last two, three months on what our customers are telling us that that is paying dividends and will continue to pay dividends to us into the future. We have not seen any new entrants come in the market recently, and what we hear in general -- and I would emphasize that term. What we hear in general is much bleeding on the street.

I see. Okay. Thanks a lot, guys.

Thank you.

Thank you.

Your next question comes from John Larkin (ph). Mr. Larkin, please go ahead.

Yeah. Good morning, gentlemen. John Larkin here. Just another comment on this yield issue. Did I hear you correctly, Andy, when you said that yield per line haul pound was down 1.9%?

That is correct.

That's year over year for the fourth quarter, but that -- perhaps that decrease softened up a bit as the quarry involved?

That is correct.

Okay. well, did I also hear you correctly to say that you expect revenue to grow somewhere in the range of 4 to 8% in the first quarter?

Correct.

Could you give us some color as to how you see that playing out over the longer term, in terms of what you think the -- the company's sustainable longer-term growth objective is going forward? You know, perhaps in a more normalized environment on the other side of the Iraq resolution?

We're comfortable, John, that if we ever return to a normal environment, that we can once again return the company to growth at the low side of 8% and the high side of 15%. We hear that from our customers that say, you know, if business would just get a little bit better, you guys are going to do really well. So it's not as much what we think, but what we hear from our customers that we have the opportunity to grow there. You know, we're -- we're not jumping up and down that we brought the quarter in at 5%, but when you look at, you know, the various news publications or listen to them, you know, that's not the end of the world either.

Okay. A couple of years ago, you had a fair amount of success establishing what I would call pickup and delivery relationships with international airlines where you essentially were their domestic arm for picking up and delivering the international air freight shipments. Are there many additional opportunities of that type around that you're currently pursuing?

Yeah, John. Our whole push on the airline side is basically the international side, and -- because it's interesting, and I don't know if you noticed this or not, but British airways announced profitability and they attributed that to their cargo growth. And we like to think that we brought value to them, as I'm sure others did too. But that -- that we helped them grow that business because of the seamless service we provide to them and their customers. We continue to push the international side because they recognize those values. Now, contrast that with domestic airlines. While we continue to do business with domestics and we want them to succeed, we are very cautious on that side for obvious reasons. So we think the best place to put our resources, both in the PUD, but more importantly in the total seamless transaction for the airline, is on the international side, yet remain vigilant on the domestic.

One final question on your brokerage and logistics operation. Sounds like you've got a fair amount of what I would call truckload brokerage business. Now would that be what I would call free-running truckload freight, or is that somehow also tied to the air freight market?

The -- for the most part, John, it's tied to our airline customers. There are exceptions to that where it is some of the free-running business, but for the most part, it's airline and/or forwarder related.

All right. Thank you very much.

Thank you.

Thanks, John.

Your next question comes from Dave Campbell (ph). Mr. Campbell, please go ahead.

Yes. Bruce, hi. Good morning. I just wanted to ask: You said October/November were good. Can you be -- excuse me -- any more specific on how good?

If you're asking for numbers, we don't release those, but, you know, we were -- we were happy with where we were at those two quarters -- or months, I should say.

Okay. And on kitty hawk, explain to me your -- your -- you're warehousing for them and they're -- but they're doing the trucking? I thought you would be doing -- their freight is not going into your owner-operator system, is that correct?

Yeah. Let me -- let me backtrack and maybe do a better job of explaining that. The first segment of that business is where the customer will come to our facility, where we will act on behalf of kitty hawk and do pallet buildup, we will receive the freight and do the pallet buildup and then in most cases, although not in all cases, we will put that on a dedicated Forward Air truck. That truck is dedicated to kitty hawk, and it will transport the kitty hawk air freight from whatever origin city -- in most cases, to their Fort Wayne hub -- and then the opposite will occur. We will pick that freight up that's been through their (inaudible) in Fort Wayne, return it to the destination, and tender it for delivery or have it available for recovery for our customer. Now, one -- we think one real critical positive to this development, both for us and for kitty hawk, is that our forwarder customer -- and let's use pilot air freight as an example. Instead of them having to drop at Forward Air and another location, they will now be able, we think and hope, both companies, that they will be able to cut their PU and D costs because they will be able to tender all their freight at one location. So we think that will be a real plus to the forwarder community, a plus for kitty hawk, and finally, a positive for Forward Air.

So in terms of your revenues, you're going to have some warehousing revenues and also some logistics revenues from this?

Yes, sir. And we typically call that -- instead of warehousing -- handling revenue. But you're right. That's exactly what it is.

It will not be in your line haul operations?

It's going to be some opportunities for that, David, but they are not specific as we sit here today.

All right. And Andy, you mentioned this big increase in logistics transportation costs. How do you make up the difference in profitability? Is it -- do you have that much less other services you provide?

Less other services to our customers?

Well, you said that when you hire outside contractors to do the movement, that they provide a lot of services that you would provide if it went in your -- in your owner-operator system.

Yeah. And that includes the insurance, it includes the trailers, it includes the power unit, includes the driver. That if we're going to the outside, whatever carrier we select, they provide all of that. Versus what -- what we would provide with our owner-operator, pay that owner-operator a set rate per mile, but then we would be responsible for the dispatch costs, the trailer costs, the communication costs, and the like.

Right. So in your opinion, the profitability is the same whether you use owner-operators or your outside contractor?

The -- yeah. For the most part, yeah. But the outside con -- the outside carriers have more variability to it, which is -- you know, as Bruce said, if you read the reports in the fourth quarter, truckload capacity is always tighter.

Okay. Thank you.

There are no further questions on the phone lines. Mr. Clarke, would you like to make any closing remarks?

Thank you for joining us all this morning, and, again, if you would like to listen to a replay on it, it's www.ForwardAir.com. Have a good day.

Once again, please be advised this will be available in a playback at www.ForwardAir.com beginning after this call, to conclude February 26th. This concludes today's conference call. Please disconnect your lines, and have a wonderful day