Forward Air Corp (Delaware) (FWRD) 2003 Q1 法說會逐字稿

Please stand by. Your meeting is about to begin. Please be advised that this call is being recorded. Good morning, and welcome to the first quarter earnings release conference call for April 24th, 2003. Your host for today is . , please go ahead.

Thank you. Good morning everyone, and thank you for joining us. Before we begin, I'd like to point out that both our earnings release and this call are accessible on our Web site at www.forwardair.com. 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 regarding first quarter 2003 results, which has been furnished to the SEC on Form 8-K, and which crossed the wire yesterday afternoon.

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, 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 COO.

Thank you, Vera. Good morning, and welcome to the Forward Air first quarter earnings teleconference. In spite of what might have been our most challenging quarter from an environmental standpoint, we are pleased to report both revenue growth and income growth for the first quarter of 2003. Considering all the events of this quarter, weather, war, SARS outbreak, we feel achieving an 84.9 operating ratio is a great tribute to both the people of Forward Air and our operating model. We are most grateful and appreciative of their efforts.

As I've done in the past, allow me to quickly do a monthly recap. January, as expected, was the slowest of the three months, followed by a decent February. March was a typical March with strong revenue. Overall, we are pleased with our revenue production for the quarter.

Switching now to updating you on some of the initiatives of the first quarter.

Our first initiative was to improve yield. Although painful at times, our people did a wonderful job with positive results, especially as we reached the end of the quarter.

Our second initiative was to successfully implement the Kitty Hawk agreement, both the handling component and the dedicated trucking component. Our people, led by , , and , did an outstanding job in making this a very smooth transition for both our customer and us.

Our final initiative was to continue the development of the foreign trade zone project in Dallas. This project remains on schedule and we look forward to completion and revenue generation sometime in the second quarter.

It's important to note that both the Kitty Hawk initiative and our FTZ project incurred start up costs during the quarter, but revenue was limited to less than the amount of only the Kitty Hawk business.

While specific initiatives are nice to discuss, the real push for all of us at Forward Air has been on execution, execution of our revenue plan and execution of our operation plan. We are pleased with our people's efforts in both of these areas.

Now, I would like to introduce Andrew Clarke, our Chief Financial Officer.

Thank you, Bruce. And again, thank you 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 indicated, we are very pleased to present the positive in revenue earnings growth in this quarter as we have done for the past two quarters. Our efforts will continue to be on growing revenues and increasing operating income to further validate the Forward Air business model.

For the last 12 months our return on equity was nearly 19 percent and our pre-tax return on assets was 24 percent. Again in our space, these continue to be some of the best results.

In the first quarter, operating revenue increased seven percent to 59., pardon me, $56.6 million. Traditionally line haul revenue was 48.7 million, an increase of six point eight percent.

Average weekly line haul tonnage increased seven point four percent to 24.6 million pounds versus last year. Average revenue per pound was down point six percent versus last year.

Logistics revenue increased 14 percent to four point five million dollars, driven by selling truckload brokerage and our other revenue category increased three percent to three point five million as a result of increased assessorial business, particularly our fee based business.

For the first quarter, income from operations increased 10 percent to eight point six million and company's operating margin expanded by 40 basis points to 15.1 percent.

Purchase transportation costs remain flat at 42.3 percent of revenue. Purchase transportation for the airport-to-airport network was 40.3 percent of revenue, which is down from 41.5 percent last year. Purchase transportation for the logistics business was 71.8 percent of revenue versus 63.5 percent last year.

Salaries, raises, and benefits were up 40 basis points versus last year. Increases in salaries and wages, including incentives as well as an increase in worker's compensation costs are the primary contributors to the year-over-year increase.

Operating leases decreased 20 basis points to five point five percent. On a dollar basis, that number is flat with last year.

Depreciation and amortization decreased 50 basis points to three point one percent. On a dollar basis, again, that figure remained flat from last year.

And insurance and claims decreased 20 basis points to two point three percent of revenue. Again, on a dollar basis, this figure remained flat with last year. We are particularly pleased again with this figure as we brought on over 40 more Owner/Operator trucks, versus last year. We have recently concluded our insurance process, as a result, our premiums will increase for this upcoming year, between 10 and 15 percent versus last year. Finally, other operating expenses increased 10 basis points to 8.7 percent. Increases in equipment repair and other operator recruiting were the primary drivers for this increase. As I stated earlier, Owner/Operator tractor count increased to 488 from 447 last year, and trailer count increased to 1230 versus 1120 last year. For the other statistics for the quarter, total assets grew to 150.9 million. The company's cash and total investments position grew $5.2 million during the quarter to $59.1 million. The company did not repurchase any shares of it's stock during the quarter.

Accounts receivable were $30.2 million for the quarter, and were 47. Allowance for doubtful accounts was $1.3 million as we had done and will continue to do, we will monitor all of our accounts very closely to insure timely payments. Company ended the quarter with operating terminals in 80 cities. And finally, for our outlook for the second quarter of 2003, the company expects to grow revenue between 4 and 8 percent versus last year, and earnings per share to be between 25 and 29 cents per share on a fully diluted basis. 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. On behalf of all the Forward Air employees and Owner/Operators, thank you for joining us this morning, and I will now turn it back to the operator for your questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star one on your touch tone phone. If you are using a speaker phone, please pick up your handset and press star one at that time. If your question has been answered, and you wish to withdrawal your request, you may do so by pressing star two. Please go ahead if you have any questions. Your first question comes from John Barnes, please go ahead.

Hi guys. Good morning.

Good morning.

First, could you discuss your efforts on rationalizing your pairs, and I guess what I'm trying to get to is, how many lanes do you entirely walked away from, how many, what kind of rationalization have you been able to do, and do you think you finally kind of bottomed out on that effort?

on your question John, I think we really haven't walked away from any lanes that I'm aware of. What we have is, either tightened up the operating costs of a certain lane, or on the other side of the spectrum, increased the revenues, probably a classic example would be freight going into Florida to heavily out of bounds state, it really has been in my years. It always will be probably until they start building plants in the state of Florida. And as a result, we have been very aggressive on the pricing side there. But as far as giving up any points or any productive revenue lanes, we have not done that.

How about on unproductive revenue lanes?

Any time it's unproductive, we go in and put a fix, hopefully, and almost every case, are sales people have done a wonderful job and have gotten whatever increase we needed, or we've slowed the frequencies down in the lanes, again, depending on each individual circumstance.

Ok. And then, can you give us just a break down real quick of customer diversification. If I missed it, I apologize, but I was kind of looking at, if you look now, versus a year ago, where your revenue is being derived from, customer type, can you give us that breakdown, and where is the growth coming from?

There's been a slight increase in the percentage of revenues broken out with the domestic international folders, and that's really come at the decrease of, predominately, the domestic airlines.

OK. Any pickup with the international airlines?

Nothing significant.

All right. Thanks for your time.

Thank you, John.

Your next question comes from Ed Wolfe. Please go ahead.

Hey, guys. I thought fuel and weather was going to hit you, but my gosh, guess not, not as bad as expected.

We weren't going to say anything to that, Ed.

I wanted to preempt you, Bruce. But in seriousness, can you talk to how fuel, when it goes up to $40 a barrel and gas prices are spiking, how that impacts your owner/operators and now, with the fuel hopefully on its way down, how that impacts you as well?

Basically, on an overall basis, fuel does not impact us. We charge the customer, if you go to our Web site, we have a scale up there that says, here is our fuel surcharge, both for the truckload and the LTL movements. The LTL is charged at a percent of the revenue that is generated by the customer. On the other hand, when we pay the owner/operator, we pay that person on a rate per mile. I think the highest rate we got to was $0.13 when fuel was very high, paying to the owner/operator. But what happens to Forward Air, the corporation, then, is they are laying where we will actually make a little bit of money because we have high density, say 30,000 pounds, on the load. And we will actually make a little bit more money than what we pay out to the owner/operator.

But the opposite of that is also true. I go back to the Florida lane as an example. Coming out of Florida, if we're running empty, that means we're generating no fuel surcharge and still paying the owner/operator a rate per mile. So, the overall impact of fuel has always been not real meaningful to us as long as we manage it, as long as we aren't running light loads and a lot of empty miles and we're able to collect it, if that makes sens.

So, you're going to stick to that the passenger to the owner/operator is almost 100 percent, give or take a week or so, kind of thing?

You know, it just depends on the week and the lanes and all that, Ed. I mean, sometimes we might win a little bit and sometimes we might lose a little bit. It's not something we spend a lot of time on.

That's fair. The insurance line has been impressive the last couple of quarters. Andy has talked about the premiums going up a little bit. I'm guess you had a pretty good claims quarter as well. Can you talk about how much of the million three in insurance's premium versus claims in the quarter?

But before Andy does that, Ed, I think it's important to note that we began a year and a half ago on a really serious push on safety. And our goal, and it's not something to just make fun of, but our goal was to become the safest carrier in America. That push has been led by our VP of Safety in Columbus, Ohio, and, in turn, all the owner/operators. And they have done just a fabulous job, I think. We, in fact, during the first quarter of this year, under really extreme conditions, our owner/operators did a marvelous job. And we really experienced very little, if any claim activity.

We were actually pleased with renewal. I mean anytime you pay a little bit more money you're not happy, but based on what a lot of other people were paying, we were pleased with that renewal. And we're confident as we go in the future that we are, indeed, going to become the safest carrier in America. And that will be reflected in our insurance costs as we go forward.

Andrew, back to you.

Thank you, Bruce. Yes, Ed and obviously it gives variable depending on, as Bruce talked about the claims in a particular quarter, but it generally runs between 60 and 65 percent of that number is the premiums portion of the - of that line, line item.

OK. So if we look at that percentage of it going up 10 to 15, that'll give us a good run rate going forward?

Yes.

OK. Did your retention go up in addition to your premiums going up? Is your deductible at a higher level than it was?

It is not.

And what is that level?

It's a half a million dollars.

OK.

And our premium year is April 1 to March 31 of 2004.

OK.

Bruce, you gave some linearity in terms of revenue when you said March was a good March. Taking that kind of seasonality out of it, 'cause March is always, should be seasonally a better month, was the revenue growth in March and so far in April above the seven percent, in line with the seven percent, or below that?

Above.

Above?

Yes.

And is April, I'd lump the two together, but has April been very similar to March year-over-year, taking seasonality out?

You know you're real good with kind of pinning us into a corner. But we're not going to comment on April. We're satisfied with where we're at.

OK. You also mentioned the word SARS. Is that something that you've seen any impact from? Or you expect to see some impact from this quarter?

You know, we've been surprised by the fact that we have not. It's rational that we will, but we have not seen it.

OK. And Andy, can you just take us through the cash flow on the quarter?

Yes. Cash flow from operations are five point seven million dollars.

What was the cap ex?

Cap ex was $550 thousand.

OK. Thanks a lot, guys for the time.

Thank you.

Thank you.

Your next question comes from Alex Brand. Please go ahead.

Thank you. I've got a couple of questions.

On the PT costs, which you've taken a fair amount of criticism for, there's been at least a lack of understanding about how that number's gone up. You said it looks like most of your benefit or you got a lot of benefit in the airport-to-airport portion. Does that imply that lower PT is a sustainable trend?

Alex, the - in looking at the airport-to-airport market, there's a couple of things. We brought in more owner, operators, which we pay a set rate per mile, but we're responsible for the trailer, we're responsible for the dispatch, and we're responsible for the insurance. When we bring in, which is what we predominantly do on the logistics side, we use outside carriers, where in fact, they provide the dispatch, they provide the trailers, they provide the insurance. And so we do have somewhat of a differentiation that has to be made on that.

And if you look at our ability to bring in and attract, as Bruce said, good owner operators, it's been able to help us manage that airport-to-airport side, which is 85 percent of our business.

As we look out on the truck load side, what we have seen in the first quarter in terms of , I think has been what you've seen and what the, at least the publicly traded guides have reported in their first quarter results, which is there's tight expansity? out there and the rates are up over last year.

But on airport to airport basis Andrew, we have more over the last, year and a half, primarily using our software superspin model. We have continuously reconfigured our system. It's a weekly event. We're getting better and better at it, and that's why you're seeing that cost go down. We certainly hope it's sustainable, we think it is sustainable, and we're looking for good things to come out of that as we go forward.

Ok. I'm thinking, in your comments, first you mentioned that the quarter reflected hardly any business from Kitty Hawk in March, but yet start up costs related to and Kitty Hawk. Can you give us any quantification on startup costs in the quarter?

No, we didn't go back and break that down. Obviously we did have startup costs in both of those projects, but you know, what I call investment spending. Both of them are well worthwhile. The point being, simply that, the Kitty Hawk phasing occurred over 4 separate weeks at the 16 locations and in each case, we had to go through training, we had to go through other processes, including positioning the Owner/Operators in the various cities. So, we had most, had one full week of revenue and then at the least, we had 4 weeks of about probably 40 percent revenue. So, we're looking forward to that contributing more as we go forward in the year. hopefully, hopefully excuse me, comes online sometime soon and we'll start generating revenue there.

Ok, but if in terms of order of magnitude, there's a reinvestment here, it's a 6 figure plus number between the two that would eventually go away or at least should, will have revenue to match that.

I would not go to a 6 figure number. I would be more comfortable with a 5 figure number.

Ok. So, it's not that big.

No.

OK. And then Andy, I think it was you, in your comments, you mentioned that there's, sort of, the focus on maybe a renewed focus on revenue growth and operating profit growth. Can you talk about what your, how your focused on achieving top line growth, I mean, there's some positives in the tough environment in the quarter, but, is there a new incentive plan that's in place? Is there some way that you're driving through the organization to focus on these things?

You really don't want Clarke to respond to who we manage revenue growth. I'm going to him at this moment and touch on it. We implemented a new set of programs, much of it designed by Andrew. Pleased to report we announced it internally last night, that 15 of our terminals hit it during the first quarter and they are receiving checks tomorrow. The incentive program is designed around 2 components. The first component is revenue growth and it is a stretch program, but it is an achievable program or revenue , if you will. And we're excited about the opportunity for our people to make money again. It's the first incentive to payout we've had in 2 years. The other component of the plan is, what we call, terminal contribution, which is basically them managing their local budgets. So, the whole philosophy is built around a local terminal. It's their business. It's their business to grow revenue, and it's their business to grow that revenue on a profitable basis. We're excited about the plan. It's a well designed plan, a lot of thought, a lot of input from a number of people went into it, and we think it will pay many dividends in the future.

OK. I'm going to go ahead and hog it for one more question. Bruce, your comments, you said yields, I forget exactly how you said it, but yields are more improving towards the end of the quarter. So, if you can just, maybe a broader comment on the pricing environment or something like that? But that sounds like the first sort of positive commentary in some time on sort of your overall pricing ability.

Yeah. A bit of a dichotomy here. Both our major competitors are still out giving away services and continue to participate in what I've termed in the past gutter level pricing. You know, we realize that we had to spend that in turn around to yield. In particular, in those lanes, as we described earlier, probably the most prominent would be the one going into Florida. We had to protect our yield going in there, and in fact, we did, on a very surgical basis, we did not implement an across the board increase in order, which is the easy way to get a yield increase, we did it lane by lane, in some cases customer by customer, and went in and fixed, we think, most of our yield issues across the board. In most cases, that meant we had to raise some rates. In other cases we actually lowered rates because it allowed us to get additional densities in lanes, which, in the end, help us.

The net impact, any time you try to change yield, it takes time. We started the project really in late February. We finally saw towards the end of March a reversal of what I call yield aversion, and for the first time we're year-over-year positive on yield, which is really a nice compliment to our people in achieving that.

Great. Thanks a lot, guys.

Thank you.

Your next question comes from John Larkin. Please go ahead.

Good morning, gentlemen. Great quarter.

Thanks, John.

Could you give us a little more color on the magnitude of the Kitty Hawk and free trade zone projects and how they're making tribute to bumping up your secular growth rate? I know it's difficult to comment on that specifically, but if you could just give us some general sense for the size of those projects and what they're going to mean to the company?

John, it's Andy. We have not, and nor do we plan to, disclose Kitty Hawk or FTZ until such a time, if at all, where they become meaningful. They're not in the sort of top 50 percent or top 50 of our customers. As a result, right now it's not meaningful. We just think it's an indication of the type of business that we are going into and in terms of enhancing the services we offer our customers.

OK. That's helpful. Also, as the balance sheet gets stronger and stronger, continue to build your cash balance, I'm sure you're spending a lot of time thinking about sharer purchases, dividends and other uses of that balance sheet horsepower. Any additional thoughts there you want to share with us?

We constantly look at how to do that. We've got mass under sitting in here wanting us to pay dividends. But our number one goal obviously is acquisitions. Acquisitions that compliment or enhance the Forward Air network, we think that's best use of cash.

We have looked at literally, it seems, you know, a lot of companies. Without success at this point but certainly haven't given up. And then if we are unsuccessful in that area, which we don't think we will be, you know, we always look at stock repurchases. That program continues although most of the month we were blacked out, or the quarter, for various reasons.

So, you know, a little bit of a round about answer, but our main issue is to grow the company and to use the money to grow the company at this point.

Then just on follow-up on your new incentive plan, which sounds very interesting. Are the sales people deployed at the terminals? And do you have a national account sales force? And can you give us a little color on that?

And then also are they basically trying to take more freight out of the air and put in on the ground? Or are we trying to take, you know, more freight away from the two competitors that have sprung up in the last couple of years? Or is there some other basic strategy that they're using to try and drive growth at each of the terminals?

I guess the quick answer, John, would be yes to all of that.

Basically it's depending on the size of the market. We may have no sales people and we would expect our terminal manager to do all the selling.

In the larger markets, we have anywhere from one to three sales areas. In L.A., for example, we have three sales areas.

We also have a national account sales force in place, which is really fairly new to our company. That's just, what three people today?

And we also have an airline logistics group, which consists of three people.

So that gives you a little bit of color of what we have spread across the nation. As far as what business they do after, they are not limited. We do not talk to our customer in terms of air cargo or ground cargo. We talk to our customer in terms of time definite services. You know, we want to sell overnight from Boston to Philly, but obviously we can't sell overnight Boston to L.A. We want to sell second day products. We want to sell third and more. And we think our customers today are more interested in the deferred product than they have ever been.

Finally, we push them very hard on what we call non-traditional business. An example of that would be the Kitty Hawk business. That's not airport-to-airport, it tends to enhance the operating characteristics of a local terminal and help them make their terminal contribution.

So they are pretty well-rounded selling all opportunities that Forward Air could bring to a customer.

OK. Thanks very much, Bruce.

Thank you.

Your next question comes from .

Hi, Bruce and Andy, hi. I just wanted to ask you if you -most of them have been answered, but on the revenue side, you seem conservative with the four to eight percent forecast in the second quarter, given what you did in the first - in the first quarter. Is that because you see some changes in the airline capacity situation that may be, that may adversely affect your profit or your revenue potential?

No. I wouldn't read anything into it. We're conservative by nature. We are very hesitant based on the last few years of an uncertain economy to come out and say, you know, we think we can grow it at 15 or 20 percent. So it's really that simple.

But in terms of airlines, assuming the domestic passenger capacity--belly capacity comes down in the second quarter, third quarter, is that good or bad for your business?

That depends on the airline, it depends on the lane they're running. And the reason I say that, David, is that the traffic moving from Boston to L.A. in the belly of a plane, that will not be Forward Air eligible except for the weekends. If it's passenger or if it's traffic moving from Cincinnati to Chicago, it would indeed come into our system. So there's both a good and a not so good portion of that.

Yes. What--in theory, though, a forwarder takes it to an airline if there is capacity or if he has flights, I mean, it never even gets to the airport if he doesn't have a flight. So how does that help you?

Well, if I understand your question, it helps us--belly capacity continues to go away. It helps if--you know most of the airlines, not all of them, most of the airlines to continue to sell their international routes business because that's extremely important to the profitability of that certain run. So if there's not belly capacity available to XYZ Airline to move a shipment from to Atlanta, yet the shipment is going to Paris, France, it will use us and that will help us, and we have seen that in the past. Now in the airline business and the current chaos that's going on there today, we would be hard pressed to predict what's going to happen. We're ready to help them.

Right. And, Bruce, you were having trouble with your yields last year, in some parts of last year, because of the length of haul, competition. Has that problem gone away?

Well, we still have--I'm trying to be nice here. We still have some less than good pricing out there is how we put that, but we have decided we're just going to ignore that. We're going to run our business; we're going to provide our customers the best service that they've ever had. We think that's been validated because we were chosen Vendor of the Year by the Air Freight Forwarders Association. And we're simply going to sell value and we're not going to get down in the dirt and sell three cent lanes.

Alright. Right. And in the Kitty Hawk revenues, will that be in logistics or a combination of logistics and line haul?

Logistics. As well as--it's in the logistics as well as the other revenue.

Warehousing and so forth?

Handling, yes.

Yes. And free trade zone revenues will be in the warehousing?

They would be in the other.

Warehousing and other, right.

Correct.

And in terms of the growth outlook for the international business, do you have any new business in the works there or, I mean, is there still--you still believe that that is the greatest growth potential for the Company, is the connecting with the international gateways?

We think that offers us a very large opportunity. Since we have three people positioned to grow that business, I hope it continues to represent a good opportunity for us, or perhaps they'll have job opportunities in the future.

And has military shipments been any factor? Some of the forwarders have gotten some military business. Has that been any factor in your first quarter revenues?

You know, in fact we have seen that, David; we have not quantified it. You know you see it out of places like Norfolk and Jacksonville, places where you would expect it to be, but nothing that's meaningful.

OK. Thank you very much.

Thanks, David.

Your next question comes from David Mack. Please go ahead.

Hey, gentlemen, how are you?

Good.

I have two questions for you and they're kind of linked. The logistics revenue over the last couple quarters has grown a bit faster than it did this quarter. I wanted, from what I'm hearing from some other areas of growth, that might be an aberration. I wanted to get some comments on that. And also, in terms of the trade free zone, I was looking for a little more detail as to any customers signed up already, what kind of potential uses you see for it? How have things changed over the last couple of months in any thinking there?

Not to be abrupt on FTZ, David, but we prefer to hold that information back for the time being. When it's appropriate, we will inform you and others of exactly what is going on there. And again, there are reasons why we have to be that way. Logistically, I think one of the reasons you've seen that their, saw that, in the first quarter, slow down, that portion of our revenue is, we went on a pretty hard-nosed program of increasing some of the yields in those lanes or in that business, better said. And as a result of that, some of the business went away.

And you know, we are not in the business of running a charitable operation. If we can't make money on a load, we're going to move on. We did attempt, in most cases, to work with our customer to increase our revenue per mile or our revenue per pound, but in some cases, the customer couldn't agree with us. That's their business. And as we like to say, it's just business. We need to move on. And that's why you saw that growth slow down a little bit. I think you'll see it come back though.

OK. Was that business related to either of the two large international airlines that came on recently?

You know, actually we enjoy great relationships with them. We have overall good yields with them. We have meaningful relationships with them, and have not had any issues like that at all.

OK. Last quarter we saw a potential competitor in one of the LTLs kind of come in and then quickly say, oh, well, this isn't a business for us. Are you, in talking to your sales people and seeing around the field, what is the sense that there is any encroachment from any non-traditional competitors of, and also, we've seen competitors for you guys kind of come and go over the years, you know, people who think they can do your type of business and then can't. Are you getting a sense of any of the staying power of any of the recent truckload carrier entries?

Probably no more than what you see publicly disseminated. We wonder why they're in the business, to be candid, but that's obviously their business to run. We think of the attempt to come into market as a great poster child that says, it's not as easy as you think it is. And even though we've been doing this for 13 years and generating profits, nobody else has been. And that's, to us, we've struggled with why people think they can walk into this business and be an overnight success. It's a tough business.

OK. Thank you much, very much, guys.

Thank you.

Thank you. Once again, if there are any questions on the phone lines, please push star, one on your touch-tone phone. There are no further questions on the phone lines.

Thank you. Again, I'd like to remind everyone that the earnings release and this conference call are accessible on our Web site at www.forwardair.com and thank you very much for joining us.

Thank you. This concludes today's conference call. Please disconnect your lines and have a great day.