Forward Air Corp (Delaware) (FWRD) 2003 Q3 法說會逐字稿

Good morning and welcome to the third-quarter earnings conference call for Tuesday, October 28, 2003. Your host for today will be Valera Doherty. Ms. Doherty, please go ahead.

Good morning everyone. Thank you for joining us. Before we begin, I would like to point out that both our earnings release and this call are accessible on our website at www.ForwardAir.com. With me today are Bruce Campbell, President and Chief Executive Officer, and Andrew Clarke, Chief Financial Officer. By now, you should have received our press release regarding third-quarter results, which has been furnished to the SEC on Form 8-K and which crossed the wire last night. You should be aware this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others regarding the company's expected future financial performance.

For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in our filings with the Securities and Exchange Commission and in the press release relating to this quarter's earnings. And consequently, actual results and operations may differ materially from the results discussed in the forward-looking statements.

The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. I would also like to remind you that in our call today, we may discuss certain non-GAAP financial measures, and a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures will be made available on our website. With those caveats, I'll now turn the call over to Bruce Campbell, President and CEO.

Good morning. Thank you, Valera, and thanks to each of you for joining us this morning. On behalf of the employees and owner-operators of Forward Air, we're pleased to announce record third-quarter operating income of $10 million, a 38.9 percent increase over our 2002 third-quarter results. The initiatives we put in place early in 2003, while sometimes painful, have allowed us to achieve these record results, and more importantly position the company better for the future.

As with past calls, here is a quick month-by-month review of the quarter. Both July and August were satisfactory months, not outstanding but good nonetheless. September, however, was a very good month with strong volumes throughout our system. What is most encouraging to us is we have finally, after ridding ourselves by choice of nonprofitable revenue in the logistics segment, seen in September sequential monthly revenue growth. We are most pleased with the efforts of our people. As we enter the final quarter 2003 of and prepare for 2004, we continue to push very hard to maintain our disciplines in the cost areas while renewing our initiatives to grow profitable revenues in both the traditional and nontraditional segments. I can assure you my efforts will be directed towards growing this company.

I would be remiss not to mention at this point that we have once again been chosen by Forbes Magazine as one of the top 200 small companies in America, our fifth consecutive year for this award. On a personal note, I am most grateful to Scott Niswonger and the Forward Air Board of Directors for this opportunity to lead Forward Air. I am excited about the opportunity, and more importantly, excited about the future of Forward Air. At this point, I would like to introduce Andrew Clark, our CFO, for a review of the third-quarter numbers.

Thank you, Bruce, and thank you all for joining us this morning. After I've concluded the financial review portion of the call, we will open the lines for your questions. In the third quarter, operating revenue increased 5.4 percent to 60.5 million. The third-quarter growth rate was above the second quarter's growth rate of 5 percent. Traditional line haul revenue, including fuel surcharge, was 51.4 million, an increase of 5.3 percent. Average weekly line haul tonnage decreased 0.3 percent to 25.1 million pounds versus last year, and up nearly a million pounds from the second quarter. Average revenue per pound including the impact of fuel surcharge was up 5.7 percent versus last year.

Logistics revenue, including fuel surcharge, decreased 5.6 percent to 4.8 million as the company continued to shed certain businesses that did not meet profit expectation. Other revenue increased 20.7 percent to 4.4 million as a result of increased accessorial (ph) business, particularly our terminal handling business. For the third quarter, as Bruce stated, income from operations increased 39 percent to $10 million, and the company's operating margin expanded by 400 basis points to 16.6 percent.

Purchase transportation costs decreased 260 basis points to 42.2 percent of operating revenue. While the company was able to generate more than $3 million in revenue year-over-year, the dollar amount of purchase transportation decreased by nearly $200,000. Purchase transportation for the airport-to-airport network was 41.2 percent of revenue, down from 43.2 percent last year. This result was driven by loading trailers more efficiently and using more owner-operators as our average owner-operator count increased from 457 last year to 473 this year. Purchase transportation for the logistics business was 69.5 percent of revenue versus 68.2 percent last year. The 69.5 percent figure represents an improvement in the figures from the second quarter of this year.

Salaries, wages, and benefits were down 40 basis points versus last year. Although the dollar amount spent in this category increased year-over-year as a result of increases in healthcare and workers' compensation costs, the company produced more revenue during the period to mitigate the increase. Versus the second quarter of this year, the dollar amount remained flat, driving the percent of operating revenue down 50 basis points. Operating leases increased 20 basis points to 5.4 percent. Sequentially, the dollar amount remained flat, and as a percent of operating revenue decreased by 20 basis points.

Depreciation and amortization increased 10 basis points to 3.1 percent. Insurance and claims increased 20 basis points to 2.5 percent of revenue. During the quarter, we experienced a slight increase in the frequency and dollar amount of smaller claims. Finally, other operating expenses decreased 130 basis points to 8.0% percent. Decreases in bad debt expense were the primary driver of that decrease.

Some other statistics for the second quarter were -- total assets grew to 166.6 million. The company's cash and total investments position grew during the quarter to $76.7 million, an increase of $22.7 million since the beginning of the year. The company did not repurchase any shares of the company's common stock during the quarter. Accounts receivables were at 30 million for the quarter, and accounts receivable days were 46. Allowance for doubtful accounts remained flat at 1.2 million. Operating cash flow for the first nine months was 24 million, and net capital expenditures were 2.4 million. The company ended the quarter with operating terminals in 80 cities, which has been the number since the beginning of the year.

For the fourth quarter of 2003, the company expects revenue to grow between 4 and 8 percent versus last (technical difficulty), and fully diluted earnings per share to be between 27 and 31 cents per share. These estimates depend on a number of variables, many of which are outside the company's control, and exclude any expenses associated with the announced secondary offering. During the fourth quarter of last year, the company's net income per share from continuing operations excluding nonrecurring items was 26 cents.

That concludes the financial review portion of the call. On behalf of all the 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.

(OPERATOR INSTRUCTIONS) Jon Langenfeld.

Good morning, Andy, Bruce. Nice quarter, excellent job on the yield and the cost side. I know you've answered this in previous quarters, but just want to get an update on it. When you look at your pricing initiatives, are there any concerns that it is taking you too far away from your core market and the volume growth may suffer longer-term?

Well, that's certainly a risk and it's certainly something we review on a weekly basis. It is not as simple to say the overall number should be this or should be that. We actually look at it, John, by lane; and we try to make sure that we are realistic that we are within the market, and most importantly that we are delivering value for our customer at a value for us. So that's our push and we do -- I mean, your point is well-made; we do look at that all the time.

Any change in what you are seeing? Clearly, it looks like you are getting some very nice -- some yield gains upgrading your freight mix.

You know, it has continued that trend since basically we initiated the program in the beginning of the year. I think we now look at continuing fine-tuning, and in some cases with our most recent release of rates, we lowered not a huge number of rates, but a fairly large amount of rates.

Good. Now if you look, Andy, if you look at the roughly 5, 6 percent yield growth in the quarter, how much of that is through fuel?

About 2.5 percent.

2.5 percent? Okay. If you kind of think through the overall volume picture, specifically on the line haul side, what is kind of the thought process there in terms of when the volume should reaccelerate? Does the trend through September kind of give the confidence level that Q4 2004, we will see those volumes start to move up year-over-year?

The difficulty we have here is that we, on a year-over-year basis, a year ago we still had the airline business, and that tends to be much larger. Example, our typical freight is 700 pounds per shipment, and the airline shipment will be anywhere from 2500 to 5000 pounds a shipment. So when you look at just the raw tonnage numbers, John, it may -- that still distorts that. We're going to start giving a good read on that in the first half -- or the first quarter, I should say, of 2004. So we are happy with where we are at.

So by Q1, you've kind of lapped (ph) that comparison?

That's exactly right.

Good. Thank you.

Alex Brand.

Thank you. I guess my question, Bruce, I want to ask about the tonnage as well. Can you give something more than the qualified statement about tonnage in the quarter? In other words, were we down a couple of percent in July but we were up 8 percent in September? Quantify for me a little bit just how strong the trends were late in the quarter.

Alex, this is Andy. Sequentially, the tonnage got stronger as the quarter progressed. And as Bruce said in his opening comments, July and August were okay from that perspective, and where down slightly in September was stronger than the rates that we had seen in both July and August.

Okay, so still down slightly, though, in September?

No.

All right. Help me then, again. I obviously misunderstood.

September's tonnage was positive.

Okay (technical difficulty).

John Barnes.

Bruce, congratulations. Could you talk a little bit about -- and Bruce, I'm sorry if I missed this. I got on just a couple of minutes late. Could you talk at all about the pricing environment? I know you had some success this quarter, but are you continuing to see the irrational pricing that you've seen in the past, or has that begun to moderate a little bit?

We've seen a little bit of moderation on that, John. We continue to basically ignore it and let people do what they want on that side, let their results stand for them. We are going to do what we think is right, and we are going to do where we think we bring the most value. We are going to price accordingly, and as I said earlier, we are also -- have lanes where we have lowered pricing. So a little bit of a mixture there. But we are ignoring our competition for the most part, is probably the nice thing for me to say.

Absolutely. Have you seen at all an exit of capacity from the market? I know one LTL decided after a short foray into the marketplace to pull out. Have you seen anybody else begin to extract some capacity from the market and that's helping support rates a little bit?

I think what we are seeing, John, are the smaller what we call Mom-and-Pops -- no negative meant there, but just the smaller players that have kind of gone by the wayside, if you will.

Okay. Andrew, back to the last question -- Alex's question on the volumes. One of your kind of ground comparisons last night in (indiscernible) announcement mentioned that in their ground business, they did not receive the normal September surge in traffic, and especially the end of quarter surge that they are used to seeing. In taking a look at your September traffic trends, did you see that normal month-end type surge and quarter-end surge that put you in the positive territory?

We did.

Okay, all right. That's all I have, guys.

John, we were already in positive territory.

Already in positive territory, so that just kind of helped at the end of the quarter. Okay. Thanks for your time.

David Mack.

Very strong quarter. I just wanted to ask a couple questions on the cost side. In terms of other operating expenses coming in similar to the second quarter at around 8 percent, is that something you guys see as sustainable as a percent of revenue?

David, a lot of that -- if you look at the revenue growth sequentially second to third quarter, you know, up over $1 million, with the way the network and the way the Company works, there is not a lot of additional expenses that you have to have to drive that growth. So you see a 7.9 or 8 percent number, and the dollar amount has fluctuated between sort of 4.6 and 4.9 this entire year. And that number, with the exception of bad debt and changes in other operating expenses, essentially stays in that range. The percentage obviously changes by the revenue number.

Okay. In terms of your goals for a sustainable margin -- and I know there is some seasonality to it -- but what is your goal in terms of where you would like to take the Company on a margin basis?

I think what we tell people, David, all the time is we are looking for 50 to 100 basis point improvement year-over-year. We think we can sustain that ongoing. We have sustained that with a few exceptions when it was typically an extraordinary item that prevented us from doing it. Our people continue to push and improve their efficiencies and their other areas that they can help us wring out costs. But -- and at the same time, and I think was important for Forward Air today, is that we really need to shove the revenue side. We have not been comfortable saying we were going to do that in the past few years because of the economy and what we call irrational competition. But we think it is time, and we are ready to push that area very hard.

In what ways are you going to start doing that?

Well, a number of different ways, which I really don't want to get into now because I'm sure they are all listening to it. But we would be happy to talk to you one-on-one.

Okay, very well. I'll take you up on that. Finally, in terms of the change in management, how really is that going to change what you're doing on a day-in, day-out basis?

Actually, it doesn't have a big effect on us. I think we were well prepared for it. We had done some extensive secession planning at the direction of the Board and at the direction of Scott Niswonger, so we were well-positioned. And I think it will just be another day for Forward Air.

And you might not be in a position to comment, but if you are, what is the reasoning for the secondary that Mr. Niswonger is going to enact?

David, as you can imagine, the advice of counsel is to simply comment on information that's available both in the press release and the S3. And so anything -- commenting anything beyond that is not appropriate.

Okay, thank you very much.

Matt Gardner.

Can you just touch on uses of cash? I know cash was up quite a bit in the quarter. And more specifically, I know last quarter you had mentioned that on the acquisition front valuations were at least becoming more realistic, I think was your wording, that sort of the (ph) thought process for you guys.

Our number one goal with cash, obviously, would be to deploy it with an acquisition or acquisitions. And indeed, we think valuations are becoming more realistic. I'll leave it at that.

Okay, and can you just touch on the new incentive program that you guys put in place -- how it is progressing, you're happy with it?

Yes, we are; we are very happy with it. We've had a number of terminals and within those terminals a number of people hit some pretty big numbers. We are real proud of them. They deserved it and they helped us to get to where we are today.

Great. Thanks a lot.

Edward Wolfe (ph).

Bruce, congratulations on the new position.

Thank you, Ed.

Same to Scott on his semi-retirement, I guess. A couple different things. Just want to follow up a little bit on the demand picture. You didn't (ph) comment on October. Can you comment first of all on how volumes are in October? And second of all, directionally, what do you see in the economy? Is the economy picking up, and you're not really seeing it because you've been so involved with calling up your own freight on the yield side or is there really no change in the economy?

I think where we are in October -- you know, obviously we are under some pretty tight restrictions on this call. I'll just say we are not unhappy. Secondly, the economy is a hard thing to call anymore, Ed. We've been talking about it for the last two, three years, about do we see a pickup. You know, we see sectors that are just unbelievably good, and then we see other areas that aren't as good. And then we see a reversal of that. So I honestly can't answer that that says is the economy picking up. We think it is, but we are certainly not counting on that.

I'm guessing less bad debt is a sign that things are getting better too, to some degree, no?

You know, I think that is a fair conclusion. I think that dismisses the efforts of our people, though, in both controlling bad debt and the credit extended to our customers. So I wouldn't want to make light of their efforts there. But I agree with your conclusions.

Bruce, have you look at the new hours of service rules and what the impact might be for Forward going forward?

It's actually very minimal, primarily because, as most of you know, we run a scheduled system. And the hours of service really has very little impact on us. We think it might have an impact on less than five percent of our runs. It just is not a big event for us, other than obviously having to retrain drivers on how to fill out logs and that type of process.

How about driver pay generally? Is there a sense you might need to give the owner/operators more pay going forward? Are they getting harder to find and keep?

You know, we are into our fourth quarter and obviously planning for next year, and that is one of the areas that we look at very hard every year to see if we are -- where we need to be on both pay and then also on ancillary items that we do for them, which in some cases is more important to them. As far as recruiting owner/operators, as we've said on past calls, it is not as easy to recruit owner/operators as it was five years ago, but we are still in good shape and think we can maintain that.

Okay, if I look at the operating ratio, you're on a run rate for the year of around closer to 84 than 83 in that area. And the last peak was 2000; you got to 82.6. Is there anything -- if you end the year with the base of freight that you have right now, let's call it about 240 million or so, that says you can't get back to that 82.6 with the current freight have, or do you need an uptick in the economy to get back there?

The easy way obviously would be with an uptick, but our goal has been and will continue to be to try to get to that level.

Is there anything that you need to do cost-wise to get there? Bad debt is one of the things; you have done a great job with that. Is there something else out there to do that is obvious?

You know, when you get your operating ratios as low as ours have been historically, Ed, there is typically no one single thing you can do to get there. You have to do a number of things. And so you shave in each of the cost areas. So I would be hesitant to say there is one area. We have about four or five areas that we are working on very hard.

Andy, can we get some cash flow numbers from you? What was the CAPEX in the quarter?

CAPEX for the first nine months was 2.5 million, so about 400,000 for the third quarter.

Okay. How about working capital in the quarter?

For the first nine months it is 24 million.

Is that a positive or a negative 24 million?

Twenty four million operating cash flow.

Okay. Just directional-wise, Andy, you have 77 million in cash starting the quarter. I mean, even if you're making 2 percent on that, that should be almost 400,000 in the quarter on interest income. Am I missing there something -- is there some of that cash that is not making anything? How should I look at that going forward?

No, the cash is invested in short-term, tax-free AAA municipal bonds. And so the number that we actually make and get on that is all tax-free.

Okay, and what's a fair percentage on that then? It's less than two?

Oh, yes.

Is it over one?

It hovers right around one. Again, if you look at the portfolio duration, it is about 45 days.

Okay, that makes sense. Thanks a lot, guys, for the time.

David Campbell.

I wanted to ask you about that hours of service rule again. You run a scheduled system. Does that mean the average operator is still running -- under his time runs under the new rules. Is that why there is no impact?

Basically that's correct, David. Each of the routes have their own characteristics, but in general that is a true statement.

Okay, thanks. And the volume pickup in September, was that in warehousing and terminal operations, as well as line haul or primarily line haul?

We track it, David, and the data that we present is just the line haul tonnage.

Okay. Right. And in line haul business changing in terms of forwarders versus airline as a percent of business coming from each of those sectors?

You know, obviously, we rid ourselves of some of the airline business. But overall, fairly stable customer base, if you will, customer mix, better said.

Okay. So I thought the logistics area is where you reduced your airline exposure.

That's correct.

But in the line haul -- but the line haul percentage is fairly stable, as well?

David, we also do have customers on the airline side that actually do ship in the line haul side, as well. So there is -- but the majority of it is -- was in logistics, but there is a portion that does show up in the line haul tonnage, as well.

That's why I asked the question, yes. But it is still fairly stable. And can you tell whether, in the airline part of the line haul, whether it is any -- whether there's any domestic or international growth, or is it -- I don't think you can really tell, can you?

That's pretty difficult. We do know that our business with BA and KLM has been very good. That's typical of this time of year, though, David.

Right, the seasonality of course is helping that. Okay. Thank you very much.

Gregory Burns.

Most of my questions have been answered. But I just wanted to revisit, if I could, on the wage and owner/operator front. I mean, obviously you guys pay a premium and you have a better situation than most other situation drivers would be looking at -- or owner/operators. But it does appear that wages are going up across the board. I'm just curious, would you revisit that or look at that on a quarterly basis? Do you look at it annually? Do you look at turnover as an indicator for what you need or don't need to do? And I'm just curious, are there any early warning signs that you guys see that suggest you may have to make some adjustments?

I guess the answer to that for the most part, Greg, is yes across the board. We look at it obviously in our planning process on an annual basis, and then constant review of it on a quarterly basis. And then again, if we start seeing a trend of turnover, we are going to look at that very hard, too. Typically, our turnover is not related to pay. Our turnover is related to the guy is going to quit driving or other reasons like that. So I don't know the exact direction (ph) we will go on owner/operator, both their direct pay and then also their ancillary pay. As we go forward, we will just have to see how that works out.

And then just on the subject of pricing - obviously got very good pricing. It looks like the LTL guys are getting good pricing and sticking and they are probably on track for another increase. I'm just curious, how do you look at that? Do you look at that as something that makes it easier for you to raise rates? Would you raise rates in sync with that industry, slightly less, slightly more, or does it really not have an impact?

Pretty much of a nonimpact to us. We look more -- I know the LTLs, having coming from that industry, are very good at putting in annual increases. And over a period of years that is a lot of money. What we prefer to do is what we call the rifle or lane approach, where we are constantly looking at lanes to see what our costs are in that lane, what our balance is in that lane, and what makes the most sense in a lane specific. We also do it by customer. So if the customer is giving us additional volumes, we obviously will be more lenient in terms of giving them a better rate. A customer who does not give us very much volume, we are obviously not prone to give them a very good rate. So we are a little bit different than the LTLs.

Okay. Thanks a lot.

Bill Fogel.

Came on a little late, so I was just wondering if you could give me an update on the timing of the equity offering.

Again, that -- we announced in the press release the numbers for the investment bankers. And it would be most appropriate to call them.

Okay. Thank you.

(OPERATOR INSTRUCTIONS)

Thank you. I believe that will conclude the call.

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