Forward Air Corp (Delaware) (FWRD) 2003 Q4 法說會逐字稿

Please be advised that this conference is being recorded. Good morning and welcome to the Forward Air Corporation fourth quarter earnings conference call for February 10, 2004. Your host for today will be Andy Clarke. Mr. Clark, please go ahead.

Thank you. Good morning everyone, and thank you for joining us. This is Andy Clarke, and I am the Chief Financial Officer of Forward Air. Before we begin, I would like to point out our earnings release and this call are accessible on our website at www.forwardair.com. With me today is Bruce Campbell, President and Chief Executive Officer.

By now you should have received our press release regarding Q4 and year-end results which has been furnished to the SEC on Form 8-K, and which crossed the wire last night.

You should be aware that 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 as 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 a press release relating to this quarter's earnings, and consequently actual operations and results may differ materially from the results discussed in the forward-looking statements. The Company undertakes no obligation is 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 that caveat, I will now turn it over to Bruce Campbell, President and CEO.

Good morning and thanks to each of you listening for joining our fourth quarter earnings conference call. On behalf of our 1,600 employees, it is my pleasure to share with you what we feel are outstanding numbers.

Outstanding in two ways. First, we achieved just under 10 percent revenue growth while continuing our initiative to improve yield. We were able to accomplish to accomplish both, revenue growth and yield improvement, a real tribute to our sales team. Secondly, we were able to bring much of the revenue growth to the bottom line, achieving an operating ratio of 82.2 percent, our best OR in three years. Our thanks to our operating team for producing these results.

When numbers are good it is best to get to them quickly. With that caveat, allow me to introduce Andrew Clarke, our CFO, to further amplified on the results of the fourth quarter and full year 2003.

Thank you all again for joining us this morning. After I have concluded the financial review portion of the call, we will open the line for your questions.

We're pleased report both record revenue and earnings results for the fourth quarter of 2003. Our continued focus on profitable growth and cost control show in these results. In the fourth quarter operating revenue increased 9.8 percent to 65.2 million. The fourth quarter growth rate was at its highest level since the first quarter of 2001.

Traditional line haul revenue, including fuel surcharge, was 54.6 million, an increase of 7.9 percent. Average weekly line haul tonnage increased 5.3 percent to 27.2 million pounds versus last year. Average revenue per pound, including the impact of fuel surcharge, was up 2.5 percent versus last year. The impact of fuel surcharge on year-over-year growth rate was not significant because the Company had a fuel surcharge in place for most of the fourth quarter of 2002.

Logistics revenue, including fuel surcharge, increased 3.6 percent to 5.5 million, reversing two quarters where we experienced a decline. Other revenue increased 46.5 percent to 5.1 million as a result of increased accessorial (ph) business, particularly our terminal handling business.

On a year-over-year basis, and excluding the unusual items in the fourth quarter of 2002, income from operations increased 41.2 percent to 11.6 million, and the Company's operating margins expanded by 400 basis points to 17.8 percent, its highest level since the fourth quarter of 2000. Purchased transportation costs decreased 240 basis points to 42.8 percent of operating revenues.

PT for the airport to airport network was 41.8 percent of revenues, down from 42 percent last year. This result was driven by loading trailers more efficiently and using more owner operators, as our average owner operator accounts increased from 472 last year to 479 this year. PT for the logistics business was 70.2 percent, down from 79.3 percent last year.

Salaries, wages and benefits were down 10 basis points versus last year. Although the dollar amount spent in this category increased year-over-year as a result of increases in wages, including incentives, health care and workers compensation costs, the Company produced more revenue during the period to mitigate the increase.

Operating leases decreased 20 basis points to 5.3 percent. Depreciation and amortization decreased 30 basis points to 2.8 percent. And insurance and claims decreased 20 basis points to 1.6 percent of revenue versus last year, excluding the retro premium add backs. We continue to have very good experience on the auto liability side.

Finally, other operating expenses decreased 120 basis points to 7.7 percent. As a dollar amount, this figure decreased 200,000 versus last year, but with the nearly 10 percent increase in revenue the impact to the percent revenue was dramatic. For the year, total revenues grew 6.8 percent to $241.5 million. Operating income grew 26.2 percent to $40.2 million. Our operating margins expanded by 250 basis points to 16.6 percent. Earnings per share grew 28 percent to $1.19. And for the year the Company's return on invested capital was 54.5 percent. The pretax return on assets were 25.4 percent. And our return on equity was 19.4 percent.

Some of the other statistics for the year were total assets grew to $175.1 million. The Company's cash and total investments position grew for the year to $86.5 million, an increase of $32.6 million since the beginning of year. The Company did not repurchase any shares of common stock during the quarter.

Accounts receivables were at $31.5 million for the quarter -- or for the year, and AR days were 47. Allowance for doubtful accounts remained flat at $1.3 million. Operating cash flow for the year was $32.8 million, and net capital expenditures were 2.7 million. The Company ended the quarter with operating terminals in 80 cities, which has been the same number since the beginning of the year.

Our outlook for the first quarter of 2004. The Company expects revenue to grow between 8 and 12 percent versus last year, and fully diluted earnings per share to be between 29 and 33 cents per share. These estimates depend on a number of variables, many of which are outside the Company's control. During the first quarter of last year the Company's net income per share was 25 cents.

That concludes the financial review portion of the call. 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.

(OPERATOR INSTRUCTIONS) Alex Brand.

Nice quarter, guys. It is good to see that in Greenville top line actually goes to the bottom line. In Houston it doesn't seem to work that way. Question. Your core line haul business is accelerating, but you have now turned logistics to positive. Your other revenue continues to grow well. Can you talk a little bit about the product outside of line haul, specific products that are getting the most traction and where you see the most continued opportunity going forward to grow your revenue?

Sure. And not to make light, Alex, of the airport to airport, because we continue to feel that is a viable and very growable business. We concentrate in a number of areas outside of the airport to airport, led by our push with our terminal managers to say, what else can you do to offset your fixed costs at your local facilities?

And those include all types of revenue opportunities, everything from handling for people like Kitty Hawk, to the warehousing opportunities on a temporary basis for many of our forwarder friends, doing customs work. Anything along those lines that helps them supplement their individual revenue objectives in their facilities.

And then we also push very hard on the logistics side. That group, as you know, last year we shed ourselves of about $2 million worth of business because it simply was not -- it wasn't giving us the type of return that we wanted. And they basically were able to replace that, to their credit, with more viable business, business that better fit our structure, and thus importantly helped us to make money. That was a painful and difficult step for our entire group, but we did it. And more importantly, they did. And the results are apparent.

This is a bit of a qualitative sort of color question, I admit. But as you look at the fact that you upsided your top line guidance. You now have -- you are raising your top line guidance for Q1 from your 4 to 8 last year to now 8 to 12. So obviously you have a level of conviction about sustainability here. But can you talk about, Bruce, where you see the balance here? Is the economy the driver here? Or is your sales effort that you instituted a couple of years ago getting that much traction and giving you that much comfort in sustainability?

The obvious answer is it a bit of both. We're enjoying a better economy. Our customers are enjoying more robust opportunities, if you will. So we're happy with that part of the equation. And then obviously the other part of the equation is, if there are opportunities out there, you have to be able to close them. And our efforts led by Craig Drum and that our entire sales group have really paid off. So again, it is a combination effect.

John Barnes.

Very nice quarter. Can you guys talk a little bit in terms of the rate environment? I think Alex asked a great question on sales effort versus the economy, but in terms of your sales effort are you getting the kind of price improvement that you think is sustainable, or do you think there's upside to what you were able to achieve in the fourth quarter?

And then more specifically, Bruce, the gutter pricing competitors that you have referred to in the past, have you seen a change in their attitude or their behavior in the marketplace in terms of how they are pricing freight, and you're seeing a general uplift in the entire pricing environment for the entire sector, not just Forward Air?

Well we basically ignore the gutter people. Our goal is very clear, and it was a goal we set out a year ago. And that was to make sure that we had priced the services of Forward Air to best reflect our cost structure.

In many cases it wasn't so much of a rate increase as it was an adjustment to rates reflecting head haul direction versus back haul direction, because we might have actually lowered rates in certain lanes. So it was what I would call an overall lane restructuring. We do price by lane. That is why I'm referring to that. And one that benefited both our ability to sustain an increased yield, but also benefited our customers -- that sounds somewhat of a dichotomy -- but it in fact helps them in certain areas because we had opportunities to help them.

So a roundabout answer to the question, we did not go out and do a general rate increase the whole year. What we did was restructuring of rates. And I think that was real important. We think that is sustainable as we go forward. If our cost structure were to change, certainly we would go in and look at that. It is an ongoing process. And it is a process that candidly we go through every week at Forward Air to make sure that we have our pricing where it needs to be.

Have you seen the change in behavior, not just from the low pricers or the bottom figures, but just in general, have you seen a change in behavior in the marketplace on pricing?

Yes, I think the answer to that, John, anytime the economy starts to pick up, and you know there are more opportunities, if you will, there is less price pressure. That is not to take away from the fact that our customers, as do most customers, always want the best deal. But it is not as intense as it was a few years ago.

I know it is difficult to quantify, Bruce, but can you give us an idea that in some of the changes and some of the difficult decisions that you have made in the last year, how do you characterize your freight mix today versus that of a year ago? Do you see that you got not only more freight in the system but better quality freight in the system? And that is what is reflecting the price improvement, or do you have the same mix and you have just done a better job at pricing what you had before?

With the caveat of the logistics business that we talked about earlier where we rid ourselves of that business, basically it is the latter. We have just gone through and done what I call a cleanup process. So not a huge change in our mix outside of what we rid ourselves of a year ago.

Lastly, as the economy appears to be accelerating a bit and there is certainly opportunity out there -- I want to say retrenchment, but you guys have stuck to your core operations and have really focused on what you got there. Do we see '04 as being maybe the next expansion year? Do you look at growing either the number of terminals in the network? Are you looking at layering on that next layer of sales professionals in your sales organization? Or do we expect Forward Air to continue with this infrastructural level?

I think first you have to look at a year ago. We made the really difficult decision, and were criticized by many, for taking on the yield improvement process as opposed to simply expanding our market share and then having to deal with cheap rates today. In retrospect we're glad we made that decision. As the future goes, we have been, we continue to be an opportunistic Company. We have the ability to be opportunistic with over $80 million of cash on our balance sheet. So I think you'll see us take advantage of what we consider to be good opportunities going forward.

Thanks for your time. Great quarter.

Jon Langenfeld.

Nice job on the quarter. First on the core business, on the airport to airport business, Bruce, what do think -- I know I've asked you this before, but I guess it was almost year ago when things weren't as certain -- but what do you think the sustainable growth is in that area over the next couple of years as you look out?

We have hopefully consistently said that during a good economic time that we can grow it between 10 and 15 percent. And during bad economic times 4 to 8, somewhere in that range. We continue to believe of those two areas of prediction, we think -- we have experienced the last few quarters very good results. We don't see that slowing down as we sit here today.

Good. That is consistent. On the purchase transportation side, you guys have obviously held a lot of the efficiency gains that you experienced earlier this year. Are there other opportunities there in terms of how you -- how you're attacking owner operator market, the loading efficiency side? Or have we seen the gains in that line, and now as we the move forward, you may need to leverage more of the broker community?

Well, it is an ongoing process. There are really are a number of key factors there, a few of them you touched on. We continuously review how we run our freight through our Super Spend (ph) software. And it tells us, as we get more freight, it helps us get more and more efficient. So we think there continues to be opportunities there.

There are also -- obviously when you get yield improvement, it helps the PT line because what freight that paid 16 cents now pays 16.2 cents, and so you're picking up some opportunities there. And then we have a real push on right now as we speak to grow our owner operator fleet, because in fact it is cheaper for us to run our freight with our owner operators as opposed to outsourcing it to another carrier. That is a real initiative for the year 2004. We're off to a great start there. I think that owner operators today in this world are fleeing to the quality companies. And the companies that can keep them running and avoid some of the situations that perhaps they are experiencing in the truckload world. So we think we can continue the improvement there. Obviously, as the PT gets better and better it gets harder and harder, but that is the challenge to us and our people, and we think we can do it.

And my other question you kind of answered. But I guess with the owner operator side it sounds like things are going well there, especially given the value your network brings to them.

So far this year, Jon, we're very happy with the progress that we have shown there, and hopefully we can sustain that through the year.

And then finally on the cash side, up to $4 per share, and a good problem to have. But it seems like a lot of the internal initiatives and internal things you have going on don't really require a lot of cash. You are really leveraging your existing infrastructure. Am I reading that right, first off?

And then secondly, I guess disposition of that cash, acquisitions, other ideas, what should we be thinking about in that ballpark?

First of all, it is a good problem to have. Secondly, as we have said through the past, we look at acquisitions. We're always interested. We don't what to do anything silly just because we're sitting on a bunch of cash. We will continue to be opportunistic in that area as we go forward.

As far as the the Forward Air model as it exists today, we don't have great needs for cash. We replace trailers, add a few trailers. We replace forklifts, add a few forklifts. We have our IT initiatives which require some money, outside of that it is normal.

And so is there a point where you get uncomfortable with the amount of cash you have? If you go through this year you add another buck, buck and a half to the cash line. At what point do you become uncomfortable with the amount of cash you have?

I've never been uncomfortable. Obviously it is an issue for us. It's an issue for the Board. It is one that we constantly re-evaluate. There are acquisition opportunities. Do we spend money there? Do we look at yield -- or dividends? Do we look at share repurchases? That is a constant review process not only for Andrew and myself, but obviously for the Board, and will continue to be.

So it doesn't sound like you lack the opportunities out there, it is just a matter of finding the right ones?

I think that is a fair statement.

David Mack.

A very strong quarter. I had a question looking down the income statement, the tax rate was a little lower then we had expected. Is there a reason for that?

Yes, David, this is Andy. Essentially the amounts that we have accrued for at the state and local level, based on the states in which we do business, and our expectation of where the taxes would be in those states, frankly didn't come in as high as we had anticipated.

Going forward, we expect our tax rate in 2004 to be about 38 percent, but we will be reviewing that number. As opposed to the year end, we will be reviewing that number more closely on a quarterly basis.

You guys have done an excellent job improving the margins and grown the revenue line. Do you think there is more to go there in terms of margins? Or do you think most of the growth in the next year or so should be coming from topline growth, which I guess conceivably should help the margin, but is it now mainly up line margin?

Go ahead.

Well, if you look at just the midpoint of our estimate in our guidance for the first quarter, we are expecting again margin expansion in the first quarter. So on a year-over-year basis we always look to get another 50 to 75 basis points expansion. As we get better, the bar gets raised higher, which just increases the work that we have to do here to make those margins better. But every one in our Company is focused on doing that, and think we're up to the task.

In terms of potential acquisitions, you guys are clearly in the driver's seat with that great cash balance and clean balance sheet, what types of deals could you potentially do and not maybe upset or raise a bit of an eyebrow from some of the -- some of your customers? Would they be more on the ancillary side? What you were saying about how you have been doing more accessorial work, if you can expand on that a little?

That's a good question, David. First we always look at what we call tuck-ins, which are competitors, if you will, the opportunities there. Second, we would look at anything that would expand our services, yet protect our customer. In other words, we would not -- we don't want to compete with our customer, because obviously that is a very important part of our ongoing existence. So it would really be a complementary type of product or service offering.

And then we look all the time at doing smaller -- not necessarily an acquisition, but an expansion of our existing service offerings. An example of that would be, for instance, FTC. An example of that would be our business with Kitty Hawk where we do handling for them. We love those opportunities. And they don't necessarily require us to make an acquisition.

In terms of Kitty Hawk, as an example, they have outsourced a fair amount of handling -- or all of their handling over to you guys.

A fair amount.

What exactly are you guys doing better or more cheaply than they could do (technical difficulty) else?

Basically what we allow them to do with them utilizing us is convert to a completely variable cost model on the handling side. Because we charge them per pound to handle their business, both their inbound and their outbound, and because we provide the labor and we provide the facility, they don't have to do any of that. And so their cost model converts at that point to strictly variable. We have taken the overhead, for instance, in Chicago it is our facility, it is our people, etc. And so that is the key factor, David, is it allows them to be totally variable.

John Larkin.

A couple of questions here. A couple of housekeeping matters related to the numbers, perhaps for Andy. Purchased transportation in the logistics division took a huge drop down to 70 percent or so from almost 80 percent. Is that really a function of getting rid of the marginal business, or is there something else going on there?

Primarily it is a function of that marginal business. But also when we have a Forward Air owner operator run that for us, the PT on that, as Bruce discussed, is less than the PT for traditional outside brokerage.

I've got you. Okay. And then could remind us, Andy, what is in the other operating expense line item? That is getting to be rather large as a percent of the total. What do you include in that?

You mean as a percent of operating revenue, it is actually down. But that number throughout 2003 in the fourth quarter it was just over 5 million. In the first quarter it was just under 5 million. But that is a lot of general supplies and expenses, things such as communications and utilities, all of our repair and maintenance, the allowance for bad debt, our bad debt expense is in there, public company expense. A lot of the different what we would call overhead type work.

Thank you, on the nose. And then maybe for Bruce, it seems to us that the line between what I would call expedited LTL and deferred airfreight is really blurring. And that perhaps as you begin to penetrate what I would call the expedited LTL market that there may be of a growth opportunity there then perhaps some of us thought. Could you give us a flavor for how much of the incremental freight may be coming from that source rather than the traditional, what I would call, deferred airfreight?

John, I sincerely wish I could answer that. I will give you an opinion, and it is based on what our customers tell us. And that is that they have more and more opportunities. So I think your beginning comments are absolutely on the money. That is a very blurred line today. And I think probably within a few years it will be completely melted together. So as a result, we think there are more and more opportunities for us, because there are opportunities for our customers.

If you were to be able to grow at say 8 to 12 percent consistently for three or four years during good economic times, perhaps even faster than that, in the 10 to 15 percent range, what is your Super Spend model tell you about how much more efficiently you can handle the freight if you were to perhaps increase the volume of freight in the network by 50 percent?

It seems to me that as you use more and more of your regional hubs, and maybe Columbus less and less, when you are able to load direct more and more that that is going to perhaps create some pretty significant opportunities for you, given that the pricing were to remain the same, to expand your margins off what is already a terrific base. Am I looking at that the right way?

The answer is yes, John. And the further answer is, it depends on where that freight comes from. So an example would be in any back haul lane if we grew a back haul lane by 20, 30 percent, a whole lot of that would go to the bottom line. On the other hand, if we grow a head haul lane, obviously not as much of that will go to the bottom line, especially from PT because we will be adding power to do that. So even then we have the opportunity to improve our PT, but the range of profitability is fairly dramatic there.

Just one follow-up on your answer there. Is your sales force provided with incentives to fill up the back haul lanes that have the extra capacity?

They are.

Edward Wolfe.

Just one quick question. The rest have been answered. First, just directionally, the last peak operating ratio was 826 in '00. I remember at the time you felt like there was more leverage to improve even from there before the economy turned on you, and acquisitions that you took on that time were a little difficult. Now you've got better pricing. You have had some time to digest what is going on here for a while internally. What is your sense of where this could peak at if everything went right several years down the pike?

Well internally, and Andy will flinch when I say this, internally our goal has always been I guess really two, and that is to be the best OR the industry. And that means we have to beat Kevin (ph), Knight and Russ Turdain (ph).

And then secondly to have an OR in the '70s. Having said that, that is going to be extremely difficult, because as Andrew touched on earlier, it gets more and more difficult as we push the OR down. But internally that would be the goal.

Ken Hoexter.

It is actually Brad Davis on behalf of Ken Hoexter. Just a couple of things. I just wanted to get a feel for business (indiscernible) this quarter. To what extent do you guys -- have you guys been going outside your network, your own operator network?

You mean in terms of filling capacity?

Yes.

It is a balancing act. As Bruce said, we're pretty happy with the owner operator count, and we continue to try to increase that owner operator count to essentially fill the needs that we have, given the fact that we brought our guidance from traditionally 4 to 8 percent now to 8 to 12 percent.

Just another thing, how many employees did you guys finish the quarter with?

Just barely under 1,600.

David Campbell.

I just wanted to ask you a couple of questions. The Kitty Hawk contract had an impact in the fourth quarter obviously. But how seasonal is their business? Is that something that you would see less of -- and a lot less in the first quarter?

I don't think I would characterize it as a lot less, David. It is similar to our business. They are heavier in the third and fourth quarter, and a little bit lighter in the first and second, but not a dramatic change.

And the duty-free trade zone, you didn't say anything about that. Can you bring us up to date on how much of an impact that has had, and where those revenues are on the P&L?

The revenues are on the logistics side. And it continues to move along. We would like to have more success out of it, but we continue to believe in the concept. Because it is a new concept, it is a little bit slow grower, but it will take off here before long.

It is still only in the Dallas Fort Worth airport?

That's correct.

But you do think there are other opportunities for growing that business in the next couple of years?

We think the concept is very good. We just have to validate it. So, yes, hopefully we will be able to grow it.

And did (indiscernible) and profit-sharing have a significant impact in the fourth quarter versus the third quarter -- labor costs?

In terms of the SG&A, yes, we had -- a lot of our terminals -- we have talked on calls past about the incentive plan that we put in 2003, where we have incentivized the people at the field level to grow the terminal revenues, as well as grow their terminal contribution, or their profitability. And a lot of the terminals stepped up in the fourth quarter, and a lot of them got paid significant incentives as opposed to what they have been paid in the past. So there was an impact, but again as I discussed during that call, it didn't outpace the revenue growth, and as a result, you saw that number decrease as a percent of operating revenue.

Those are normally accrued only in the fourth quarter? Is that going to be something that you would see during the course of the year as well?

No, you'll see during the course of the year for the majority of the people get paid at the terminal level, but we do accrue for annual incentives throughout the year.

That's good. Thanks a lot for the good results.

Gregory Burns.

I just wanted to take a look at the cost side of the equation. And I got on the call late, so I may have missed it. But on the workers comp, which in some of the health care and some of those increases, what is your outlook essentially over '04? And basically do you think those cost guidance will continue rapid growth?

We don't -- we do expect the insurance that we pay on workers comp to increase during 2004. But during 2003, we had -- it is not only the frequency, which wasn't an increase, but the severity of workers compensation, we got hit with a couple of workers compensation claims during the year which impacted that number negatively to us. We're doing, we think, our job to manage the severity going forward, but we will see a slight -- we will see an increase in the amount that we pay on the insurance side.

But below the rate of revenue growth?

Again, we are in the middle right now of those discussions with our workers comp carrier. And so we will have to see where they come out. We will know more at the end of the first quarter.

Switching to the owner operator side, it sounds like you're happy with how things are progressing there. And I know you guys pay top-notch wages and it is a better job. But I'm just curious, what are you assuming -- you've got hours of service, you also have cyclical pickup under way, and you're probably going to have more demand out there for owner operators? Are you making any assumptions about wage increases either in '04 and '05 for that group?

Actually what we did, Greg, was not much wage increases, we did some supplementing on ancillary costs that they have to pay. So we have tried to improve their package to be fair to them, and at the same time be fair to us in terms of the total cost to us. So we think we offer overall a great package, a great work environment, and just a good opportunity for an owner operator.

So, Bruce, other than reimbursing them for whatever incremental cost might come down the pike, you don't expect to actually pay anything more beyond that, even if the cycle picks up?

That is our expectation. Life changes, as you well know as you go forward, but that is our expectation as we sit here today.

Gentlemen, there are no further questions.

Thank you very much.

Ladies and gentlemen, this does conclude your conference call for today. We thank you for your participation, and ask that you please disconnect your lines.