Forward Air Corp (Delaware) (FWRD) 2004 Q2 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the Forward Air second-quarter 2004 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Ms. Valera Doherty, you may begin your conference.

Thank you. Good morning. 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. Joining us this morning from San Francisco is Bruce Campbell, President and Chief Executive Officer and from our corporate headquarters in Greenville is Andy Clarke, Chief Financial Officer.

By now you should have received our press release regarding second-quarter 2004 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 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 the press release relating to this quarter's earnings. Consequently actual operations and results 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. With that caveat, I will now turn the call over to Bruce Campbell, President and Chief Executive Officer.

Thank you, Lera. Good morning and thanks to each of you for joining us today. I am going to be very brief this morning so we can go quickly to Andrew and the numbers and then the Q&A session. I do want to recognize all the sales professionals with our team who helped us achieve three months of solid growth and even more importantly, have us off to a very strong start in July; just an outstanding job but we can do even better.

I would like to also recognize our operating group who came oh so close to having us operating in the '70s for the quarter, with an actual operating ratio of an 80.4 percent. Just an outstanding job but we can do even better. And finally, a quick thank you to our technology group whose latest innovation, a Web-based booking system was an immediate hit with our customers. Again, another outstanding job but we can do even better. Now Andrew Clark, our Chief Financial Officer.

Thank you all for joining us this morning. After I have concluded the financial review portion of the call we will open the lines to answer your questions. Let me add to Bruce's congratulations to all of our employees for a fantastic quarter. Everyone at Forward Air shares in the success of these results, and we believe our customers who validated Forward Air's leadership position to the deferred airfreight market.

During the second quarter and continuing into the third quarter they have placed their vote of confidence in our people and service as we saw strength across all revenue sources. We expect to continue this trend by keeping our focus where it has always been, delivering superior services. In the second quarter total operating revenue increased 15.5 percent to $68.4 million. Our growth rate in this quarter is the highest since the first quarter of 2001 and is the fifth consecutive quarter of increased growth.

Traditional line haul revenue increased 14.7 percent to $57.5 million, driven by a 14.4 percent increase in average weekly line haul tonnage to 27.7 million pounds versus last year. Average revenue per pound including the impact of fuel surcharge was up 0.2 percent versus last year. While the growth in this figure is flat year-over-year the company's average shipment size increased during the quarter by 7.3 percent.

Logistics revenue increased 28.6 percent to $6.1 million; after a lot of hard work we are pleased that this business is growing once again in a manner that meets our profit expectations. Other revenue increased 12.4 percent to $4.8 million as a result of increased statutorial (ph) business particularly our terminal handling business. On a year-over-year basis income from operations increased approximately 34 percent to $13.4 million and the company's operating margin expanded by 270 basis points to a record 19.6 percent. It is clear that the Forward Air model does have significant leverage.

Purchase transportation costs decreased 90 basis points to 40.8 percent of operating revenue. PT for the airport to airport network decreased 100 basis points to 39.5 percent of revenue versus 40.5 percent last year. During the quarter we averaged 501 owner-operator trucks versus 483 last year and 508 in the first quarter of 2004. Continued increased demand for our airport to airport services forced the company to rely more on non-owner operator power during the quarter last year. Despite this challenge the Company was able to produce record results in this network as Route optimization improved yields and better load factors mitigated these increased costs.

Purchase transportation as a percent of revenue for the logistics business decreased 460 basis points to 65.7 percent versus 70.3 percent last year. As I mentioned earlier our commitment to growing this business profitably has paid off with these results. Salaries wages and benefits were down 60 basis points versus last year to 22.1 percent of revenue. Although the dollar amount spent in this category increased year-over-year as a result of increased wages and incentives, as well as health care and workers compensation costs, the Company produced more revenue during the period to mitigate these increases. We continue to be pleased with productivity at the terminal levels.

Operating leases decreased 90 basis points to 4.7 percent of revenue on essentially flat cost year-over-year. Depreciation and amortization decreased 50 basis points to 2.5 percent of revenue, again on essentially flat costs year-over-year. The one area where we experienced some difficulty during the quarter was insurance and claims, which increased 50 basis points to 2.7 percent of revenue. While our insurance costs decreased slightly for the quarter we did experience a heavier claims expense during the quarter.

Finally other operating expenses decreased 20 basis points versus last year to 7.7 percent versus the first quarter this year, however, those expenses decreased 90 basis points. Other relevant information for the quarter include total assets grew to $192.1 million. The company's cash and total investments position grew during the quarter to $99.9 million, an increase of 13.3 million since the beginning of the year. The Company repurchased 47,700 shares of its common stock during the quarter at an average price of $30.36 per share and the total debt position stands at $920,000.

Accounts Receivable were 33.8 million, and accounts receivable days were 46. Allowance for doubtful accounts remains flat from the first quarter at $1.1 million. Operating cash flow for the first half of 2004 was 17.5 million versus 14.5 last year. Net capital expenditures were $3.3 million for the first six months versus 2 million for the same period last year. During the quarter our average trailer count increased to 1377 versus 1236 last year. At this time we are increasing our previous annual CapEx guidance from 7 million to just over 9 million to account for the purchase of new capital equipment, primarily trailers, in the second half this year. The company ended the quarter with operating terminals in 80 cities which is flat year-over-year.

For the third quarter of 2004 the Company expects revenue to grow between 14 and 18 percent versus last year and fully diluted earnings per share to be between 37 and 41 cents per share. These estimates depend on a number of variables, many of which are outside the company's control. During the second quarter of last year the company's income for fully diluted share was 29 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 with Robert W. Baird.

Great quarter. A couple questions, first on the capacity. I know you have a lot of leverage to pull, but any signs of capacity constraints, whether it be on the weekend or within certain facilities?

Jon, we experience capacity constraints any time the economy gets good like this, and we are used to dealing with it. We know what we have to do in order to add additional capacity. We currently are going on a real hard push to increase our owner-operator count, which we have not done for a while. But this is going to be a big push to get us to where we need to be. The outside market is tight, but we are known as a good payor and we are known as somebody that the driver doesn't have to load the load or unload the load. So that's a big positive for us in working with our outside carriers. So we are aware of a very tight market out there, but we are confident we can handle it.

What about the physical infrastructure on the other side of the capacity issue?

Jon, we work real hard to make sure that unless it's an end of the line terminal that we have just not properly updated over the years, we are in good shape in almost every facility. As far as breaks go we have the ability through our software to adjust freight and move it in different directions so that we don't overfill an existing break.

So it's obviously an issue but one that you feel you continue to effectively deal with; nothing major on the horizon there?

Correct.

Okay, and then how do load factors compare today to the 2000 range when you are peaking out, because I know you are getting heavier shipments now, just wondering on a relative basis where we stand.

Four years ago is way beyond my memory capacity. Andrew, do you?

The load factors have continued to increase.

So they are higher than they were back then?

That is correct.

Okay, and then Bruce, given the robust volumes moving through the system, do you have the capacity and the management team to take on acquisitions at this point given the attention that I'm sure you are paying to operations and is clearly showing in the numbers?

We over the last few years have really done a lot of hard work to make sure that we have the right people in the right positions anticipating that these times were going to occur again. And we think even though it is very busy and that's a good thing to be involved in, that if the right acquisition came along we could certainly jump it and be comfortable that we could do it in a successful manner.

Okay and one last thing for you Bruce, what are you worrying about these days? Where is your attention being focused, (indiscernible)your thoughts there?

I guess our biggest push right out is to maintain our quality of service. We've always been known as a high-level service provider any time that things get busy like they are now, that's easy to let slide. And we've talked and counseled and work with our people to make sure that we continue to provide high levels of service even during very, very busy times because that's what our customers have come to expect.

Well, great, great job. Excellent work, keep it up.

Alex Brand with BB&T capital markets.

Good morning, guys. I guess Bruce, you said so far July was good. I think it was your comment there. I was wondering I guess two things on that. Can you give us anymore color on good as far as it's better than Q2 or any acceleration there? And if not, can you at least comment on the relative to, it seems like everyone suddenly is worried about retail sales are slowing and a potential slowdown in the back half of the year here. Are you seeing anything that would give you any evidence that anything has slowed down?

If anything it is the opposite. Our business levels are very strong, surprisingly strong. And something we're very happy about. We see no evidence of any type of slowdown. We are hearing, I guess what I call the worry birds saying. That's because people are stocking early for Christmas. If they are indeed stocking in July for Christmas that will be the first in my thirty years in the business. Right now business is robust.

Okay, and you had record margins in the quarter, but I hear you saying that you had to go outside for power more than you wanted to, and you are going to aggressively push for more company power. Does that imply, then, that should be cheaper for you I guess in the scheme of things, so it implies that you are going to continue to have at least some opportunity to push your margins up?

I am not sure I would say we went out more than we wanted to because we want to be very careful before we add an owner-operator we're sure we can run him or her and keep him very busy and give them a very good lifetime job. We do not want to hire an owner-operator and two weeks later not have enough work for them. So one of the ways that we accommodate that is as we grow we wait until we are balanced. In other words if we have a load out of L.A. we want to have a load going to L.A. that we can put under our own power or our own owner-operator.

Until we reach that point we use outside sources to handle that extra freight, if you will. But we think we are comfortable now that we have pretty predictable lanes where we need additional power. We're going to add that. We've got a very big push starting next week and think we can improve that number. But after having said that, I would say PT in the area of 40 percent is an awfully good PT number and it's relying on not only the use of more owner-operators, but you have to achieve good load averages. You have to have good yield, etc. So not necessarily as simple as let's put owner-operators on and that number is going to go down. But we think, again, we can do better.

Fair enough. And one more question on I guess the question would be about the pricing environment. Your yields didn't move much in the quarter, but your weight for shipments up a good bit, and I assume you get discounts as the weight increases. So just correct me if I am wrong on that and sort of comment on the pricing environment overall.

We took a rate increase, as you probably recall, in the early part of the year. So on a quarter-over-quarter basis we were not anticipating an increased yield. We are happy with the pricing where it is today, and your comment that as a shipment if we are tendered 1000 pounds rather than 500 pounds that's a good thing for us because it's almost as easy to handle 1000 as it is 500 pounds. But it does, it can cause some downward pressure, what I call natural pressure on yield because the rates go lower as the weights get higher. So that's between the two our concentration on getting good yield. But the increasing weight, they tend to negate each other, and we're happy with where the yield is today.

Good quarter, guys. Thanks.

Rob Farley (ph) with Bear Stearns.

It's actually Nat Brooklier (ph). Good morning. A quick question for you guys. Wondering if you can kind of talk to competitors resent acquisition within the space and how that kind of shakes out in terms of potential volume opportunities for you guys and also the kind of potential impact on pricing going forward.

Well, the acquisition I think that you're referring to is where U.S. Express bought CRST's Max division. And the good thing about that is that takes three players and reduces it down to two, and so we're happy about that. We do think we're able to get freight out of that acquisition. That is a normal process when we bought companies in the past. You don't get 100 percent of the acquirer's business. So that was a normal bleed-off, and we were happy to be able to get it. Hopefully that leads, Nat, in the future to solidifying yields and the opportunity to perhaps increase (indiscernible). We'll have to see as time passes.

David Ross with Legg Mason.

A question about the revenue side; how much of the revenue growth is derived from new airfreight forward to customers versus existing airfreight forward to customers versus other carriers?

I am not sure we could answer that in any great detail. We do, obviously, have some new customers that have come on board. We do or have experienced growth from our existing customers, and we probably, again as I stated earlier were able to get part of the CRST demised freight. So it's probably a combination of all three.

Now that you are currently handling a lot of exact or time definite business for large LTL carrier, could you run more traffic like that through your network and are there other kinds of expedited freight that could be used to further develop your secular growth story?

Sure. That is the quick answer, sure.

And finally, and if you could remind me how many shares were repurchased again in the quarter? I got the average purchase price.

47,700.

47,700, all right, thank you.

David Campbell with Thompson Davis & Co.

Good morning Bruce and Andy. I just want to ask you about the terminals expansion. Normally in the past when we have seen growth in the business we have seen you add terminals. Evidently you don't see any need for that, obviously, but is there something different about this expansion in the business that is different than the past?

You may see us go into what we call some second-tier cities. We are evaluating that today as we sit here to see if there are opportunities. Because of the size of our network today there won't be any dramatic expansions into any large city that we don't serve today.

How about the role of international traffic and gateways? Can you tell whether that's helped you more than the domestic growth in the business? Are they both going up about the same percentage?

It appears David they are both going up about the same.

Okay, and has the increased service and increased traffic in certain lanes avoiding your cross dock operations, has that been a factor in reducing purchase transportation costs below 40 percent?

That is indeed a factor.

And there's no particular stop to that? There's no maximum point? Are you still seeing places where demand can increase the direct service loads?

That's correct.

Great. And so as far as fuel surcharges, that is included in the yields. Can you tell us how much the shipment size has gone up at least in percentages?

The average shipment size in the second quarter increased by 7.3 percent.

Versus what in the first-quarter, do you have that number?

It was up probably in the 3 to 4 -- I do not have that exactly, but it has increased from the second versus the first quarter. And obviously the second quarter on a year-over-year basis.

That's great. Remarkable you are able to increase or keep your yields flat despite that trend. Obviously the rate increase helped, but any other -- obviously you will be able to pick and choose traffic. I guess that's a factor, too. Is that correct?

I am not so sure it is a pick and choose, David, I think we work with the customer. It depends on the operating characteristics of their business, the density, where it's going, the lane and all of that. So we try to price it at a level that is fair to them and it's fair to us and go from there.

Okay, thank you very much.

Donald Broughton with A. G. Edwards.

Good morning, gentlemen. A couple items. Earnings were certainly better than we expected, but I noticed -- I'm sorry yield per pound, you touched on this earlier, Bruce. Yield per pound was a little less of an improvement than we expected. Was that a function of higher shipment weights, or is there anything else there that we should be aware of?

No, that number has a tendency to move around, Donald, not just because of the actual haul price, but because of the length of haul, because of the size of the shipment and all that. As long as it stays in that type of a range where we were this quarter it certainly is nothing to worry about.

Do you expect a continued positive trend there?

We do.

And insurance claims a little higher than we expected. Anything there you would like to enlighten us on what is happening?

Donald, as I said in our comments the actual insurance amount was down slightly on a year-over-year basis. We simply had heavier claims expense and one in particular where we are fully reserved on it. And our self insurance reserve and how much we pay the first $500,000 when we do have an accident, for an occurrence it tends to be costly.

Sure, sure.

What happened in the second quarter.

Good, very good. Well, solid quarter, I will let somebody else ask a question.

(OPERATOR INSTRUCTIONS) Art Hatfield with Morgan Keegan.

Great quarter. Most of my questions got answered, but just one thing I kind of wanted you to help give me a better perspective on. It was funny actually looking through some of my notes back from first quarter of 2000. You said your goal for property ratio was 79 to 80. And I have to say that you are pretty much there, and congratulations on doing that. You probably would've gotten there a lot sooner had it not been for the downturn. But what can you do to get that lower? You had talked about, Bruce, mentioning you had hoped to drive that lower. Is it just a function of revenue growth at this point, or are there things you can do operationally to tighten costs up more?

As we talk internally, Art, revenue certainly helps. But the other side of it is, it is a matter of controlling labor. It is a matter of load averages. It is a matter of not having accidents. It is a matter of not having more comp injuries and all of those things. But as we said way back when you were good enough to pull that old quote out, we really think we can operate this company in the '70s; that makes Andy and the financial people cringe but we think we can, and we have to have a lot of right things occur. But we think we can do it, and that is our goal, and that is what we are going to do.

Great. Thanks, Bruce.

At this time there are no further questions. Today's call will be available at www.ForwardAir.com. This concludes today's Forward Air conference call. You may now disconnect.