Forward Air Corp (Delaware) (FWRD) 2005 Q1 法說會逐字稿

Good day, everyone, and thank you for joining today’s Forward Air Incorporated first quarter earnings teleconference. Today’s conference is being recorded. [OPERATOR INSTRUCTIONS]. And now for opening remarks and introductions, I would like to turn the conference over to Valera Doherty. Please go ahead, ma’am.

Good morning, and thank you for joining us. Before we begin, I’d like to point out that both our press release and this call are accessible on our website, at www.ForwardAir.com. With us this morning are Bruce Campbell, our President and Chief Executive Officer, and Andrew Clarke, our Chief Financial Officer.

By now, you should have received our press release regarding first quarter 2005 results, which we furnished to the SEC on Form 8-K, and on the wire last night. Please 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 facts 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 issued yesterday evening. And 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’ll now turn the call over to Bruce Campbell.

Good morning. Thank you, Lera, and thanks to each of you for joining us this morning. I will touch briefly on our operating results and then Andrew will discuss them in greater detail with you in just a moment.

Our revenue, our operating margin, and our earnings per share were all records for the first quarter. Especially pleasing was our operating ratio, while not in the [news], did make it to an all time high of 80.8, a truly remarkable accomplishment for the first quarter of any year.

I congratulate the Forward Air team for all their efforts to make this happen. I wish to concentrate my portion of our presentations on what we feel was a critical milestone, not only in this quarter, but in the history of our Company. We realize many of you think our revenue growth was less than spectacular, and I would like to address this area.

First, and least important, on a year-over-year basis, with both fewer business days and Easter falling within the quarter, we had a more difficult comparison. Obviously, this wasn’t unexpected. More significantly, we addressed not only a rate increase during this quarter, but more importantly a rate structuring issue.

Allow me to give you some history. We began to feel, during the second half of last year, we were experiencing a change in the historical traffic patterns, specifically in the origins of freight and coincidentally the power available to move this freight. Of particular concern to us was freight originating on the West Coast.

After much study, deliberation, and discussion, we decided a major rate structure change was required, as we felt this was a permanent change. Specifically, we increased rates off the West Coast a full 9% effective March 1 of this year and additionally we implemented a 3% increase for the balance of our system.

Without question, this impacted our revenue growth during the quarter. However, without question it was a very necessary step for us to properly position the Company for the future. We recognized going into this change, that we were placing both our customers and our sales professionals in a difficult position, but one, that once again, was critical for properly positioning the Company for the future.

To have chosen to ignore this situation, while easier in the short term, would have been a mistake for our future. Having successfully implemented this change, we are now able to focus the Forward Air team’s efforts, for the balance of the year, on doing what they do best, providing industry leading service while continuing to grow our business.

Thank you, and now here is Andrew Clarke, our Chief Financial Officer.

Thanks, Bruce, and thank you all for joining us this morning. After I’ve concluded the financial review portion of our call, we will open the line for your questions.

We are pleased to report both record revenue and earnings results for the first quarter of 2005. As Bruce mentioned, our focus remains on profitable growth, and the entire Forward Air team should be proud of their performance during the quarter.

In the first quarter, operating revenue increased 8.1% to $69.5 million. Traditional line haul revenue, including fuel surcharge, was $58.8 million, an increase of 8%. Average weekly line haul tonnage increased 2.5% to 27.3 million pounds versus last year. And average revenue per pound, including the impact of fuel surcharge, was up 5.3%.

As mentioned earlier, our March rate increase, while impacting volumes, certainly helped drive our yields higher. Logistics revenue, including fuel surcharge, increased nearly 15.5% to $5.9 million. Other revenue increased nearly 2% to $4.8 million.

On a year-over-year basis, income from operations increased 24.6% to a record $13.4 million. And more importantly, the Company’s operating margin expanded by 250 basis points to 19.2%, another record for the Company.

Purchase transportation costs decreased 100 basis points to 41% of operating revenue. Purchase transportation for the airport-to-airport network was 39.7% of revenue, which is down from 41.3% last year. This result was driven by higher yields on freight, federal load averages, and using more owner-operators, as our average owner-operator count increased from 508 last year to 555 this year. Purchase transportation for the logistics business was 69.7% versus 67.4% last year.

Salaries, wages, and benefits decreased 60 basis points versus last year. The primary driver of this change as a percent of operating revenue was the decrease in salaries and wages, including incentives, as well as health care cost reductions versus last year. These decreases, however, were offset by somewhat increases in workers’ compensation expenses.

Operating leases decreased 30 basis points to 4.8% of operating revenue on slightly more dollars spent. Depreciation and amortization increased 10 basis points to 2.7%. And insurance and claims decreased 50 basis points to 1.7% of revenue versus last year. We continue to have very good experience on the auto liability side.

Finally, other operating expenses decreased 20 basis points to 8.4%. Positive experiences and bad debt expenses, as well as decreases in corporate expenses versus last year, were the primary drivers of the year-over-year improvement.

Some other statistics for the quarter were; total assets decreased slightly to $213 million. The Company’s cash and total investments position grew during the quarter by over $5 million to $116.8 million.

The Company repurchased a total of 142,650 shares of its common stock at an average purchase price of $28.81. Net accounts receivables were $35.7 million for the quarter and AR days were at 46. Allowance for doubtful accounts were 900,000, reflecting the high quality of our receivables.

Operating cash flow for the quarter was $8.1 million and net capital expenditures was less than $100,000. The Company ended the quarter with operating terminals in 80 cities.

Our outlook for the second quarter. The Company expects revenue to grow between 8 and 13% versus last year, with fully diluted earnings per share to be between $0.29 and $0.33. 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 net income per share was $0.26.

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] Edward Wolfe, Bear Stearns.

It’s actually Matt Brooklier for Ed Wolfe. I just wanted to kind of dig in a little deeper on the margin improvement you guys showed in first quarter, considering the revenue came in a little bit lighter than people had anticipated.

Can you walk through what were kind of the primary drivers in terms of you guys being able to still show about a 260 margin improvement on a year-over-year basis? I know the purchase transportation was down a good amount. Just kind of talk to those issues in general.

Certainly. If you look at the top line, 8% on the airport-to-airport side, that was driven by the 5.3% increase in our yield. So, that certainly does help drive operating margin improvement.

The biggest cost expense item is purchase transportation. And in that particular area, as we talked about, we were able to have more owner-operators this year versus last year. And that percentage of owner-operators that were, in fact, operating the network while in the third and fourth quarter of last year, was north of 15 to 20%. It was back down into the 15% range that we’ve talked about as an ideal range for us to use owner-operators to operate our network. So we weren’t going outside the owner-operator force to cover the freight as we had been in the second and third and fourth quarters of last year.

So, those were good drivers of the operating improvement. And we talked about the leverage on essentially the fixed cost portion of the model, which is insurance and claims, depreciation and amortization and rent. So we were able to continue to drive margin improvement out of there.

Right. Do you guys sense that the ratio of total owner-operators used to haul freight, are you going to be able to keep that consistent going forward, or are you going to have to start to outsource more of your loads outside of that network, into the second quarter and later on in the year?

That’s really a function of two different areas. One is the balance in our network. We think part of the structure change that we put in place during the first quarter helped us deal with that. And then secondly, obviously the availability of owner-operators.

Our push today, as we sit here, is really concentrating on just recruiting team owner-operators, and we have had success since the beginning of the year. So, if everything goes the direction we want it to, we think we can maintain that, and that certainly is a priority within our group.

Alex Brand, Stephens, Inc.

First question, Bruce, you talked about the decision that was made strategically to -- particularly on the West Coast, to change your rate structure. But you clearly drove away some business, and I guess the thing that I’d like to try to understand is, do you think that’s a short-term phenomenon?

And have you seen anything that would give some evidence or some confidence to us, perhaps early in the second quarter, that it was a short-term event, that you can recoup lost business and maybe even reaccelerate your top line growth rate?

Yes, without violating all the forward-looking statements that Lera is sitting here beating on me about, let me say this. Any time we have done a rate increase in the past, which I believe this was our fourth one and really our first structural change, we go through a period that we have a certain amount of rejection from our customers. And we understand that.

We put them in a bad position, so that’s their way. Not all customers, some customers, their way of reacting to the increase. We then work very hard, we have a great group of sales professionals who go out and -- with the understanding that we’re going to be punished for a bit, go out and regain or attempt to regain that business.

The positive I can tell you is, we think we are seeing success in that area. Our tonnage per day, at this point of the month, is as high as it’s been. So, we’re comfortable that we made the right decision. We’re happy that it’s over. We’re happy that the process is done, and our people can get back to doing what they do best.

Well, I mean, it clearly had the desired effect on your operating margins, and --.

I would like to think that while it did help OR, there were some great efforts in addition to that, especially in our PT side. While not disagreeing, I don’t want to overlook those efforts either.

Well, certainly your people must be doing something right, because, you know, as you know, you had a competitor that responded to your price increases by cutting prices, and that did not result in improved bottom lines for them, so certainly your people deserve some credit.

That’s not one we’re going to touch.

Right. That’s why I said it. Can you talk about, if the market is disappointed with the top line, I think you still have a meaningful amount of buyback on your existing buyback program. What’s the status of that? How much is left under the existing plan that would potentially be available?

Alex, we have just approximately 1.5 million shares, so that’s on a split adjusted basis. The original authorization was for 2 million, but with the stock split that went to 3 million, and to date, we have repurchased 1.5 million shares. We still have 1.5 million left.

Jon Langenfeld, Robert W. Baird.

Bruce, how does the economy feel to you, and I guess, more importantly, how do you think it feels to your customers?

I guess my reaction to that, Jon, would be it’s not what I would consider to be robust, but it certainly is not bad. Perhaps there was a bit of, a year ago, of all of us becoming a little bit complacent and spoiled, if those are the right terms. But right now, business is good. It’s not the gloom and doom, or at least we don’t see the gloom and doom that others tried to portray.

Yes, like the markets? Well, I guess when you look at -- I mean, I guess the conversations you’re having with customers, clearly, they don’t have long term visibility, but have those conversations changed at all? Do they still see the need, and I guess an elevated need to make sure they’re securing capacity as they move through the year?

That’s a great question. I think there may be a little bit of backing up in that area, that they’re not quite as aggressive as they have been in the past. We, for one, believe that’s going to change, and that it’s going to return to the way it was a year ago. Perhaps not quite as soon as it did a year ago, but I think it’s going to become an issue here, before very long.

And do you think, if we say it’s a 3% type GDP economy, in terms of growth, and looking at your forecast for 8 to 13% revenue growth, I assume that’s kind of a 3 to 8% volume growth? So you’re basically saying anywhere between 1 and 2.5 times GDP volume growth. Does that seem realistic, longer term?

I think it does.

Okay, and the 1 times volume growth, would that be -- again, looking over a longer term, not just a quarter, but 1 times GDP-type growth. Would that be more disappointing?

[Multiple speakers] Absolutely.

Okay, so you’re definitely looking still at a multiple of that? All right, good. And then lastly, update on the acquisition prospects. I know there’s limited you could say here, but I guess I’d be interested in understanding number of opportunities. Do you still see opportunities coming in front of your desk? How have valuations played out there? Have you gotten to that stage, looking at any of these, and are you encouraged or discouraged on that front?

Well, if you’ve been exposed to the market, as I know you have, when valuations get as high as they are now, a lot of properties come on the market. The question is, what are they worth? And when valuations get very high, you have to kind of back away, unless it’s just an absolute perfect company.

We continue to look at a number of different properties. We will continue that process as the years go on. But we’re very prudent in our review of those properties and don’t feel that just because we’re sitting on over $100 million in cash, that we have to go out and do something just to do it. On the other hand, if it’s the right fit, we will be very aggressive in doing it.

And, I guess, maybe the follow-up to that, I know, the first quarter of last year, you got pretty deep into the process of looking at one opportunity. Have you gotten any further over the last four or five quarters in that, in terms of looking at deals, or have they still been pretty much high-level type conversations?

I really wouldn’t want to go into that at this point.

Okay, that’s fair.

David Ross, Legg Mason.

Just a couple quick questions, most have already been asked. With the owner-operator count, it was down slightly in the first quarter sequentially, from the fourth. Typically it trends upward. It’s a difficult environment out there. Are you continuing to grow the owner-operator count in the second quarter, or how’s that trending versus the first quarter?

Well, typically what happens during the first quarter, is we will allow that number to slip a little bit intentionally, mainly to make sure that the remaining owner-operators get all the miles that they need. And we can keep them happy, because obviously the first quarter is our weakest in terms of the usage of the owner-operator.

The environment is still tough, but we still have been able to attract the type of teams and owner-operators that we want, namely, the ones that are the most safe, the ones that are the most professional, and the ones that can live up to what we require. So, we’ve had the amount of success that we’ve needed so far this year.

Okay, great. Also, how fast do you think that you could grow the line haul operations without adding additional owner-operators? Andy was saying earlier, the load factor improved, but I kind of wonder how much more room there is to go there?

David, we can continue to grow it, and we can do it by both adding owner-operators, by increasing load factors, and by going to the outside, as we’ve talked about many times in the past. We will use outside carriers to fill excess demand on any given night.

So, our growth on the line haul side is not constrained by the amount of owner-operators we have. Obviously, it costs us more, because at that point, we’re simply paying for a one-way move, but we will cover loads when the demand warrants that we do so.

Okay. And the last question is just about the sustainability of your margins here, kind of in the low 80s, approaching sub-80 level again. It seems that, with tonnage not being up a lot, that you’ve made some real headway in the cost structure there, and I want to know your comfort level with margins, going forward?

Well, that’s why we are in business, is to make money. Not to be short with you at all, but every day that we go to work, our goal is to improve our operating margin. That’s what our people do in the terminals. That’s what our salespeople do. They are incentivized to do that.

So, whatever measurement we use in terms of, it’s the end of the first quarter, can you get better, was the same question we were asked at the end of the fourth quarter and the quarters prior to that. So, our answer’s the same. We have to address a number of different areas. We have to be vigilant in our day to day activities, and we have to sell better than we’ve ever sold. And if we do all those things, we can continue the improvement.

Art Hatfield, Morgan, Keegan.

Most of my questions have been answered, but one, I don’t know if you can answer this, or if you’re even willing to. But, the rate increase you put in place, can you kind of give the magnitude of the negative impact it had on your volume growth in the line haul network, one? And two, what kind of operating ratio you may have had if you had not put the rate increase in place?

The magnitude of it is very difficult for us to quantify, Art, because we aren’t always told everything that we didn’t receive, as you might imagine. That’s a very difficult number to nail. We do, in fact, know that we missed out on business, so that’s the extent of our quantification there.

I can appreciate that. I guess what I’m trying to get a feel for is that, if people focus on the top line, while it may have obviously had a slight negative impact in the short run, is it likely or is it possible that, while that occurred, you may have had an incrementally positive impact on your margins in the quarter by doing so?

Well, we think we probably did, but you have to realize that didn’t go into effect until March, so it would have been a minimal impact. Our intent there, Art, was not so much to impact the first quarter OR, but was to position, as both Andy and I said in our openings.

We were extremely concerned about the long term implications of what we see in terms of traffic changing. And had you asked me five years ago, if I thought the day would come where we would struggle to cover loads off the West Coast, which is what happened last fall and winter, I would have laughed at you. We used to pull off the West Coast just to get fuel money to come back to the Midwest and to the Southeast. Those days are over.

The rate structure had not changed to accommodate that yet. And so, we went ahead, we made the change, we were put in the penalty box. We think we’re well on our way out of it, and we think, most importantly -- and as long as you followed our Company, you know how we are. We are focused towards the long term, and we’re going to position the Company to be successful 6 months from now, a year from now, and hopefully many years from now.

Bruce, that’s very helpful to get a sense of how things should transpire going forward.

David Campbell, Thompson, Davis.

Bruce, I guess that last answer helped me a lot to understand why the rate increase on the West Coast, and that is that the demand for your services apparently has switched from not enough to in excess of your capacity. And therefore, you felt like the rate structure out there was too low, based on your historical demand. Is that correct?

That is correct, David.

Okay. The increase in trailers -- I mean there’s a big increase in trailers from the fourth quarter to the first quarter. What’s going on there?

David, that’s CapEx that was taking place throughout all of last year, and we just put them into service at the beginning of this year. So, we’re going to continue to buy trailers where it’s appropriate. As we bring in more owner-operators, we have to have the trailers in place for them to use.

All right, but a 20% -- more than a 20% increase year-to-year, it seems like a lot of increases. Is that because you’re supplying more of your own trailers?

Well, we are doing that. We also are going through a cycling period where what you might see happening is, we still have the old trailers in that we haven’t cycled out and the new trailers have already hit. That’s kind of a normal process for us to go through. You’ll see that settle down as we go through the year and continue our CapEx program to upgrade our trailer fleet. We have had an increase and that’s actually good.

Okay. You said the shift on Easter holiday wasn’t a big factor in your revenue growth in the first quarter, but how much was it, in your opinion? Is that last week of March normally a very good, strong week? Could you see much less of an increase in volume that week than you had the previous weeks?

We certainly didn’t see a very, very hard push like we normally see. Easter affects the Northeast the greatest amount, our Northeast region. And it affects other regions too, but what that exact number is, again, I don’t know. But, it just wasn’t quite the push that we normally would see. And conversely, we’ve seen a stronger April.

But you said your volume per day in April was up. You said a peak. I assume that’s better than it was in March, and that’s kind of unusual seasonally, isn’t it?

It is, very much so.

And also it gives you some confidence about where the second quarter is going to be, I guess, in your volume assumptions. Is that correct?

To this date, yes.

And what about the tax rate for the year? Was it higher than normal in the first quarter?

I was actually, David, lower. It went to 37.2. That was driven by the – pardon me, 37.5, it was driven by the -- which is the same as what it was last year, but obviously you see that we have more of the investment income. I know that you’ve mentioned that in the past, in terms of our ability to get higher yields. Short term, tax-free municipals are now trading at north of 2.5%.

Okay. But the 37.5 was okay to use for the year?

Yes.

Okay. That’s great. It just seems like you probably, with the revenue increase you’ve got sort of built in, it seems like you probably are very conservative on your second quarter forecast. Does that reflect any uncertainty on your part, or just what?

Our forecast is our forecast, David.

Paul Carter, Evergreen Investments.

Just a quick clarification. I’m sorry if you’ve already said this. When did you actually announce the rate increase? I know it was effective as of March 1st, but I’m guessing it was announced much earlier than that, and then when did you actually start seeing an impact from a volume perspective?

I guess the word leaked the latter part of January and it was officially announced the 1st of February. Typically, we normally will see somewhat of an immediate reaction.

Kevin White, (indiscernible) Capital Management.

Actually, I had the same question as the previous caller, but I have a follow-up to that. When you said you typically see an immediate reaction, how much business do you feel like you’ve lost in February, as people were repositioning their logistics plans prior to the actual rate increase that took effect at the beginning of March?

We would love to be able to answer that. It would be strictly conjecture. We know because people tell us that in certain cases, freight has been diverted from our system or our network. But to quantify that, I would be misleading you.

Well, without trying to put you on the spot for absolute numbers, you perhaps have a bit of an apples-to-apples comparison between how much January was up year-over-year versus how much February was up year-over-year. And again, I stress, not to ask you for those absolute numbers, but what, in rough terms, might have been the differential between what you saw in January versus what you saw in February?

Again, if we could give you accurate numbers we would. We can’t, and we would be really, really hesitant to do that. I understand your point. I think it’s a great point, but we just don’t do that.

Brandon Cook, JP Morgan.

Most of my questions have been answered, but I was just curious, have you seen more push back, more reluctance to accept the price increases from certain kinds of customers, larger or smaller, or airlines versus forwarders?

I would say it’s all over the board. I’m not sure there’s a clear pattern there. Every city is a little bit different. Every customer is a little bit different, and depending on who their customers are, that has an impact on it too, so pretty much all over the board.

Okay. Obviously, you talked about the strong demand out of the West Coast. Are you seeing any other regional trends within your network as you look into March and April, in terms of relative strength or weakness?

You know, the strength so far this year, has shown up in the Southeast. They’ve done a wonderful job. They’ve got two great leaders and their business levels have been strong throughout the year. That traditionally is not the case, so that’s very encouraging to us.

[OPERATOR INSTRUCTIONS] There are no further questions at this time. I’ll turn it back over to our speakers for any additional closing comments.

Thank you again, everyone, for joining us and I’d like to remind you about our replay available at www.ForwardAir.com. Thank you.

That does conclude today’s conference call. We thank you for your participation. You may now disconnect at this time.