Forward Air Corp (Delaware) (FWRD) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Forward Air, Inc. Second Quarter Earnings Conference for 2005. [OPERATOR INSTRUCTIONS.] I would like to now turn the presentation over to your host, Miss [Lara Tardy]. Please go ahead ma’am.

Thank you very much. Good morning. Thank you for joining us. Before we begin, I’d like to point out that both our press release and this call are accessible, as you’ve already heard, on our website, at www.forwardair.com. With us this morning are our President and Chief Executive Officer, Bruce Campbell, and our Chief Financial Officer, Andrew Clarke. By now you should have received our press release announcing second quarter 2005 results, which we furnished to the SEC on Form 8-K and across the wire yesterday afternoon.

Please 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 issued yesterday. 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 will now turn the call over to Bruce Campbell, President and CEO.

Thank you [Lara], and good morning. I am going to be very brief this morning, so we can move quickly to the other portions of our call. However, I would be remiss not to acknowledge the incredible efforts made by our Forward Air team to deliver not only record revenues, record income, and an industry leading operating ratio, but also for all their hard work in fully integrating the Express Global business, truly a remarkable accomplishment, by a hard working team of employees and owner operators. We are most grateful for their efforts.

And now, Andrew Clarke, our CFO.

Thank you Bruce. And thank you all for joining us this morning. After I’ve concluded the financial review portion of this call, we will open the line for your questions. We are pleased to report both record revenue and earnings results for the second quarter of 2005. In the second quarter, operating revenue increased 13.3% to $77.5 million.

Traditional line haul revenue, including fuel surcharge, was $66.7 million, or an increase of 16%. To put this in perspective, this figure is actually higher than it was during the fourth quarter of 2004. Average weekly line haul tonnage increased 7.9% to $29.8 million. And average revenue per pound, including the impact of fuel surcharge, was up 7.6% versus last year.

Our March rate increase, along with the additional long haul business generated from the Express Global acquisition, helped drive yields higher. Logistics revenue, including fuel surcharge, decreased 2.5% to $6 million. And other revenue remained flat at $4.8 million. We do not expect these two areas to grow during the next few quarters, as the focus of the Company is on the airport to airport business.

On a year over year basis, income from operations increased 25.4% to a record $16.8 million. And, more importantly, the Company’s operating margin expanded by 210 basis points to 21.7%, an all-time record for the Company. Purchase transportation cost decreased 80 basis points to 40% of operating revenue. Purchase transportation for the airport to airport network was 38.4% of revenue, down from 39.6% last year.

This result was driven by higher yields on freight, better load averages, and using more owner operators, as our average owner operator count increased from 501 last year to 553 this year. Purchase transportation for the logistics business was 71.2% of revenue versus 65.7% last year. Salaries, wages and benefits decreased 100 basis points versus last year to 21.1%.

The primary driver of this change as a percent of operating revenue was the decrease in salaries and wages, as well as health care costs versus last year. This decrease was offset somewhat by increases in workers’ compensation expenses.

Operating leases decreased 30 basis points to 4.4% of operating revenue, on slightly more dollars spent. Depreciation and amortization remained flat at 2.5%. With the input of our outside valuation experts, we have preliminarily assigned the value of the assets and non-compete acquired from Express Global at $12.75 million. And we will amortize that amount over the next 10 years. As a result, we expect our amortization expense from the transaction to be approximately $300,000 per quarter for the next 10 years.

Insurance and claims decreased 30 basis points to 2.4% of revenue versus last year. During the quarter, we experienced a claim that we have reserved to our full deductible amount, which is similar to what we experienced during the second quarter of last year. And finally, other operating expenses increased 20 basis points to 7.9% from last year. The primary driver of that change was an increase in pool expenses that we are now paying to our owner operators, which is a valuable retention tool.

Additionally, the Company incurred expenses associated with our previously announced Board of Directors search. Some of the other statistics for the quarter were total assets decreased to $206.8 million from $213 million at the end of the first quarter. The Company’s cash and total investments position decreased over that same time period by $22.9 million to $93.9 million.

However, during the quarter, the Company spent $12.8 million on Express Global, $2 million on capital expenditures, $3.8 million on dividends, and $17.4 million repurchasing a total of 630,700 shares of its common stock, at an average purchase price of $27.52.

Over the last 12 months, the Company’s return on assets and equity rose to 31% and 24% respectively. During the second half of 2005, the Company will be cycling out of approximately one-half of its trailer fleet, or 800 trailers, at a net cost of approximately $12 million in capital expenditures.

While we expect our depreciation expenses to increase as a result, we believe we will see a savings in our maintenance expense and down time. And, further, after we have completed the cycling of the trailers, not one of our trailers will be older than the year 2000 model. In addition, the Company will be expanding its main sort facility in Columbus for approximately $4 million.

Net accounts receivable were $40.2 million for the quarter. And AR days were 49. Allowance for doubtful accounts remained flat, reflecting the high quality of our receivables. Operating cash flow for the quarter was approximately $17 million. The Company ended the quarter with operating terminals in 81 cities, which was an increase of one versus last year. We began an Asian operation in Harrisburg, Pennsylvania during June of this year.

Our outlook for the third quarter of 2005, the Company expects revenue to grow between 13% and 18% over last year, the fully diluted earnings per share to be between $0.34 and $0.38. These estimates depend on a number of variables, many of which are outside the Company’s control. During the third quarter of last year, the Company’s net income per share was $0.27.

That concludes the financial review portion of our 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.] Alex Brand of Stephens.

Let me just start with the press release, where Bruce was quoted as saying that he’s encouraged by positive trends he saw during the quarter. Can you just comment on what the trends in the quarter were, and sort of what we should read into that? Was that tonnage or margin or everything?

Well the trends are probably what you would have expected Alex, with the exception that April and May actually were better months than we anticipated originally, going into it. And then obviously we got a kick when we brought on the Express Global business. The positive trends would be everything that you look at within the Forward Air network right now is very good. It’s as good as I’ve seen in 15 years.

Okay. And I guess one thing that surprised me was on PT costs, despite taking on the XGS business off the West Coast, which would require more outside power, your PT costs were still sort of in check or flattish.

Our group did a really, really good job there. You know, kudos to them. And then a lot of the business fit in where we needed it to fit in. And then last but not least is a certain yield improvement on some of those lanes that really had a positive impact.

Okay. Can you just talk about, Andy, you talked about the yield in your comments. How much was the surcharge? And then how much of that 17 plus cent yield was a result of taking more long-haul business off the West Coast?

Approximately, on a year over year basis, 2% of the increase in the yield was as a result of the higher fuel versus last year. And then looking at the mix of our business in the month of June, we saw that increase in terms of the miles per pound go up by approximately 8%.

Okay. And last question for me, your tractor count doesn’t seem to be moving much, in spite of the acquisition. And I’m just wondering, is it because you’re doing more outside power, and even though we’re not seeing that in PT, and the rest of it’s dropping into your network as you grow? How are you managing to do that?

Well, it’s a combination of a number of things Alex. But remember that we -- it doesn’t matter how many tractors we have, if we don’t have the lane balanced. So if we have 50 loads coming out of L.A., and 25 going into L.A., then we’re going to have to go to outside sources. And that’s what we’ve had to do, especially post-integration. We are happy with where we’re at on the owners operator count. But we have obviously intensified our efforts to recruit additional primarily teams into our network, to accommodate our growth.

Does your good PT, or your relatively low PT imply that you’re not having any trouble finding outside power to buy good rates right now?

I wouldn’t say we haven’t had any trouble. But overall we’ve established a few really good relationships with other outside carriers. And they have really done a good job for us.

Okay. That’s it for me. Great quarter guys.

John Barnes of BB&T Capital.

Bruce, going back, could you give us an idea, have those positive trends that you saw in the quarter, have they continued into July? I would image they have, given your guidance. But just what have you seen thus far in July?

I think if you take Andrew’s guidance that he talked about earlier John, you can draw the conclusion that we’re happy with where we’re at.

Okay. Just talk a little bit about the general rate increase you took earlier in the year. I would imagine it didn’t hurt that a weaker competitor -- that you acquired a weaker competitor. But could you just talk a little bit about the stickiness of the GRI, how well received it’s been by your customer base?

Well I think overall we did very well with implementing the increase. We obviously put more pressure on the people in LAX and in San Francisco. So that one was a little bit tougher. But it was very much needed. It was not something we were doing just for fun. And I think in retrospect it was absolutely the right thing to do. And it has helped us get to where we are today.

Okay. As you’ve looked at the book of business, and the customer list, have you seen a number of their customers trying to find lower cost options? And, if so, what are the lower cost options? Are they trying to find a more asset intensive LTL type of partnership? Or are those -- ? Is -- ? Where are they turning to, if they’re not turning to Forward Air?

The very nature of their job is to find a lower cost alternative. But, at the same time, it has to be an alternative that will provide them high levels of service, protect their integrity from the standpoint of not back-selling to their customer, and other issues like that.

Are there other places for them to go? Yeah. There are regional carriers who do similar types of business that we do. Except they only do it in specific lanes or specific areas of the country. There are LTL carriers that do what we do. You have BAX Global that has a forwarder push going on.

So we have competition. We’ve had competition. And I honestly believe that in the future we’re going to have competition.

Okay. Are they indicating a -- ? The forwarders that I talk to that use your service are always worried about handing over the business to somebody who may go photocopy the proof of delivery or something like that, and try to steal the customer. I mean are they worried that without -- ? If they had to turn to somebody else, they’re worried about losing that customer to an asset intensive carrier, and therefore it makes you guys a little bit more attractive to them, regardless of price? Or is price still kind of dictating the decision process?

I think your conclusion is fair. And then if you go to the price side John, you have to remember that while price is important, in many cases, not in all cases, service is equally if not more so.

Okay. Last question. I noticed that you guys are getting ready, or you have opened the Harrisburg, Pennsylvania facility. I guess that’s facility number 81. Can you give us an idea of how many more you may be looking at this year, what your expansion plans are?

As we sit here today, we are not looking at anything else.

Okay. That’s it for this year?

Yeah. That could change next week. But as I sit here.

Very good guys. Great quarter. Thank you.

[Brandon Cooke] of J.P. Morgan.

Could you talk a little bit about how you thought you did in the quarter on picking out some of the U.S. Express customers versus what your expectations were going in?

Do you want to go with that Andrew?

Sure. Obviously, as we talked about, the trends that we experienced during the quarter between April, May and June, clearly June was stronger than both April and May. So we did pick up a portion of that business. The way we looked at it was the purchase price of 12.75, if you amortize that, was approximately $100,000 a month of additional expenses.

So everything that we were able to generate in terms of revenue and operating income above that was a good decision. And obviously we think we well surpassed that. To get specific in terms of how much is incredibly difficult, if not impossible, because of the sort of variable nature of our customers’ business.

Okay. Were there certain geographic segments or industry verticals where you were having more or less success in picking up some of those customers? I know it looks like you did a pretty good job on keeping your pricing pretty solid.

Yeah. The primary area that we got a lot of that business was out off of the West Coast, primarily San Francisco and Los Angeles. And if you go back to our March 1 increase, where we had somewhat of a bifurcated price increase, where it was 9% out of those two facilities. We did, during that time period, see some slippage in business. And obviously when we acquired Express Global, that was the areas that they had seen a little strength. But other markets, such as Chicago and Dallas and Atlanta have also been strong as well.

Okay. I appreciate it guys.

[OPERATOR INSTRUCTIONS]. Ed Wolfe of Bear Stearns.

Yeah, it’s actually [Matt Berklier] for Ed Wolfe. I just wanted to kind of hone in on your CapEx guidance. I am not sure if I got all the numbers for total CapEx this year.

Okay. We’re going to purchase, in the second half of the year, approximately 800 trailers. And they’re all the composite trailers, which will cost us approximately $12 million. That will be done over the next six months. We’re also in the process of expanding our Columbus sort facility, which will cost us approximately $4 million.

I am not sure that entire $4 million will be spent during the second half of the year. There may be some of that that is spent in the first half of 2006. We have spent, in the first six months of this year, $2.1 million. So if you tack on the 16, and there will be more IT spending, we would expect the total CapEx for the Company to be in the range of $20 million for the entire year.

All right. Got you. And can you talk a little bit more as to kind of the revenue trends within your logistics and other business lines? I know that they were kind of flat to down this quarter, and you guys don’t expect them to grow, with the focus more on your line haul business. Can you kind of just talk a little bit more into what’s going on with those business lines?

Both of the -- the logistics side of our business, Matt, is doing well. It’s just in comparison to the over the road business it looks a little bit on the weak side. We have had one dedicated account that has reduced in revenue. You know, the great thing about having a dedicated account is it’s a big chunk of revenue.

And the bad thing about it is when part of it goes away, it’s a pretty big hit. The good thing about that, as I go bad/good/bad, is that most of that business went into our LTL network. So it’s not like we lose business. And that’s part of what we try to accomplish with our logistics.

The other side, in what is truly brokerage freight, where we got out and solicit truckloads and then try to power it with other power, you know, we’ve put a lot of effort in that since the beginning of the year. We’ve hired people. And I think you’re going to see growth there in the second part of the year.

Okay. And finally, I am just trying to back out the acquisition revenue in the quarter. You guys had one month of that in second quarter. If I’m going to play with the numbers and look at the growth rate in the first quarter, I’m getting roughly say $3 million to $3.5 million in gross, which would put me on a kind of a $40 million run rate. Is that a fair way of looking at that? And I realize it’s not easy to kind of quantify what was the XGS revenue in the quarter. But am I kind of ballpark?

I think that is really hard to answer.

Okay. I tried.

Good try.

Thanks guys.

David Campbell, Thompson, Davis.

Hi. The repurchase of stock in the second quarter, you said was $17.4 million. I just wanted to make sure that’s correct. Right?

Correct.

And why are the shares outstanding, the average, the same in the first two quarters?

Because it’s a weighted average. And they were purchased in the month of June. And so, as a result, they get weighted less.

So you bought them all in June. Okay. So that explains it. And the other question I had was about the downturn in logistics. You answered that. What about warehousing and the customs brokerage business? That was fair -- that was also flat. Is there no growth plans there for the rest of the year?

Actually, we’ve made some changes there David. And I think hopefully we’re going to see some growth as we go forward.

Okay. And also, could you explain the insurance business? You did a little bit in your formal remarks. Is that $1.8 million of insurance and claims, is that a fairly normal amount? It was up from $1.2 million in the first quarter.

Yeah. That reflects, David, a half a million dollar fully reserved claim.

Okay. So you may get more of those. But they’re -- it’s not predictable.

That is correct.

And in April you were forecasting revenue growth of 8-13% for the quarter, which you obviously made, but with the help of Express One. You said that April and May were strong months. So I’m trying to figure out -- they would have been closer to 13% if they were strong months. But evidently they weren’t.

Well, again, we were pleased with the results we had in April and May. We would have stood on our guidance that we gave you back in April. And obviously when we bought Express Global, that did have an impact on us. But, you know, for just a small portion of the quarter.

That was effective June 1?

Correct.

Uh-huh. Right. And the other thing is you explained the cash. And the total terminals in the statistics thing is wrong, I guess. You had 81, not 80. Is that correct?

That is correct. We have 81.

And the other one is an agent terminal? The new one? The new Harrisburg terminal is agent?

Correct.

Okay. Well thank you. I think that’s about it. I appreciate your help.

[David Ross] of Legg Mason.

Good morning gentlemen. Most of my questions have been answered. But I wondered if you could comment on the current acquisition environment, and how active you guys are still looking at it.

We’ve continued, as we have in the past, to look at opportunities. I’m sure you’re aware, as probably most people on this call, that to buy a company today, people really think a whole lot of their own company. And the multiples they’re getting at almost ridiculous multiples. I mean it’s crazy, some of the things that are going on. So it makes us a little bit more jaundiced. But it does not preclude us from continuing to look. And if we have an opportunity, and we can buy it at the right price, we’d certainly do it.

Fair enough. Thanks.

[OPERATOR INSTRUCTIONS.] Jon Langenfeld of Robert W. Baird.

Good morning guys. Just so I kind of capture the volume trends, I think you’d said in the first quarter you were about 4% or 5% on the volume growth in March. I’m assuming that was kind of 5-6% April and May, and kind of mid teens in June.

That’s correct.

Okay. And then when you look at the percent of business coming off the West Coast, if you kind of just look at it now on a run rate basis, having added in U.S. Express, what would be your guess in terms of what percent on volume basis of the line haul comes off the West Coast?

The West Coast still represents the entire West Coast region, still representing sort of 20-22% of our volume.

Okay. So not a material change there from where you were before the Express business?

A little bit.

Okay. And then how did weight per shipment trend? I guess both when you look at April and May, and then as you added in the Express business?

It was actually flat from where it was last year. And during this period last year, it was really ramping up significantly. And so it’s just sort of flattened out.

And no material change with the Express business. Did they have a similar profile?

Yes.

Okay. Do you look at all? Or is there anything you can share in terms of as you layer in this business, what percent of your shipments go direct, meaning not through a hub? And did that change materially as you added the Express business?

We were able to route freight directly in certain situations. And that tends to occur more frequently over the weekends, where you’re bypassing a hub. And again, one of the reasons that we had to bypass was not only we had the density. But we also needed to expand our facility in Columbus to be able to handle more freight. So there was an ability to add more direct loads. But we only do that when we’ve got the density to justify the run.

And what? And I know you used to share the number in terms of what percent of your business bypassed Columbus, or bypassed hubs altogether. I can’t remember which. Where does that stand?

Columbus still represents about 42% of our total tonnage that goes through Columbus. And then we do a lot of regional sort. So in Newburg, New York and Atlanta, Georgia, we run regional overnights, which we’re always going to do, because it’s the best way to affect overnight deliveries in a lot of those close-in regional markets. So approximately 80% of our freight goes either direct or through one hub. And again, that could be either Columbus, or through a regional sort.

And do you see that number changing at all here, again, materially, as you layer in the Express business?

We don’t.

What else? What about on the driver pay side? Obviously you had a pay increase last year, first time in a decade. But do you feel like you’re going to need to address that again?

I hope we don’t. We have done a lot for them Jon, in addition to just raw dollar pay. We think we have the best fuel surcharge program in the industry. We have done other things. So right now we think we have it positioned where it needs to be.

Okay. And then on the line haul side, what percent of the line haul was owner operator say a year ago versus this year?

It actually hasn’t changed that much.

Okay. So still able to, even with the influx of the volume, still able to handle it?

Correct.

Okay.

And then what you have to realize, even though you get out of balance, Jon, in L.A. or San Francisco, to a greater tune, you still have more business at all the other terminals. So, from a proportional standpoint, it hasn’t changed that much.

Okay. And then finally, I think I missed it. But what was the 500 or the half a million fully reserved claim that you were discussing?

It’s a normal part of running trucks up and down the highway. We had an incident that we needed to fully reserve for half a million dollars.

Oh, I got it. That was just part of the reason why you had the sequential increase on the insurance?

That is correct.

Got it. Okay. Thanks a lot. Nice job.

Sir, I’ll hand the call back to you, as that was the final question.

Great. Thank you all for joining us this morning. And again, feel free to listen to the replay of today’s call at www.ForwardAir.com. Have a great day.