Forward Air Corp (Delaware) (FWRD) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Forward Air Corporation first-quarter earnings conference call. At this time, all participants are in a listen-only mode, and we will conduct a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Ms. Valera Doherty. Please proceed, ma'am.

Good morning. Thank you for joining us. Before we begin, I would like to point out that both our press release and this call are accessible on the investor relations section of our website at www.forwardair.com. With us this morning are our President and CEO, Bruce Campbell, and our Chief Financial Officer, Andrew Clarke. By now, you should have received our press release announcing first-quarter 2006 results, which we furnished to the SEC on Form 8-K and on the wire yesterday after market close.

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 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.

And now, with that caveat, I will now turn the call over to Bruce Campbell, our President and Chief Executive Officer.

Thank you, Valera. Good morning and thank you for joining us. Obviously, we are very pleased with the overall performance of our entire team during the first quarter, and most grateful for their efforts.

In reviewing the first quarter, we would like to touch on some key issues. First, we were able to achieve overall revenue growth of 18.4%, led by growth in our airport-to-airport segment of 22%, truly an outstanding result by all of our team members.

Secondly, and of extreme importance, we were able to reverse the negative fourth-quarter trend in our logistics revenue, allowing us to resume our growth in this important area. Even more important is the continuation of this trend into the second quarter, with record-setting growth just this past week.

Third, our operating ratio improved 160 basis points to 79.4 OR, led by improved efficiencies in the purchase transportation area -- again, truly an outstanding effort by our team.

Fourth, we continued the development and implementation of our terminal automation program with great success. Over 50% of our facilities are now operational, including all of our major operational centers. We continue to be on track to be fully implemented by June 1.

And finally, we continued the development and testing of our Forward Air direct product, including live testing with one designated customer with much success. This expanded product offering of Forward Air should be ready for full implementation June 1 of this year.

I would like to conclude with the sincere thanks to all of our team for delivering such great results. And now, Andrew Clarke, for our financial review.

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

As Bruce mentioned, we are pleased to report both record revenue and earnings results for the first quarter of 2006. In this quarter, operating revenue increased 18.4% to $82.3 million. Our line haul revenue, including fuel surcharge, was 71.7 million, an increase of 22%. Average weekly line haul tonnage increased 13.7% to 31.1 million pounds versus last year. Average revenue per pound, including the impact of fuel surcharge, was up 7.3% versus last year. Excluding the impact of fuel, average revenue per pound increased 5.1%.

On March 1st of this year, we implemented a 3% general rate increase. Our revenue per pound is still benefiting from the longer length of haul business, which has a higher yield.

Logistics revenue, which Bruce mentioned earlier, increased 2% to $6 million. We are pleased that more then replaced the logistics revenue lost during the fourth quarter of last year. And assessorial revenue declined slightly to 4.6 million versus $4.8 million last year.

On a year-over-year basis, income from operations increased nearly 27% to a record $17 million. The Company's operating margin expanded by 140 basis points to a record 20.6%.

Purchase transportation costs decreased 160 basis points to 39.4% of operating revenue. Purchase transportation for the airport-to-airport network was 37.7% of revenue, down from 39.7% 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 555 last year to 594 this year. The purchase transportation for the logistics business improved to 69.2% of revenue versus 69.7% last year.

Salaries, wages and benefits increased 60 basis points versus last year to 22.8% of operating revenue. The primary driver of this change was the increase in salaries and wages including incentives as well as health-care costs versus last year. Health-care costs negatively impacted the quarter by nearly 0.7% of operating revenue. Additionally, the Company recognized $200,000 or 0.3% of operating revenue in the first quarter for restricted share grants during 2006. The impact of 123(R) is expected to be approximately $300,000 in each of the remaining quarters in 2006.

Operating leases decreased 60 basis points to 4.2% of operating revenue on slightly more dollars spent. Depreciation and amortization increased slightly to 2.9% from 2.7% of operating revenue. Insurance and claims increased by 10 basis points to 1.8% of revenue versus last year. Both quarters, however, were excellent in terms of safety and claims. And finally, other operating expenses decreased 10 basis points to 8.3% of operating revenue.

Some of the other statistics for the quarter -- total assets decreased slightly to 212.2 million from 212.6 million at the end of last year. The Company's cash and (indiscernible) investments position increased over that same time period by $3.3 million to $82.6 million. During the quarter, we spent $2.2 million on dividends and $4.4 million repurchasing a total to 124,000 shares of our common stock, at an average purchase price of $35.49. Over the last 12 months, the Company's returns on assets and equity rose to 35 and 26%, respectively.

Net accounts receivables were $44.3 million for the quarter, and accounts receivable days were at 48. Operating cash flow for the quarter was approximately $8.9 million versus 8.1 million last year. Gross capital expenditures for the quarter were 2.4 million, which was offset by $3.1 million in proceeds, primarily from the sale of trailers. The Company ended the quarter with operating terminals in 81 cities, which is flat versus the end of the year.

Additionally, the Company is evaluating the purchase of facilities in key gateway cities including Chicago, Atlanta and Dallas, among others. Our growth and therefore the need for space has expanded over the last several years, and we expect it to continue. We have evaluated the all-in costs of occupancy in these major markets, and believe that reinvesting our substantial cash flow back into the business in this fashion will bring us several key advantages. First, we can design and operate buildings and specifically suited to our needs, including ample doors and trailer parking, which is critical in light of our expanding presence in these markets. Second, ownership allows us to lower our overall occupancy costs in these markets. As we get closer to finalizing these transactions, which we expect to take place over the next six to nine months, we will provide the appropriate update.

And now, for our outlook. For the second quarter of 2006, the Company expects revenues to grow between 13 and 17% versus last year, and fully-diluted earnings per share to be between $0.38 and $0.42. 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 $0.37, which was positively impacted by $0.03 per share from the one-time settlement with the City of Atlanta regarding a terminal that we owned in that market.

That concludes be 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). Alex Brand, Stephens.

I guess, let me start with sort of the mundane. Andy, can you just talk about the sort of trends in the quarter by month, any noticeably stronger months or pretty steady?

It was actually -- March was the strongest month, although January and February were strong as well. So it was pretty steady up until March. March had -- both quarters had 64 operating days, so that number effectively is flat. And I think March benefited slightly this year versus last year, because you'll recall Easter fell in March of last year versus April of this year.

And in terms of replacing your lost logistics customer, I assume that was replaced with multiple customers, so we have less customer concentration risk now?

That is correct.

Now, Bruce, in your comments you mentioned that the Forward Air direct product is -- the testing has gone well. Does that mean that you now feel that much more confident that sort of the pickup and delivery aspects have been sort of more finely tuned? And does that, I guess, further mean that you can go ahead and sort of presell the product even though you won't actually roll it out until June?

It means that we tested our technology, which is critical in this area, with one particular customer. The actual testing of it went extremely well. We have some cleanup to do in that area, but nothing out of the ordinary. We had the opportunity last week to review it one more time when we were in Dallas, and it went extremely well. So we have grown what we consider to be some really good resources at this product, and we're excited about the opportunity that we have, and we are excited about the revenue that we believe it's going to bring to us in the years to come.

So is it a product that you can go ahead and start preselling to your customers then?

We will roll it out as it becomes appropriate, and as it becomes something that we're confident that it's going to do everything we think it will do. I don't want to commit to you that we're going to start selling it tomorrow. We are selling it to a few customers on a test basis today. We are in the development process of the sales and marketing angles that we will take. But, again, we will roll it out June 1 if everything goes right.

Have there been startup costs associated with this initiative that are in the numbers? And if so, are they meaningful?

There have been, and it depends on how you define meaningful. But there are some costs involved.

And I guess obligatory question on the competitive landscape. Any changes there to competition and/or pricing from competition?

No. It's the same story; it happened for 15 years; it will be for the next 15 years. And that is if the people in East Tennessee can do it, then so can we. It just seems that they haven't been able to. In any event, pricing continues to remain what I would call stable. We do not respond to competitor pricing. It has never been a core value of Forward Air, and it is not going to be one, at least as long as I am here. And we press on. Our whole focus is not on competitors; it's on Forward Air and how can we get better.

Great quarter, guys.

Jon Langenfeld, Robert W. Baird.

Maybe a continuation on the Forward Air direct product. Just trying to understand, realistically, over time, how much of your freight goods flow through this direct product? Is this something where it's 5% of your freight or 50% of your freight? And I know that's a --

That's a tough number to hit, Jon. There are two areas that we're pursuing here. First is customers who are today not in the Forward Air network, who do not take advantage of our airport-to-airport network, primarily because they have to have people picking up and delivering their product. If you had to put them into a mold, which I'm not crazy about doing anymore, but if you did, you would probably say most of the international forwarders would fit that mode. So we have an opportunity there to not only acquire additional PU&D revenue but to acquire the line haulers. We call it feed the monster.

Then, the second issue or the second angle that we have here is to go to our existing customers, as you implied earlier in your question, and sell this product to them. In some cases it's most appropriate; in other cases it's not. One of our customers may have their own facilities in 20 different cities in the US. It's unlikely that we have an opportunity to sell to them in those cities the PU&D services. On the other hand, if they have a shipment destined to a smaller city in the US, where right now they are having to handle manually the PU&D process, we can do that for them. So the answer is completely across the board. What the final number will be will just take time before we can tell you.

No, that's very good color. That's what I was looking for. And then, I guess, on the financial side of that, the returns, I'm assuming, are still very good just because you are not deploying the assets again. But does all the revenue and margin run similar to the core business?

Well, our initial pass on that is we are not as concerned with the margin as we are gaining a toehold in this area. Now, that's not to say we want to do it for free because, as we say around here, we are not interested in practice. But we think the benefit comes from the fact we can go to the local PU&D guys, and there's literally thousands of them across the US, be able to bring in greater tonnage. So we're going to bring some cost efficiencies to them. We're going to eliminate much of their back office work, and we're going to provide them cash -- in many cases, within seven days -- for their services, where today they may have to wait as long as 45 days.

So, all of that having been said, we think it's a very, very solid product to bring to them and help them but without hurting them. We're not interested in putting cartage companies out of business, but we are interested in making money. We think we make money the way we always have, and that's by gaining efficiencies out of it that are not in the system today, not by riding on somebody's back.

So it sounds like the biggest opportunity with this is the growth avenue, like you said, feeding the monster in terms of the line haul business and making that product more attractive to both new and existing customers?

That's a fair conclusion.

And then, on the CapEx plans, are we talking about half a dozen locations? Are we talking about two dozen locations? Can you give us a little bit of a ballpark on that?

It's closer to a half a dozen.

And is that something where the CapEx plan would come out in '07, or would actually we start to see some of this outlay occur in '06?

You'd start to see it towards the tail end of '06, and then you would see it more into '07. And again, we are not going to six right away, but we're going to build up to that.

And is a typical location that you would be buying -- would it be a greenfield, or would it be existing structure or just depend on the market?

It depends on the market, but the ones that we're really focused on are greenfield where we can, again, go in, design the building, design the layout, design the parking such that it fits our operational needs, because we have a very specific use in these markets.

1 And can you pretty quickly -- once you decide on the place and buy it, is it a 6 to 12-month type build to get that up and running?

Yes, 6 to 12 months is a good figure.

And then, finally, Bruce, maybe just your reaction to kind of the overall freight trends. It seems like more of the commodity-based freight here in the US, quite volatile here in the first four months of the year versus your customer base, the more service-sensitive freight seem to be much more stable and much more robust. I think I know the answer to this, but I'm assuming that is just the beauty of being in this part of the market?

I think that's a fair conclusion. If you go back to Andrew's comments earlier, we didn't see a lot of volatility in the first quarter. We saw what we considered the normal seasonality, and that is January is a little bit -- not slow, but less than March. And March obviously was very good. And that's a typical seasonality for us, with really very little volatility in there.

Edward Wolfe, Bear Stearns

It's Matt Brooklier for Ed Wolfe. I just wanted to follow up on Jon's question regarding CapEx and the new locations for you guys. Would you kind of quantify what the potential spend could be on these roughly half dozen locations?

In the three that we're really looking at, it varies depending on what we ultimately settle on. But you can get out in the out years. We will look at Los Angeles, as an example, and that will be a significant number, simply because of the cost of land in L.A. and the amount of land that we need to acquire. So we have $82.6 million; we continue to generate pretty significant free cash flow. And so we have got the ability to really ramp that up, and the CapEx in those markets where it's appropriate and build a pretty big footprint and at the same time still preserve the capital that we have generated.

The potential CapEx related to this expansion program -- is a single-digit millions, or is it above that?

It's above that.

Turning towards just kind of growth in the quarter or growth in the current quarter, 2Q, Bruce, I think you said in your prepared comments that Forward Air had experienced record growth thus far in 2Q. Was that just in respect to your logistics business, or was that all in, including the line haul business?

(Indiscernible) and I think that's important because, as we touched on the earlier, we went backwards in that area in the fourth quarter. That was most disappointing but, at the same time, understandable, because of the loss of the customer. On the other hand, you've got to get up and you got to go to work. And our people did that, and they did it to just absolute perfection. And it's something that we are most proud of.

Most importantly, though -- and I think this is where I was headed with the second-quarter comment -- that momentum continues into the second quarter. They are doing very, very well. So sometimes, when you get hit in the nose, it's good for you because you kind of regroup and come back swinging even harder, and that's what they've done.

So the growth there in that comment was specific to the logistics, the rebound in revenue and growing that business going forward?

That's correct.

And finally, just looking at the quarter, if we attempt to take out the XGS benefit, it looks like you guys grew tonnage at kind of mid single digits with nice pricing. Looking out for the remainder of the year, is it fair to assume that you guys are planning for kind of, again, ex-any potential acquisitions, kind of mid single digit type tonnage growth if the economy holds up, plus getting nice price, mid/upper single digits?

What we have provided is guidance for the second quarter, which has been the policy for the Company for some time now.

Adam Thalhimer, BB&T Capital Markets.

First of all, just to get a little bit more specific on the competition question, Kitty Hawk is out there putting out, I don't know, a press release per month about entering new markets, most of which you are already in. In general, what do you see from them in those marketplaces?

I'm going to have to say this right. We, again, are focused on the Forward Air product. We don't spend a lot of time thinking about Kitty Hawk or any other competitor. We are convinced that if we provide the most value to our customers that we will win the business, and that's really the extent of the comments I want to make on that. [Good] question -- I just don't want to get into that.

You took a 3% rate increase this year, roughly in line with last year. How was that received, generally?

Well, generally, when you go to a forwarder and say you are going to increase your price, they are not real happy. And that's certainly understandable, but we do have costs that we have to deal with on an annual basis. And that's the purpose of the increase, as it was this year. And overall, the reception of it was good. We even had one particularly large customer look at us and say, with all the investments that we've made -- which have been substantial over the last year, if you look at brand-new trailer pool, basically, or at least 50% of our trailers, over 800 trailers purchased, if you look at the investment we've made in technology, if you look at the continued investment we're making in technology, we think that the 3%, in his words, was a good investment by them into our company. So that was pretty much the general tone.

On the last call, you guys talked about securing back hauls to the West Coast, that that was going to be a key priority in the first couple of months of the year. Did you make any progress on that front?

Yes, I think we did. I can tell you this -- that's not something that you wave a wand at and all of a sudden it's fixed. We did make a very key hire in that area, and we think we're going to reap the benefit of that. But it's a slow process. It's one that takes a little bit of time. It's finding the right customer who can feed that need of ours because, obviously, you can't go to everyone and find people who are shipping to that particular area of the world. But we are pleased with where we are today. We think we've made progress, and we think we're going to make more progress as the year goes on, which will have huge benefits to our balance situation that we fight every week now.

David Campbell, Thompson Davis & Company.

I wanted to ask you about purchase transportation costs and the line haul business, 39-point-something-percent. Is that a ratio that's sustainable over the rest of the year? Is there something unusual going on in the first quarter?

Well, David, the guy who runs that is sitting in this office with us, and I'm sure he's shaking his head up and down yes. On a more serious note, that was an outstanding performance, and it's one that we think we should be able to keep going forward. And there's a lot of different variables that go into achieving that. It's not just how much does it cost to move a trailer from point A to point B? It's how much freight do we have on that trailer? Has all the freight been properly binned? And on and on and on and on. So all of that came together pretty solidly in the first quarter. We think we can continue that, but you get into situations that are nobody's fault, as we like to say -- or the other way to say it, ain't it awful where we have, if we have 50 loads out of balance coming out of L.A., I can assure you that our PT will go up. There's just no way around it.

On the other hand, we are working diligently to offset that as we go forward into the balance of the year. So that's a roundabout way of saying we're going to do our best to keep it there; certainly no guarantees.

In other words, it's somewhat unpredictable?

That's a good way to look at it.

And CapEx for the year without the gateway facilities -- could you give us a new number on that?

Without the gateway, it's still approximately $12 million.

And that excludes proceeds from sales, right?

Correct.

And the buyback of the stock -- is there any authorization left?

Yes, still 2.8 million shares, approximately.

And salaries and related costs -- obviously, health-care costs are another issue. But will there be some benefit from the terminal productivity program, the terminal automation program, in terms of salaries and related costs going up less than revenues go up?

Yes.

We hope so, but I think it's important to realize in this particular area that, as Andrew touched on earlier, part of that increased cost was the fact that we paid out a much higher incentive amount, and that is good, because that leads to bottom-line improvement. So if we have that one category go up, it's not necessarily the end of the world. What we look at are what are our controllables in terms of dock labor, office labor, those types of areas. And then, as Andrew pointed out earlier, the health-care cost was somewhat significant. We think we have reversed that or at least slowed that trend, but that is something that we are focused on.

How the [TAP] interacts with that is yet to be -- we don't know the full impact of that. We think we will have some improvements there, but we can't sit here and tell you, you know, that's worth 50 basis points or whenever.

And also, some of that will show up -- if you look at our service standards for the first quarter, a lot of that is getting greater visibility into the line haul network so you can dispatch those trucks on a more timely fashion, and therefore increasing your overall service to your customers. And that's not going to show up in salaries and wages, but it does show up in customer satisfaction and ultimately in retention.

Well, there's really not much more to say, because it was such a good quarter. Thank you very much for doing such a great job.

Donald Broughton, A.G. Edwards.

Good quarter, gentlemen. All my questions have been asked. Thank you.

Ken Hoexter, Merrill Lynch.

I just wanted to follow up -- you just kind of went over a question on the price and the West Coast surcharge. So I just wanted to understand that a bit. So you don't feel the need to do another round to kind of help balance the flows. Is this just something that goes with the general rate increase for everyone? Or can you specifically focus, as you did last year, that focused surcharge on the West Coast?

Let me back up just for a moment. Historically, we do what we consider to be general rate increases. Last year, as you pointed out, we increased the West Coast to a higher degree, primarily because of the change, again, historically to what has occurred on the West Coast. Used to you didn't want to go to the West Coast because you couldn't get off of the West Coast. Today, as we all know, with the advent of all the Asian imports, we now have a complete switch in balance. So we addressed that a year ago with a higher rate increase on the West Coast. This year, it was straight across the board, so it was a 3% increase, regardless of location. We think we have addressed a year ago the imbalance on the West Coast. That's not to say that we won't continue to evaluate that, but we are happy with where we are today.

So it worked to what you were expecting? It helped balance out the flows relative to what you were looking for, so you don't need to do it again?

That's correct. As we sit here today, we don't.

Are you adding trailers to continue to meet this phenomenal volume growth that you saw?

We basically went through our trailer pool a year ago. We brought in over 50% of our fleet is now brand-new. Part of that addition or purchase was a few of them were additional trailers. We do have, I believe, somewhere around 100 trailers to bring on yet this year, so that will take care of any growth we have.

That's helpful. Increased owner/operators -- you have consistently stated -- each quarter, somebody always asks you, any problem getting drivers? But it looks like you continue to get more owner.operators. Is there any change in the environment that you're seeing out there? Is it still just because you have the local network that's easy to get home at night, that you're not really finding trouble in some of your markets? Or are you seeing any kind of tightening or loosening within that market?

It's basically the same as it has been. Again, I go back to where we at one point in our history had people lined up to go to work for us as owner/operators. And today, we spend in a quarter 100,000 to $150,000 recruiting owner/operators. We have been successful there. But the reason we have been is, as you pointed out, we have a good network for them to run in; and, secondly, just some superior efforts by our people in recruiting to bring on additional owner/operators. But it's tough. It has been. It will continue to be. And that's just part of the cross we have to bear as we go forward.

Where are you seeing most of the growth coming from? Is this from the forwarders, international airlines? Where is it tilting these days?

Pretty much across the board. I'm not sure you could pull out a single segment and say it's better than the others.

I know you don't typically see the products. Are you seeing any strength in any particular areas?

No. Again, we don't require that when the freight is tendered to us. Anything we would be telling you would strictly be a guess.

Great job on the quarter. Thanks a lot for these numbers.

And there are currently no questions in queue.

Thank you, everyone, for joining us. And I would like to remind you that there is a replay of the call on the investor relations portion of our website, www.forwardair.com, which will be ready shortly after the conclusion of this call. Thank you.

Thank you for your attendance on today's conference. This concludes the presentation. You may now disconnect. Good day.