Forward Air Corp (Delaware) (FWRD) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter Forward Air Corporation's earnings conference call. My name is Janelle and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. For replay purposes if you would like to listen to the replay, please go to www.forwardair.com; in the Investor Relations section you will be a defined the information for the replay.

I would now like to turn the presentation over to your host for today, Ms. Valera Doherty. Please proceed, ma'am.

Thank you. Good morning. Thank you for joining us and before we begin I'd 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 Chief Executive Officer, Bruce Campbell, and our CFO, Rodney Bell. By now you should have received our press release announcing third-quarter 2006 results which we furnished to the SEC on Form 8-K and on the wire after market close yesterday.

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 the 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.

Now with that caveat, I'll turn the call over to Bruce Campbell, President and CEO.

Good morning. Thank you, Valera, and thanks to each of you for joining us today. We are pleased to announce the 17th consecutive quarter of improved results for our Company, showing improvements in our operating revenues, our income from operations, and our net income. Most importantly, we posted the highest quarterly operating revenue in the history of the Company. We are most grateful to the entire Forward Air team both employees and independent contractors for their efforts during the quarter.

However without question we did face a tougher economy during the quarter as indicated by the decline in the average weight per LTL shipment handle, a critical measurement for us. Conversely we were able to offset this by showing on an annualized quarter-over-quarter basis an increase in the number of LTL shipments handled, obviously another critical measurement for us. This increase combined with a nice yield increase allowed us to minimize the impacts of the smaller shipment size.

Clearly the shining light during the quarter was the excellent performance by our logistics group who turned in year-over-year revenue growth performance of over 30%. This area has been and will continue to be a major initiative for our Company as we go forward.

Among the new business acquisitions during the quarter for the group, the logistics group was a new partnership with United Airlines and our most recent award, the Pilot Air Freight sort operation in Columbus, Ohio, which just began this month. We continued and finished the initial rollout of the Forward Air Complete service offering during the quarter. Forward Air Complete is our new innovative pick up and delivery service offering designed to help us better penetrate the international freight forwarders and to provide our existing customer base even more service offerings within the Forward Air network. This continues to be a key initiative for our team as we move forward.

Moving to the operating side for a moment, we were most pleased to open our new hub expansion in Columbus, Ohio during the first week of October. This new expansion increased our facility to 125,000 square feet and 168 doors, providing our operating team a great new work environment and our customer base even better service than in the past.

Finally I would be remiss not to thank again our employees and independent contractors for once again helping us be recognized by Forbes Magazine for the eighth consecutive year as one of the 200 best small companies in America.

Now Rodney Bell, our Chief Financial Officer.

Thanks, Bruce, and thank all of you for joining us this morning. After my comments, we will open the lines for your questions. Financial results for the third quarter 2006 are as follows.

Operating revenue increased $5.6 million or 6.6% to $90.4 million from $84.8 million in 2005. Income from operations was $19.8 million, which was a 6% increase over the $18.7 million reported in 05. As a percentage of operating revenues, income from operations declined 10 basis points to 21.9% versus 22% in the third quarter a year ago. Net income for the period increased $0.7 million or 5.5% to $12.7 million from $12.1 million in the prior year quarter. Fully diluted EPS was $0.41 compared to $0.38 which is a 7.9% increase versus last year.

Financial results for the nine months ended 9/30 '06 are as follows. Operating revenue increased $27.7 million or 11.9% to $259.6 million from $239.1 million. Income from operations increased $7.7 million or 15.7% to $56.5 million compared to $48.4 million for the first nine months of 2005.

As a percentage of operating revenues, income from operations expanded to 28.8% (sic--see press release) from 21.1% last year. Net income for the period increased 12.4% to $36.8 million from $32.7 million in 2005. Diluted EPS was $1.16 versus $1.00 in 2005, a 16% increase.

The components of our third-quarter offering revenue were as follows. Traditional linehaul revenue increased 4.5% from $73.2 million to $76.5 million. Logistics revenue, which is primarily our EUV business, increased 30.8% from $6.5 million to $8.5 million year-over-year. Other revenue increased 5.9% from $5.1 million to $5.4 million. For the nine months ended, traditional linehaul revenue increased 11.8% from $198.7 million to $222.2 million. Logistics revenue increased 22.3% from $18.4 million to $22.5 million. Other income was unchanged at $14.8 million for both periods.

Operating expenses associated with the third quarter 2006 compared to the same period 2005 were as follows. Purchase transportation for the airport-to-airport network was 39.7% of airport-to-airport revenue compared to 40.5% in 2005. PT for logistics was 70.2% of logistics revenue versus 69.8% last year.

Salaries, wages, and benefits as a percentage of operating revenue declined 30 basis points to 20.3% from 20.6 in 2005. Reduced incentives offset by higher healthcare costs along with the impact of FAS 123(R) resulted in this improvement. Operating leases as a percentage of revenue were flat at 4.1% for both periods.

Depreciation and amortization as a percentage of revenue decreased 100 basis points to 2.3% from 3.3% in 2005. In the third quarter of 2005, there was a $0.7 million charge for accelerated depreciation on trailers that were sold. Additionally we benefited $0.3 million from computer software and equipment that became fully depreciated in the second quarter of this year.

Insurance and claims increased 70 basis points to 1.7% from 1% in 2005. Insurance in the third quarter of 2005 was positively impacted by adjustments related to vehicle liability -- vehicle claims liability based on a third-party actuarial study. Additionally both premiums as well as claims were slightly higher in 2006.

Finally other operating expenses increased 50 basis points to 7.6% to 7.1%. The previously mentioned disposal of trailers resulted in the posting of an approximately $0.3 million gain in 2005.

For the nine months ended 9/30 '06, purchase transportation for the airport-to-airport network was 38.6, compared to 39.6 in 2005. Logistics PT was 69.9 versus 70.3 of logistics revenue. Salaries, wages, and benefits rose from 21.4 to the 21.2. Operating leases declined 4.1% from 4.4%. Depreciation and amortization declined 40 basis points from 2.9% to 2.4%. Insurance and claims were 1.7% in 2005 and 1.8% in 2006. Lastly, other operating expenses as a percentage were 7.8% for both periods.

Some other relevant operating statistics for the quarter were as follows. Total assets as of September 30, 2006 were $207 million from $213 million at the end of 2005. Cash flow from operations was $16.2 million for the quarter and $38.2 million year-to-date. Our cash and short-term investments position decreased $14.2 million to $65.2 million from $79.3 million at the end of a year. The decline was primarily due to the company repurchasing just over one million shares of its common stock for $33 million.

Average linehaul pounds per weight for the third quarter decreased slightly to 32.8 million pounds per week from 33.1 million pounds per week in 2005. As Bruce mentioned, during the quarter our average shipment size decreased 5% while total shipments for the quarter were actually up versus the third quarter of 2005. There was one less business day in the third quarter '06. Business days were 63 versus 64 and 171 versus 172 for the quarter and the year-end to date in 2006 and 2005 respectively. Total number of terminals remained the same at 81.

Finally guidance for the fourth quarter is as follows. We are forecasting operating revenues to grow between 6% and 10% over Q4 of '05. We are projecting EPS to come in between $0.42 and $0.47 per share compared to $0.38 per share last year.

Thank you for joining us and the operator will now start taking your questions.

(OPERATOR INSTRUCTIONS) Alex Brand, Stephens.

As many questions as I like. All right, Bruce, we have heard about what happened. Your shipment weight dropped. Can you give us more color about how this played out? If you were down 5% for the quarter, was it really bad in July, worse than that? And then was better and you sort of made up a little in September? Help us understand how this sort of progressed.

I think you have to separate the average shipment size, did not deviate a whole lot month-to-month to total revenue. I think what you're looking for is did we see a building of momentum and are we experiencing a peak? The answer is first of all, July was probably unfairly characterized as a bad month with the fact that the Fourth of July interfered with the first week of the month, which it did not a year ago. That is just the way the calendar fell this year. But July was not an extraordinary month. We did see improvement as the quarter progressed.

We continue to see improvement but we would not characterize the overall business climate as great. We would characterize it as decent and I think we're somewhat spoiled from maybe the past two years, when it was -- the common characterization is more robust. But our business levels today are good.

All right, so you saw a slow down, but it does not feel to you like prior recessions? Your sense is -- I realize it is just your feel, but after your experience in the industry, you do not feel like it is worse, it has gotten worse in the last, let's say, two months?

With the clear caveat that I'm certainly not a qualified economist, we certainly aren't predicting that. I think it is a normal process we all go through and it cycles in and cycles out. The number we watch to indicate that is obviously weight per shipment. The encouraging thing on the other side was we think our market penetration improved simply by looking at the increase in the number of shipments we handled. So we were pleased with that.

Okay. Can you make a distinction -- I guess number one, in your customer base between international forwarders or domestic or maybe a different way to look at it is your gateway business still okay in indicating international business? Is it still sort of there and domestic is weaker, any kind of color on that front?

Again it would be with the caveat that this would not be precise science, but I think your postulation is probably correct. Gateway business remains strong. It is good. Most of our forwarder customers today which makes it somewhat hard to segregate the two handle both international and domestic business. I think it is fair to say that their international business is stronger today than in the past, which is one of the reasons we are pushing so hard on the international side.

All right. Nice segue to my question on complete. Your complete --

Any questions for anybody else?

They said as many as I wanted. This will be my last one, how about that? Complete sounds like you feel like it has had a good start. Are there any indications you can give us as to how it has gone? Is there something you are watching in terms of shipment count? Are you measuring it separately? How can we know how that is progressing?

As we have said in the past, we have rolled this out in the very deliberate and methodical manner, primarily to make sure that we knew what we were doing and probably even more importantly make sure that the technology side of the business was correct. Because this does in fact require a lot of technology.

That having been said, we let the program move along as we introduced it back in June and we measured more the quality issues as opposed to the quantity issues initially. Once we were comfortable with that, then we began pushing the rollout with that culminating in September of a complete rollout of the product. What we have seen in the past few weeks is very encouraging. We've got the shipment count up to a nice number that we're happy with. We will continue this through the fourth quarter, making sure that again we are happy with the way things are working out. If they continue the way they are, then that will be a major initiative for us as we go into 2007.

I would add just this one bit of information about complete. As we attempt to sell this to customers whom we have not sold to in the past, what we are finding is the sales cycle is a little bit longer. That is okay. We are okay with that primarily because typically when you are into a longer sales cycle you also tend to not lose the business overnight because of one little bitty thing going wrong. So we hope that as we go into 2007 it becomes a viable part of the future of Forward Air.

Thanks, Bruce. I appreciate it.

Brannon Cook, JPMorgan.

Just a follow-up question on the complete that you're rolling out. You talked about the longer sales cycle. Should we think about that being two or three quarter sales cycle or potentially shorter than that?

I think as we learn, the best answer we can give you today is that is probably right especially on the true international forwarder who we are bringing to them a product they have never seen before. It is just going -- and it has taken us some time, although we have recently started to experience some positives on that. So we think it is going to be a good product for us as we go forward and look forward to it providing us the results we would like to see.

Okay, then kind of a follow-up question on the demand. You talked about the environment being decent, not strong. It looks like your fourth quarter revenue guidance implies some acceleration. Is that more a function of the comparison being a little easier or is something going on in terms of October demand that makes you a little more optimistic in how revenue grew in the third quarter?

I think it is an overall combination of those factors.

Okay, so no real change in demand from where September levels were?

You know, I think if I tore apart your question you are asking, are we experiencing a stronger peak all of a sudden? The answer to that is we are experiencing a peak, we just simply -- it's not a huge peak as in the past. Now I can tell you after doing this for 16 years typically what happens, and this is a forward-looking statement, the longer a peak goes without the type of height of that peak that you would expect, the more November and December will be very good. Now, that is based on historical facts. It is not based on what is going to happen this year. Obviously we can't predict that.

Okay, and then you announced the two business wins with United and Pilot Air. It sounds like you have some momentum on winning some of these larger contracts on the logistics front. When you look out at that pipeline, is it little stronger than it has been? Obviously you are working off a small base there, but do you feel like you can continue these kinds of growth rates looking forward?

We do.

Can you quantify the magnitude of the business wins with United or Pilot Air Freight?

I would prefer on this call not to do that. Obviously all our competitors listen. I'm sure they are all running to get on the phones, so we are not interested in doing that.

Is there something a bit different in the market that makes you more confident that you can grow the logistics business, or is it just getting out there and being more aggressive and winning some new contracts?

It certainly helps that we are working off of a smaller base, so that is the first thing. Secondly it is simply an area that we have not pushed in the past that we are now and that means there are more opportunities. We have our people in place that we worked on for the last year and a half developing the levels of expertise required, and they have done a really good job. So we are more comfortable or confident that those opportunities that are brought to us we are going to be able to seize and do a good job with.

Great. Thanks for the time.

Jordan Alliger, Deutsche Bank.

Thinking about the fourth quarter and the revenue outlook, care to say as you think about the 6 to 10% sort of volumes relative to price because price does seem to be holding up pretty solidly and just sort of your view on that?

I'm looking for my notes here real quick. Obviously, Jordan, the yield and the pricing has been strong, but we're looking from a tonnage standpoint, from a volume standpoint for that to contribute as well as well as maintaining the current -- on the logistics business to maintain the current growth rate there. So if you were to think about it in thirds, a third of the growth -- the growth that we're predicting is coming from yields in the upcoming quarter, approximate one-third from tonnage and then the contribution to the logistics business will be about one-third of that as well.

Okay, and then just sort of going along those lines, how would you describe -- I know on the last call there were some comments about the pricing environment and competition. Care to give and update on your overall view of the pricing markets moving -- aside from you guys and the competition?

We altered our pricing a bit, Jordan. By that I mean we did not go in and cut rates across the board or respond to what I consider to be stupid actions such as no dim, which means that customers do not have to have their freight dimensionalized, which is in effect an outrageous discount. It is also a good way to lose money. That having been said, we do participate perhaps more actively in the spot rate issue, which we incur on a daily basis. And the reason we choose to go that direction as opposed to matching some silly rates is because we think the silly rates are short term and that on a long-term basis we're much better off dealing with it in the spot market.

Okay. Then just sort as a general thought, any theories as to this so-called delayed peak that everyone is talking about? Why are we delaying the peak?

I would love to be able to answer that. I have no idea. Again, our experience from having done this for 16 years is if a peak is delayed it becomes much more intense at the end. That having been said, I have no idea if that is going to happen or not.

Weight per shipment in your thoughts based on what you've given for the fourth quarter, can that -- can you go from down what it was to positive again in this swing of a time?

We make no assumption that the weight per shipment would increase for our projections.

Okay, great. Thank you very much.

Jon Langenfeld, Robert W. Baird.

First question, you have had some very good wins here on the logistics side. Do you feel like there is more to come there? You've kind of contacted some customers, had some success with customers you haven't done business with before. Are there more companies like that out there to penetrate?

I certainly hope so. We will spend part of tomorrow with one of them that we have never done business with in the past. So yes, we think there's plenty of opportunities there. It is strictly a matter of focusing our efforts without diluting our efforts in our mainstream business, which we think we can do.

Would you characterize the pipeline on that type of business, maybe the noncore linehaul business as pipeline is being healthy?

I think that is a fair characterization.

It sounds like it is just a function of more focus and maybe things have slowed in other areas so it is more focused from the salespeople and yourself in terms of targeting that business that has brought it to a successful point?

I think that is a fair conclusion.

Good. Then if you look at the cash balance, obviously you are very aggressive buying stock in the lower 30s. How do you balance that with the acquisition opportunities out there and maybe if you could characterize that environment as well?

That environment remains robust. The issue with that as I think we all know is there continues to be what we consider to be excessive valuation, although we have seen a tempering of that. So perhaps we are more optimistic today than we were in the past calls. Obviously we balance the two issues. One is how much stock to buy back and how much cash do we have available for acquisitions?

The other thing obviously is we have the capabilities of borrowing money. We have never levered this company, but under the right circumstances we would certainly do that. But it is going to take the right circumstances. We are not interested in doing silly deals. But again, a good opportunity we would not hesitate to do that and I think we have the support of our full Board to do so.

Would you lever the company for a buyback?

As we sit here today, my response to that is no. Obviously that is a Board decision and not Rodney nor mine. And I can tell you we have discussions on that, but as we sit here today we would be much more inclined to want to grow the company via acquisitions and acquisitions go through these cycles as you well know where valuations get silly and they come back. As they come back, we are going to have opportunities.

Good. Just a reminder for me. The DHL business, United business, Pilot Air, is that all in the logistics and other categories?

Actually I think it's fair to say a portion of it is there, but both the DHL business and the United business generates LTL and they generate truckload. So there is a mixture there. The Pilot as we outlined covering the new store operation we have for them, that is all in logistics.

Good. Then can you talk about the capital spending, how the plays out with the new terminals both in the fourth quarter and then next year? (multiple speakers) The capital expenditures -- what you're looking at all-in there fourth quarter and then next year?

For the balance of the year, CapEx is going to be approximately $10 million. That is both revenue equipment as well as what we will spend on the real estate. The total for real estate for '07 is about $45 million and we are currently evaluating revenue equipment as well as our technology spend for 2007. It will not be anything crazy, very similar to the last two years.

When you're talking real estate, that includes the development as well of those properties?

Correct.

Very good. Thank you.

Helane Becker, Benchmark.

First with earnings now out, what is left on the share repurchase program?

I believe we have slightly under one million shares. To date we have done 1.3 million on 3 million authorized, so approximately 1.7 million is left.

All right, so with the stock down about 11% this morning we could expect to see you back in the market?

We will have to see.

Okay. All my other questions have been asked and answered. Thank you.

David Campbell, Thompson, Davis & Co.

I just wanted to ask you on the days in the quarter you said one less day. Was that the July 3 thing or was that something else?

It was actually, Dave, that was in September. There was one less business day this year versus last year.

Okay. When did Forward Air Complete start? Was that July 1 or -- I never realized it was [delivered], so when did you actually start getting revenues for it?

We have it in beta the latter part of Q2 and started opening up on a limited rollout in Q3, David. We have consistently said don't really bake in any big revenue gains into that until 2007 because that's what we are doing internally.

Okay. Do you have any explanation for your growth in the quarter versus the Air Transport Association report that domestic traffic was up 9% in August because we don't have the September yet but that 9% is a pretty strong, pretty big number.

Actually our growth in August was 9% too. But I am not sure you can take the ATA numbers and match them up against our market. I'm not sure that is a good comparison. I understand that is an indicator and would not argue that point, David, but I am not sure it is a great indicator for us because we handle so much domestic non-air related traffic.

Right, I understand. Could you just tell me a little bit more about the United contract? The partnership? What are you doing for them?

We basically handle their business out of their Dulles gateway in Washington, D.C., so all their import activity that comes in there, which is a major gateway city for them, all their import activity that comes into Dulles is then dispersed throughout the U.S. and then the opposite is true, their expert activity is picked up at various points in the U.S. and brought into Dulles for consolidation and sent overseas.

That Dulles activity is going to get bigger; I mean they're focusing more and more flights in there away from JFK. So that should be good for future growth? And the Pilot contract, it sounds like you are sorting something. What are you doing for them?

Actually we are on a private network similar to the Forward Air network on a smaller scale. They run that on the weekends only. So as a result, we provide their sorting activities. So the freight comes in just exactly the same as the Forward Air freight. We unload the trailers. We reload the trailers to the destination and we are paid accordingly.

So you have become their dock workers, in effect.

That is exactly right.

In addition to the transportation.

The other good side of that is they get into situations where they will divert freight out of their network in Columbus into our network in Columbus, which is a win for them and a win for us. So there are some positive side issues there that go on.

Right, right. Most of my other questions have been answered. Thank you very much.

[Robert Schmidt], Bear Stearns.

This is Rob Schmidt; I'm actually calling from Ed Wolfe's line at Bear Stearns. I was just wondering if you could comment in a little bit more detail on the competitive environment and tell us? Have there been any meaningful marketshare shifts in the last quarter and do you expect any in the next couple of quarters?

You know, we have not seen that. Obviously talking to our customers all the time we have seen shipment count growth. If that that had gone negative we would have had a concern. We have the same competitors we have had for about a year now or beyond depending on the company. So it seems to be about the same. I think we are actually in some cases against some of the companies making some inroads.

Okay, that was it. Thanks.

Matt McGeary, Sentinel Asset Management.

I'm sorry, I just missed your comment on the repurchase. How much do you have left on that?

1.7 million shares.

1.7 million shares. Are you legally able to buy today if you decided to do so?

Technically we wait 48 hours before we start buying, but -- and that is our policy.

That 1.7 million, is that a big enough program in your opinion? Do you need to go back to the Board do you think at some point and see about getting that upsized just giving your cash position and great cash flow generating capabilities?

We meet obviously quarterly with the Board. We meet with them this Friday -- this Thursday/Friday and that is always a topic for discussion.

In conversations I had recently with a truckload carrier obviously a different business, they commented that they were seeing potentially some opportunities or the opportunities they were seeing in the M&A environment right now were more abundant in the logistics end of things. I'm wondering if you would agree with that? And if so, is that an area where you would look for M&A? Is that your primary focus for M&A?

I think that is fair assessment that anytime the market gets frothy like it is now and people are paying 9, 10, 11, 12 times PE, then obviously everybody with a truck or somebody in the logistics business decides they can sell their company for that amount. So more and more comes on the market. We concentrate on areas that we think will bring value both to the Forward Air shareholder and the Forward Air customer base that at times is in the logistics business but not limited to it.

Okay. And just lastly, I mean you got this question before. I'm just wondering if obviously I'm not asking you to make a prediction but I'm wondering what you're hearing if anything from your clients just regarding this slowdown. Obviously you're hearing a lot from the sell side anyway that we think sort of the world is coming to an end here. I'm just sort of curious what commentary you are hearing from your customers about what is going on right now, how they think about things going into '07? Just sort of the general environment?

I would go back to our original statement and that is most of our clients, their business activity levels are good. They are just not great and it is certainly not as you described an end of the world scenario. Actually if we had not gone through some of the really frothy periods of the last two, three years we would probably consider this to be a decent year from that standpoint. But it is what it is and it is decent is how I would describe it.

Thanks, guys.

As this time there are no further audio questions. I would like to turn the call back over to management for closing remarks.

Thank you, everyone, for joining us and I would like to remind you that a replay of this call will be accessible on the Investor Relations portion of our website at www.forwardair.com. Again, thank you and have a great day. Goodbye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.