Forward Air Corp (Delaware) (FWRD) 2009 Q2 法說會逐字稿

Thank you for joining Forward Air Corporation second quarter 2009 earnings release conference. Before we begin I would like to point out that both the press release and this call are accessible on the Investor Relation section at Forward Air's website at www.forwardair.com. With us this morning are Chairman, President, and CEO Bruce Campbell, and Senior Vice President and CFO, Rodney Bell. By now you should have received the press release announcing second quarter 2009 results which were furnished to the SEC on Form 8-K and on the wire yesterday at the market close. 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 facts may be deemed to be forward-looking statements. Without limiting the foregoing words such as believe, anticipate, plans, expect, and similar expressions are indeed to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors among others, set forward in our filings with the Securities and Exchange Commission and in the press release issued yesterday and are 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 I'd like to introduce your host for today's call Mr. Bruce Campbell, Chairman, President and CEO.

Thank you operator, and good morning. Thanks to each of you for joining our second quarter conference call. Our second quarter results reflect a continuing impact from the global recession that we are all experiencing. While we think we may have seen signs of bottoming, and perhaps leveling off, it remains difficult to call. We did have some highlights during the quarter led by our Solutions team from a large loss in April, to a moderate loss in May they were able to achieve profitability during the month of June, a truly great effort. This was accomplished by both the addition of $13 million annualized of new business into the system, while making excellent progress on the productivity side. With this effort to not only improve the revenue flow, but also achieve greater efficiency, we continue to feel good about the progress and the ability to achieve the operating profit goals we have established for them.

Our core Airport-to-Airport segment continues to feel the effect of the recession as stated before, but soft steady improvement during the quarter culminating in an operating ratio in the high 80s for the month of June, our first operating ratio in the 80s for quite sometime. Our areas of emphasis here continues to be on stringent cost controls and improved productivity. On the revenue side, we continue to push hard for new opportunities in each of the cities we serve, but remain very cautious on a yield equation. While we understand we can't drive yield during this economy due to the competitive landscape, we do have a choice not to participate in some of the desperation pricing currently existing in the marketplace. This action or better said, this discipline has allowed us to stabilize and slightly improve our yield. As we look forward to the second half of the year, we continue to emphasize the execution of the core fundamentals of the model with understanding that the longer term view of our -- of keeping our core team in place is critical in anticipation of normal economic conditions returning. And now, Rodney Bell, our Chief Financial Officer.

Thank you Bruce and thank you all for joining us this morning. Following my comments, we'll open the lines for your questions. Operating revenue for the second quarter declined $21.9 million to $99.7 million, or minus 18% in the first quarter. Q2 revenues as compared to the first quarter of 2009 were actually up 3.2%. Revenue for the quarter breaks down as follows: Airport-to-Airport revenues inclusive of Forward Air Complete were down $24 million or 26.8%. Tonnage declined 22.2% compared to Q2 of last year. This is slightly less than the 22.3 year-over-year decline experienced last quarter. As a point of clarification, there was one more business day in Q2 2009 compared to Q1, so average weekly tonnage was actually down 1%, while total tonnage was up slightly. Included in the decline in systems revenue was $6.2 million or minus 7% from the year-over-year reduction in fuel surcharges. That trend was extended in the third quarter in consideration of the higher fuel and fuel surcharges in 2008.

All in yield inclusive of the 3.6% benefit of Forward Air Complete, offset by the previously mentioned decline in fuel surcharges was down approximately 5.9%. Logistics revenue, which has been a solid performer for the last two years, unfortunately succumbed to the challenging freight environment, shrinking $3.2 million -- to $12.3 million, or minus 20.6% compared to the second quarter of 2008. Other revenue, which is primarily fee-based terminal revenue declined $522,000 or 8.4%. For distribution revenues from our Forward Air Solution segment was up -- were up $5.3 million or 46.5%. This is a result of rolling on of nearly $13 million of annualized new business over the course of the quarter, as well as the acquisition of Service Express in September of last year.

Moving in to expenses, for the second quarter our lower revenue base, and the resulting negative leverage on those costs that are primarily fixed in nature is apparent. Consolidated Purchase Transportation as compared to Q2 2008, which was one of the best PT quarters in our history, increased 280 basis points to 42.2% of revenue. Airport-to-Airport Network PT increased 510 basis points to 42.7%. This increase is due to growth of Forward Air Complete which has a higher ratio of PT to revenue, than our traditional Airport-to-Airport service, as well as previously mentioned difficult prior year comparisons. Logistics PT was up 750 basis points to 77.2% of revenue. This margin deterioration was due to our logistics group earning more lower margin loads, positioning our system owner operators in order to improve balance and reduce higher rollover costs in our Airport-to-Airport network. Additionally, the prior year quarter margin included the benefit of higher net fuel surcharges. We did however improve our margin from the first quarter of this year by 140 basis points.

Salaries, wages and benefits were down $217,000, but up 510 basis points from last year. This was due to additional fixed salaries primarily from our Solutions group, as well as $0.5 million workers' compensation actuarial adjustment. Operating leases were up $936,000, or 210 basis points from last year. This increase is due primarily to additional facilities resulting from the acquisition of Service Express last year. Also due primarily to the 2008 acquisition was increased appreciation and amortization which increased $825,000 or 150 basis points from Q1 '08. Insurance and claims were up $609,000, or 90 basis points due primarily to increased premiums, as a result of higher number of vehicles under coverage, as well as a vehicle liability actuarial adjustment. Due to lower year-over-year diesel prices, fuel expense was down $1.7 million or 110 basis points. Our management team did a good job managing other operating expenses which were down approximately $1 million for the quarter.

Income from operations fell, $15.4 million to $4.9 million in the first quarter. Our operating ratio declined 1180 basis points to 95.1 from Q2 -- however -- Q2 '08. However, compared to the first quarter of the year, and excluding that quarter's goodwill impairment charge, we improved our OR by 260 basis points Net income per diluted share was $0.10 compared to $0.42 per share a year ago, $0.11 per share was contributed by our Forward Air Inc. segment, while our Solutions segment resulted -- results created a $0.01 drag on our earnings netting to $0.10. Other key metrics and operating data are as follows: Total assets decreased $2.1 million to $305.4 million from year-end. Cash flow from operations was $4.9 million for the quarter compared to $6.3 million in 2008, and $21.4 million compared to $17.2 in 2008 on a year-to-date basis. Our cash position since year-end has increased $2 million to $24.1 million.

Capital expenditures which were related to almost entirely to progress in our Dallas facility, were approximately $10.3 million for the quarter and $15 million year-to-date, with the exception of approximately $4 million in Q3 to complete Dallas, we expect CapEx to be minimal for the balance of the year. We ended the quarter with $39.4 million of availability on our $100 million line of credit. Our cash collection team had another solid performance with DSO for the period coming at 46 days, compared to 45 days at the end of March, and 60 days a year ago. Average weekly tonnage was down 22.2% compared to Q2 '08, and it was down approximately 1% compared to Q1 '09. Average shipment size compared to Q2 '08 was down 10.2% to 694 pounds, and was up 3% from Q1. Shipment count was down 13.3% versus last year, and up from minus 14.7% for Q1. At quarter end Forward Air Inc. segment had terminals in 84 cities, and our Solutions segment had terminals in 19 cities. Assuming no further material deterioration in the current market environment, we expect a year-over-year decline of revenue for the second quarter(Sic-see press release) in the range of 15% to 20%. We expect income per diluted share to come in between $0.08 to $0.14 per share. That concludes our comments, now back to the operator for your questions.

Thank you.

(Operator Instructions)

Your first question comes from the line of David Ross with Stifel Nicolaus. Please proceed.

Good morning Bruce and Rodney.

Good day.

First question is on the pricing side. You mentioned that the yields were difficult in the quarter. Is that from new competitors getting into the Airport-to-Airport business, because they have nothing else to do with their truck? Is that causing the pricing waters to be a little muddied, or is it the existing competition?

There is some of what you suggested David, but it's primarily the same stupid people.

And also, because they are getting squeezed by their customers. Are they also squeezing the carriers like you guys, or are they getting squeezed themselves, and you guys are really trying to hold the line?

The world today as it exists, the shipper knows they can push the price down. They turn around to the forwarder and push it down, and the forwarder turns around to us and pushes it down. We take into consideration who the customer is number one, and then number two, is it a reasonable amount, knowing that we can't protect the yield that we could have protected a year ago, but at the same time not wanting to perform the work for zero. So it's a food chain process. We know we have to be part of it, but we also know we can back away from it.

And then on the full distribution side, it's nice to see you have good business win throughout the quarter, and that your profitability improved throughout the quarter. How much of the improved profitability was because you were getting the added volume versus the productivity improvements you were making?

I don't know that we have an exact number on that David, but I would guess it would be probably a 50/50. They made tremendous drives on their productivity as we call it, instilling the Forward Air discipline, in both their dock operations, their delivery operations, and the integrity process that we expect at Forward Air. And then it certainly helps to have new revenue come in to play, because this is similar to the Forward Air core business where density is a critical factor. They've done a good job in both areas. We are hopeful that they continue to add, as we go through the second half of the year.

You mentioned in the release lower overhead costs. What about backhaul? Have you started make any dents into kind of increasing the backhaul revenue?

Backhaul is really not that big of a critical component. There are a few areas where we have opportunities for backhaul, but that's certainly not a priority as we sit here today.

Thank you very much.

Thank you.

Your next question comes from the line of Ken Hoexter with Merril Lynch. Please proceed.

Great. Good morning. Just on the Airport-to-Airport, Bruce where do you feel like you are seeing it starting to stabilize?

Well, start at the beginning of the quarter, April was not a very good month to put it bluntly. At that point we were going through all kinds of manipulation to say this can get really, really bad, and then in May we start to see improvement. If you go back to what Rodney said, about the shipment, the number of shipments that we handled during the quarter were down during the quarter about 13%, 13.5%. For June they were only down 4%, but the revenues held, or better said, the volumes stayed in the 20% range. What that means to us is. we obviously are facing a yield issue as the entire industry is, but more importantly we are protecting market share, and perhaps even in this economy growing market share. If we can hold -- we are now focused very hard on the shipment metric, because of its importance. And understanding that, where a year ago the shipment would have weighed 750 pounds or 800, this year its only going to weigh 630, and we have to deal with that. So, that is a long winded way of saying we finally saw shipment size -- pardon me -- shipment count stabilize and actually improve. That's a really good sign for us. What we need to see now is shipment size start to increase. We have yet to see that, but we aren't seeing decreases either.

Okay. On the purchase transportation, Bruce walk me through with where we are in the economy, what would you expect to see. Why would we not see capacity getting cheaper, so PT maybe as a percent of expenses actually declining more than what I guess we saw increase year-on-year.

What you see is the capacity is in fact cheaper. The problem is, so is the revenue. So we are maintaining a roughly, on the pure outside to Forward Air network, pure brokerage revenue, we are seeing roughly the same type of relationship that we saw a year ago perhaps a little bit of deterioration. But the other thing we are seeing as Rodney said in his statement, that as we position more and more owner operators for us onto -- into the West Coast, pardon me, and into other areas where we needed balance, that will drive the percentage of PT to a higher rate. We are okay with that. I mean obviously we'd like to see the revenue per load start to increase again. But for right now that's probably the best we are going to be able to do.

Last question I have is on the Solutions side. Just want to understand what led kind of Solutions to turn positive. Was it more on your cost cutting side that you were talking about? Was it the addition with these revenues? And I guess with that, are there any start-up costs with the $13 million of new contracts?

Yes. Good questions. The start-up costs I'll start there. During April and part of May really whacked us, but that is the price of bringing on new business. We are okay with that. There were three key items that drove Solutions. One was what we just discussed, additional revenue. Two, was their improvements and productivity, again on the dock side and on the driver delivery side. And the third part was the resizing of our overhead. And we went through some painful cuts in May, cuts you don't have to take but you have to, and so we think we've now have been positioned to achieve profitability. They did it in April -- pardon me -- in June, even getting whacked on the head with the work comp actuarial adjustment. So we feel good about where they are. We realize they have work left to do. And I keep preaching to them, and preaching to anybody who will listen, we have got to instill the Forward Air discipline across the board there, and we are working hard to do that.

Great. So all those revenues are now on board?

Yes. And we have a couple new awards coming on board that begin in August, and kind of run through September. So from the revenue standpoint, they are doing a really, really good job.

Great. Thanks for the time, Bruce.

Thank you.

Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Please proceed.

Thank you. Good morning Bruce. Good Rodney.

Good morning, Todd.

Bruce or Rodney, can you talk about Airport-to-Airport trends sequentially during the quarter, what you saw, either on the volume side from a shipment count or tonnage comparisons?

Well, on the volume side, the quarter basically went as you might anticipate. April was not good. Nice improvement in May. June stabilized at that level. We did not have a big end of the quarter push. Although the business levels were decent, but not what we were used to say two years ago or three years ago. Is that a fair?

It's fair.

And then what about heading into July at this point?

July, as you well know from the seasonality standpoint is not a good month. So we weren't expecting, or aren't expecting July to be anything great, so --and it's lived up to that. It's okay. It's coming in right where we planned on it to come in, but still less than last year.

Okay. And I guess thinking about then, what you saw during June from a volume perspective, and then your comments on the full distribution side, putting that in context with the fact that the OR on the Airport-to-Airport business was in the 80s, and then thinking about your third quarter guidance. What kind of is the thought process with the range for the third quarter? I mean obviously you saw the improvement in distribution. You got a profitable run rate during the month of June. Sounds like a good OR in the Airport to Airport business, even though there wasn't a big quarter end rush. What's the thought as you think about the third quarter, and the earnings range that you laid out?

Well, the thought process is, we've been through almost a year of this type of economy. And none of us have enough -- I mean you just simply don't know what's going to happen tomorrow. So we take a very conservative approach, as we tend to do all the time. But we are just not going to jump up and down yet, regardless of what Kudlow says about green sprouts, and tell you things are wonderful, and here we go. That could all change tomorrow, but as we sit here today, we're -- we think the responsible thing to do would be to be conservative in our outlook, to plan on being in this environment, not plan on any immediate improvement,and to operate accordingly. And hopefully that would pay dividends to us down the road.

Okay. Fair enough. Two last ones. With the Dallas facility opening up in June, what's kind of the net impact of what is going to happen with depreciation expense? And it sounds like you are consolidating some facilities, so I would assume the lease expense would come down, net net until we get to the same place in the third and fourth quarter. Or is there a little bit of a pick up on the expense line because of the lease expense reduction?

There's a little bit of a net pickup on that, as we come out of those other facilities thats going to be rolling out over the last half of the year if you will Todd. But net net, it's a pickup but nothing crazy . The big -- the big expense savings that we can't quantify as we sit here today, is the efficiencies on the docks. As we go into these larger facilities, that are better set up to handle both Airport-to-Airport, as well as Solutions. So that is the one we are anxious to get our hands around, and we'll be able to report that back probably in the

When does the facility -- the Dallas facility go live?

At the end of June.

And so any transition? So you've seen that and basically a smooth transition is my question?

We have probably 90% of the transition. We have one customer specific operation left on the Solutions side to move.

Okay. And then just one last one. Rodney, you had a comment in the prepared remarks, and I think I missed but you talked about an accrual adjustment for $0.5 million. Was that favorable during the quarter, or was that a headwind during the quarter?

It was a negative adjustment during the quarter.

Okay, very good.Thanks a lot, guys.

Your next question comes from the line of Alex Brand with Stephens, Inc. Please proceed.

Good morning, gentlemen.

Good morning.

I guess I want to take a little bit of a different approach. Apparently things are bad out there. And what are you thinking about longer term? I mean, you are the strongest player in what you do certainly in Airport-to-Airport. What opportunities are created in this environment? Are there more opportunities to pitch, pick up and delivery, parts of your network that your competitors can't provide, maybe opportunities to pitch for more Solutions business because people want to outsource that, that last mile or something? How are you guys thinking about the market opportunity?

The quick answer to all of that would be yes. On the Airport-to-Airport side, it's a continuous process of not only selling our services from Philadelphia to Atlanta, but selling Forward Air Complete, selling Forward Air TLX, our Truck Load Brokerage operations. So the big opportunity on their side has been the other business if you will. The other business being that outside of the actual Airport-to-Airport business, not that we aren't interested in it also. On the Solutions side, probably a little bit more dramatic, the difference. Many of the competitors on that side of the -- or in that market are struggling. I'm not going to name names. We've been able to gain business because of their struggles. We've been able to gain business because we now have a reputation of providing high levels of service in this business. And we have people calling us, as opposed to us trying to beg our way in. So out of every situation, even if it's a bad situation, you can drive good, and I think we are doing our best to do that during this period.

I mean I think competitively YRC has a pretty good, pretty big pull product, right? And Conway is now set to attack that market. Are you seeing new players in there, or is it more about managing the inbound phone calls?

I wrote down before I came in here Alex, not to bring up YRC, and you broke that. YRC is a decent competitor on the pull side. That's the remnants of business they acquired from USS Logistics, and to be candid, we've been successful in going after that. The Conway entry, we've heard for a number of months, and we don't see them anywhere. That is not to say they aren't in the business. We just haven't run into them. Perhaps they are after a different market segment, who knows. but that's how we see it today.

Fair enough. On the cost side I mean, I know there's not a lot you guys can do there, but I have heard some talk about maybe some guys unwinding some of the driver rate per mile increases that were given two, three years ago. Have you guys given any thought about doing something like that?

No. We think we have the best owner operator contingent in the business. They perform safely. They perform on time. Could we lower their rate, yes, we probably could. We could probably get away with that. We'd make some people unhappy, but the fact remains times are tough, and we can jam them. And then six months from now or a year they would turn around and jam us probably. I would if I were them. We just don't conduct our business model that way. We value them. We want them to stay with us forever, and continue to perform well. So we are going to keep them right where they are. Okay. And Rodney did you say how much the revenue per pound was the fuel?

I did. It was 7% or $6.2 million, Alex.

Okay. Thanks a lot guys.

Your next question comes from the line of David Campbell with Thompson Davis & Company. Please proceed.

Hi Bruce. Hi Rodney. I wanted to ask you about the change in 2010 in August to TSA requiring a 100% screening of cargo and passenger planes, including inbound from overseas. Do you see any impact on your business as a result of that, those new TSA requirements? Today we do not David. And anything I say on this, I want to make sure we all understand that it's conditional, because these rules tend to change at a moment's notice. I think the industry in general has done a good job to adapt to the standards, to both TSA and the other security regulators. Obviously if you look at a British Airways, somebody who is a major player in the industry, they are not going to back away, just because of security requirements. They are going to continue to push forward and adjust to the new security requirements, and we are going to do the same thing. Just thinking in terms of time it takes to screen this cargo, whether it might just reduce the cargo that's out there. Well there is one other way to look at it. If you look at El Al, they've been screening cargo for years, and their cargo business is very good. Okay. And is the Solutions revenue still a seasonal as ever, that is you'll have this big fourth quarter increase relative to the third quarter? Let me respond to that by saying we hope so. Right. Well, the normal increases, is still normally seasonal, can I put it that way? Yes. Normally seasonal. The last question is if revenues overall are down 15% in the third quarter, would you expect a less of a decrease in the fourth quarter? Yes. Thank you. Thank you.

Your next question comes from the line of John Barnes with RBC Capital. Please proceed.

Hey. Good morning guys. Bruce, going back to the pricing question, could you just talk a little bit about pricing in the Airport-to-Airport business, renewals versus new business wins?

I have to say all these things nice, so my mother won't be upset with me. The big thing we are seeing today, there are two areas we are going into that, relatively new to us, although been here for a two months. One is, if you ship within the Airport-to-Airport business of Forward Air and our competitors, we don't use the national motor freight classification guide. We simply have a single rate tariff, and if you ship with us, that's what -- that is what you will pay. Thats then goes through -- or that then goes through a filter called dimming. And we dim the business, or dimensionalize it based on the characteristics of that shipment. If you are using national motor freight classification guide like El or Conway, all of that is taken into account. In our business, we only take it into account, if it's at an extraordinary light shipment. That having been said, we have competitors out there, who run out and give away dims. Well, what you are doing is, you are giving away your trailer space. And when you give your trailer space, it's hard to make money. So dimming has become a real big issue. We refuse to give on that.

We make some adjustments where the shipment characteristics will support it. But we are not running around yelling no dim, no dim, no dim so we can haul a truckload of pillows from New York to LA for $500. And that's what we are seeing out in the business. We also see, and we touched on it earlier, John, where the shippers are pushing the forwarders, who are pushing us to provide rates. A year ago 85% of the rates that moved in a forwarder business, and this came directly from a major forwarder, 85% of their business was on standard rates, 15% of it was on an ad hoc base or a spot base or a quoted base. Today for that particular forwarder, that ratio has been exactly flopped, so that they have 15% of their business moving on normal standard rates, and 85% quoted. That in turn puts pressure on them to put pressure on us. And that part is understandable. And we want to work with the forwarders where it makes sense, but again there are some times that does not make sense.

Okay. Very good. From the competitor situation, are you surprised that it's taking as long to strip capacity out of the market as it is? Just seems that the longer they go -- some of these competitors go with kind of this irrational pricing, at some point they are going to run out of, they are going to run out of profitability, or whatever. I mean are you surprised that they are holding on as long as they are?

But I always go back to what Bill Legg used to say in his days at Alex Brown. And that is, it's always awfully hard to kill a trucking. company And I think that is more true today than it's ever been. What are banks going to do with a bunch of trucks or terminals? I mean -- the list is endless as to why they are staying in business, or are able to stay in business. But sooner or later economics work and we'll have a change.

Let's say that volumes begin to get a little bit better. Let's say we are in for a kind of long slow recovery, and that some of these guys are able to survive. Do you envision any type of recovery where this pricing would be impossible to get back? Or there's no chance of getting back to it, to kind of where you were at the peak?

I think it will be a gradual process. I also think that the day will come because of all the -- what we have seen failures ,and let me back up a second, John, is we've seen a lot of small fleet trucks go out of business. Win business or demand is a better word. When demand increases slightly, we will see capacity strained, and at that point pricing power comes back. The question is, in my mind, is when will that occur. And does any more capacity come out of the market before that does, because every time capacity comes out, we are going to see a better upside in time if that makes sense. So I guess my answer is yes. We'll get pricing, reasonable pricing power back in the future.

Okay. And then Rodney, you talked about your DSO kind of crept up on you a day better than a year ago, but could you just talk about any bad debt experience during the quarter, or percentage of customers that are on some kind of watch list now?

As far as bad debt over the course of the quarter, very minimal John. In terms of the customers that are on the watch list, a one hundred percent. All joking aside, we always keep a close eye on our airline customers. We love the airlines. We love doing business with them, but it doesn't take a genius to know that you need to keep a close eye on those guys. We have been very fortunate, we've --both the age and the quality of our receivables are perhaps better than they've ever been. Our team, Bruce is knocking on wood, and I will too, our team and collections and receivables are doing a fantastic job.

Alright. Very good. Thanks for your time, guys.

Your next question comes from the line of Nathan Brochmann with William Blair & Co. Please proceed.

Hey Bruce and Rodney. How are you doing?

Good morning.

Hey, I just want to talk a little bit about, last quarter we were talking about how customer demand kind of shifts away from the premium time-definite product that Forward Air offers. Just wanted to see what you are seeing kind of now, throughout the second quarter. And kind of what your outlook for that is in terms of also that a leader or a laggard, compared to like regular products.

The shift to less time sensitive movement would be what I would call a lagging. And the leader -- the leading indicator would be when it shifts back. And then take that a step further to perhaps better answer your question, are we seeing that? We have people out there that are selling four and five days when the norm was two days as an example. So that's pretty much of the normal process in this type of an economy.

Okay. And kind of going into the cost side, obviously you guys did a great job on the cost side this quarter. I mean how much more is there to continue to wring out of the system and keep leveraging down, if demand stays where it's at? Or do you feel comfortable where you are at today without sacrificing service levels, and there's not much to do?

I don't think we are ever comfortable, and that is a value of Forward Air and our people with the cost side of the equation. On the other hand, we don't want to, as we call it, get into the muscle of the company. We have a great group of people. We have a number of great leaders who are seeing us through this difficult time. And we are just not willing to go after, that for a quarter or maybe two quarters worth of slight cost side improvement. On the other hand, we are extremely vigilant on the discretionary side, where we can take out unnecessary costs. We are certainly going to go after that. We have gone after that, and they have done a good job there. And I call it the hidden cost and that is productivity. It's critical that we have high levels of productivity today more than ever. It's critical that we eliminate any waste in productivity. And again I think our people have done a nice job, and we look forward to continued improvements in those areas.

One last question. What's kind of the process for identifying the opportunities for that productivity? Is it more technology? Is it different processes?

Yes, yes, and yes. We literally review every process we have on an ongoing basis. And technology has indeed been a big part of helping us improve certain areas, depending on what area they are working on. Today as we discuss, or in these discussions on this call we are rolling out our fast comp software in Denver for our Solutions team, which is really nice piece of software that we are hoping will improve our processes,s not so much on the dock but really the back office side of it. So if that's -- and will be successful. I shouldn't say if, right Glen? When that is successful, we think we'll see some more productivity improvements in the back office side. So it's across the board. During times like this you have to look everywhere.

Great. Thank you very much. That's a great example.

Thank you.

Your next question comes from the line Satish Jindel with SJ Consultant. Please proceed.

Hello Bruce. You are not allowed on this call.

Okay. I'll hang up. Can you comment on DHL and BAX which is now DB Schenker They are showing airlift between sort of secondary markets -- both of those companies are either customers, or potential customers. Is that having any impact on creating any opportunity for you or affecting the business you may handle for them?

It always creates opportunity as you describe. We have experienced some increases. We've also experienced a few decreases where one of them that you mentioned took down some dedicated lanes because they couldn't support it. Their business levels wouldn't support it. So it's both the plus and the minus. Okay, The other second one and I know you said you didn't want to talk about YRC, but now that you already broken the rule. Besides their full distribution business, because YRC has a lot of long haul business, without YRC do you have a sense what percentage of that long haul business could be a target for your Solutions group, to see what kind of volume and revenue? Well, from a Solutions standpoint on YRC, and you are making me violate a number of certain -- on the Solutions side we are going after that business and other business, so its not just the YRC thing. So we are happy with where we've been able to bring them, and what they've been able to accomplish. On the Airport-to-Airport side, I would take you back to the demise of the Consolidated Freightways, way back at the beginning of the decade. And literally, on the Tuesday after Labor Day, we saw 20% increase in our business volumes. From a planning standpoint if we look at, if YRC was to go down, I don't know how much of that business we would get, or better said how much our forwarders would get, but we think it would be significant and a big help to us. But just to wrap that up, that's certainly nothing we can plan on. We don't wish them any ill will, but we do in fact have to be aware of it.

You mentioned about the shipment size having gone down, and that if it goes up what that means to you. Do you have a feel for what amount of that reduction has come as a result of the decline in economy versus changes in the product profile of the shipments, and the customer base that you are handling?

You know, that is a great question. I would have said maybe a few years back, that the type of business that we are handling now compared to then would have been more significant, but I really don't think has had that much of a change over the past year. We are handling the same thing today, that we did a year ago. It's just instead of 35 boxes, we are handling 28 boxes and so we have a proportional reduction in our weight. It's just as easy to handle 750 pounds across the dock, as it is to handle 630, whatever the number may be. So it's a significant driver of cost in our network. Now the opposite of that is obviously true too, and that is when that average shipment weight per shipment starts to increase, we get the benefit of it. So it's part of our business, and we can live with it.

And the last question is more of a follow-up as what David Campbell asked. And I would like your clarification on it is, he raised a question about TSA's requirement for 100% security screening. To me, that actually means that there should be more growth opportunity for you because some of the shipments in a maybe getting put on our aircraft, which will require the security screening may get diverted to the preferred air freight, and you may actually see increase in the volume rather than decrease, as he may have been alluded to.

You can make that argument. I'm not convinced it's a great argument, but I -- certainly we are aware of it. The reason I am not convinced it's a great argument is, it wouldn't be going in an airplane in this age in the first place, if land transportation would have sufficed for their service needs, but there may be a portion of today's air cargo, true air cargo, freight that goes into an airplane, that could be diverted to the ground because of this.

Wonderful. Thanks very much Bruce.

Your next question comes from the line of Jon Langenfeld with Robert W. Baird. Please proceed.

Good morning guys. Have you done much in the way of kind of looking at that shipment data, and seeing if it's the same type of customers? I'm just reacting to the shipments only being down 4% or 5% in June, weight per shipment, is it the same characteristics, the same type of freight moving? I know you have difficulty in seeing that. But what is your thought there?

I think it's a really good year-over-year comparison. What we look for John, and what can throw that number, is if we had -- typically airline business provides larger shipments, weight per shipment. Had we had a dramatic change in our airline business year-over-year I think, the point you were kind of driving at would have been true, but we really haven't. I think it's a really good year-over-year sample.

Great. When was the last time shipment count was positive? Do you have to go back to June of last year?

I would assume that is probably right.

Alright. Good enough there. And then what about on the percentage base, what percent of your miles are outside carriers at this point, and where was that a year ago?

We have that all the way down, we have some fluctuation there. A good week would be 3%, and a less good week would be around 5, 6. A year ago, it would run in the range of 10% to 12%.

And then if I think back two, three years ago, kind of well probably three years ago when the environment was still strong, that was kind of in the 15% to 20% range? Am I remembering that correctly?

That's exactly right.

Okay. So sounds like you are doing a good job of trying to maximize miles of your existing fleet? There is probably not a lot more you can do there.

Yes. I think they've done an excellent job.

Okay. Good. And then. let's see what was the day count for the first and second quarter?

It was 63 in the first and 64 in the second, John.

Okay. And then. what is the status in the virtual hubs Bruce? I know you talked a little bit about that earlier this year.

They are doing excellent. I mean, that's been kind of a surprise positive in a tough year, and you can imagine what they would be able to do if we had a normal year. We continue to add facilities, although we are rapidly getting at saturation, but it's been surprisingly good.

If you have to guess kind of on a revenue contribution from those virtual hubs, what would you be thinking about?

If you call me, I'd tell you that number. I don't want to tell you that where --

Okay. That's fine. That's fine. And then lastly, if you think about kind of 2010, and no real recovery in the economic environment, maybe slow 1% GDP growth, what are the factors that you think can actually drive better earnings for you in that type of an environment? Again, assuming don't get worse, but they don't get better either.

I think on the Airport-to-Airport side, we have to continue doing exactly what we are doing, and really driving the cost side down. Knowing full well we are not going to have the 78, 79 ratio like we did during good times. But that we should really drive an OR in the upper 80s and do that consistently. That's a big, big task. On the Solutions side, I'm assuming that they still continue to have some business success because of their newness to the business, if you will. With that having been said, we expect them to get down into the lower 90s. And during a good quarter whatever defines a good quarter, we expect them to be in the upper 80s. We are not there today, but we are going to really push them to get there so that as we go into 2010, they have the ability to consistently hit the numbers we want them to hit. And I really think they are getting the infrastructure in place to do that.

So it sounds like you feel there's enough leverage out there that the base of earnings in 2009, even if it doesn't get better, you can at least show some progress in 2010?

I certainly hope so.

Thanks for your time.

Your next question comes from the line of Edward Wolfe with Wolfe Research. Please proceed.

Hey, Bruce. Hey, Rodney.

Good morning.

Talk about if you would, about the trends specifically and your average pounds per week. If they are down 22 for the quarter, how did that play out from April through June, and into July?

Actually probably been, somewhat consistent through at least the first part of the year, on being down, on being -- on the average weight per shipment being down. It's actually -- we've seen some decrease there, but hopefully it's stabilizing. I am getting an actual sheet now which we can send to you. January, our shipment count was down almost 14%. That improved all the way to down to 7% in June.

That shipment count, but what's the pounds per week?

The pounds then, the change in pound was at 23%.

In June?

And that's been pretty consistent throughout the year.

I'm sorry Bruce. You faded out. You said 23%, but I don't know in what period.

It was actually 23% in the month of June, and it's been roughly in the 23% range all year.

I'm just looking at your reported average pounds per week, down 222 for this quarter, and down 21 for the first quarter.

We are getting into some day discrepancy and this is the report that we look at on a weekly basis. So give or take, that is the range we are in.

Okay. But will you provide shipments going back? It sounds like shipments is something you would focus on more than pounds.

I am looking at a sheet that we produced and I think we'd be happy to send that out. Maybe that would be good data to get out there.

Okay. And if I look at the revenue per pounds per week at 233, that is down 6.1. How did that look net of fuel, that negative 6.1? If I just add the 6.2 million back, I am getting a positive yield which has got to be something wrong with that.

If you strip out the benefit of Forward Air Complete, with the growth of the that, we strip that out to get to a good number, and if you strip out the fuel, the true yield was down 5.9%.

Is that net or gross? The fuel at 5.9 Rodney?

Without fuel.

I'm sorry I lost you again.

That is without fuel.

Without fuel. Okay. The $4 million that is left to be spent in Dallas, is that all going to happen in the third quarter or is that spread out?

Actually, its basically done, it's just a matter of finalizing all the last issues of completion.

So from a cash flow perspective, I'm guessing cash flow being modest, flattish, modest in the third quarter, and then we will start to generate some free cash again in the fourth quarter kind of scenario?

Right.

Okay. Last one. Where is Forward Air Complete broken out, and what was the revenue in the second quarter?

Broken out -- it's actually not broken out. It's included in long haul revenue in the Airport-to-Airport, Complete for the second quarter it was 4.8% compared to 4.5 in Q2 of '08.

Perfect. Thanks guys. I appreciate it.

Thank you for joining us today for Forward Air's second quarter 2009 earnings conference call. And please remember the webcast will be available on the IR section of Forward Air's website at www.forwardair.com shortly after this call. Thank you for your presentation. You may now disconnect. Have a good day.