Forward Air Corp (Delaware) (FWRD) 2009 Q3 法說會逐字稿

Thank you for joining Forward Air Corporation's third-quarter 2009 earnings release conference call. Before we begin, I would like to point out that both the press release and this call are accessible on the investor relations section of Forward Air's website at www.forwardair.com.

With us this morning are Chairman, President, and Chief Executive Officer, Bruce Campbell, and Senior Vice President and Chief Financial Officer, Rodney Bell. By now you should have received the press release announcing third-quarter 2009 results which were furnished to the SEC on Form 8-K and on the wire yesterday after 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 the 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, claims, expects, and similar expressions are intended to identify forward-looking statements.

You are hereby cautioned that these statements may be affected by 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 may 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 will turn the call over to Bruce Campbell, Chairman, President, and Chief Executive Officer. Please proceed.

Thank you, operator, and good morning to each of you joining our third-quarter earnings conference call. I would like to begin by sharing with you news similar to what you've heard from others. The economy continued to hamper our results throughout the quarter. We entered the quarter without high expectations. Rather, we continued to focus our efforts on the fundamentals of the Company, fundamentals which will allow us to wreak even better results once we are through this economic morass.

Accordingly, we have a number of highlights from the quarter which we would like to share with you. First and foremost, allow me to comment on volumes and how we see the current economic environment. I will begin by saying we definitely saw a pickup in the airport-to-airport volumes during the month of September. While this increase has not put us back to 2008 levels, it was definitely an improvement on a sequential basis. More importantly, this trend has carried into the fourth quarter.

Does this trend indicate we are entering better times? The answer is we don't know and only time will tell. In the meantime, we are grateful for the improved volumes.

Secondly, our Forward Air Complete Group, which is the pickup and delivery service for our airport-to-airport segment continues to show great growth in spite of the current environment with revenue growth of over 27% on a year-over-year basis. We feel strongly product line will continue to grow and provide us with excellent margin opportunities into the future. Accordingly, you will see us devote more and more resources to this ever-important service.

The next highlight I would like to bring to your attention is our Forward Air TLX Group, which is our Xpedited Truckload brokerage product line which while not growing as in the past, more importantly, did finally see a stabilization of their revenues, driven in part by the return of old customers, customers who found they could not obtain the same service levels from other carriers. While price remains important, some business simply requires good service, which we provide on a consistent basis.

The main issue facing our airport-to-airport group continues to be yield erosion. We have seen a firming of yield in the recent weeks and our team continues to work diligently to improve this critically important area. It is important to realize that while yield won't immediately return to the higher levels of the past, it is essentially that we start reversing the erosion and begin on a very targeted basis improving our yield. We believe we are positioned to do just that.

Finally for the airport-to-airport team, we announced this past week our new service into Mexico in a strategic partnership with [Mexpress]. We look forward to providing this service for all our customers as we move into the future.

Now onto our Forward Air Solutions segment, which continued to struggle with the poor economy, especially as it affects the specialty retailers. Interestingly, we did not see an uptick in this business during the third quarter as we did in the airport-to-airport segment, but thankfully we did see an increase in business at the beginning of October. Additionally and most unusual for this business segment, we continued to add new customers and/or new pool locations for existing customers during the quarter. This is unusual because shippers normally don't make these changes during this time of year, which we feel is a continued endorsement of our Solutions team and product service.

Additionally, we made great strides in improving many cost areas and in creating additional efficiencies within the network. As normal economic times return for the consumer -- and they will -- we feel we have positioned this segment to be very successful both in terms of revenue growth and profit contributions to the corporation.

Finally, I would be remiss if I didn't recognize the entire Forward Air team for once again helping us achieve recognition as one of America's top 200 small companies, the tenth time in the past 11 years. Our sincere thanks to each of our team members for their outstanding efforts.

Thank you for your interest in Forward Air and I will now turn over the presentation to Rodney Bell, our Chief Financial Officer.

Thank you, Bruce, and good morning. Following our prepared comments, we will open the lines for your questions. Before we get into the financial details of the quarter, let me address a change in our earnings release format. Hopefully you noticed the addition of the Forward Air, Inc. operating statistics on page nine of the release. With input from many of you on the call, we have incorporated the key statistics behind our airport-to-airport business, including Complete, along with our Logistics business. The purpose of this is to provide this data correctly and consistently each quarter, and hopefully you will find it useful.

Operating revenue for the third quarter was $103.1 million, a decrease of 15.1% from the third quarter of 2008. In our Forward Air, Inc. business segment, airport-to-airport revenues were $66.7 million, a decrease of $22.4 million compared to last year, resulting from an 18.9 decline in average weekly tonnage and a 5.3% decline in yields. The yield decline consists of minus 2.4% from line haul pricing and minus 6.2% from reduced fuel surcharge, offset by plus 3.3% with a positive impact of Forward Air Complete, which has continued to gain traction.

Logistics revenues were $13.2 million, a decline of 15.5% compared to Q3 2008 as a result of continued lack of demand and overcapacity in the market. Other, which is primarily terminal fee-based revenues were down 13.7% compared to last year. Sequentially from Q2 2009, airport-to-airport revenues were up slightly at 2.3% as average weekly tonnage in yield saw slight improvements as well as good sequential growth from Forward Air Complete.

Logistics grew sequentially 7.3% from Q2 as the rate of decline slowed over the course of the quarter. September was actually flat in Logistics for the prior year month.

In our Forward Air Solutions segment, revenues were $17.6 million or an increase of 30.9% compared to Q3 2008. This increase resulted from new business wins primarily in Q2 as well as two months impact of our acquisition service [Express] in September of last year. Unfortunately based on shipping projections from our customers, we modeled heavier revenues beginning in September, which did not materialize until the last week of the quarter. This resulted in lower than expected topline and a slight loss for the quarter.

Our overall operating ratio for the quarter was 93.5, compared to 84.1 last year or 940 basis point deterioration. Compared to the second quarter of 2009, our OR improved 160 basis points sequentially.

Our people had another good quarter managing [partnership] transportations through maintaining high load factors and excellent management of network miles. We continued to keep variable costs in check with volumes while hammering away at discretionary spending. All in all, the Forward Air, Inc. segment performed as expected while Solutions, due simply to a lack of projected revenues, came in a couple cents short of original expectations.

CapEx for the quarter, which consisted almost entirely of the completion of our Dallas facility, was $18.8 million. CapEx for the fourth quarter which primarily consists of IT spending, will be less than $2 million. We project CapEx for 2010 to be approximately $10 million returning us to a substantial generator of free cash flow.

We ended the quarter with $27.2 million of cash, $53.5 million of debt, and $39.5 million available on our line of credit. We finished the quarter with a 47-day DSO, compared to 46 days at the end of Q2. The quality of our AR remains good.

At the end of the period, Forward Air, Inc. had terminals in 47 cities while Solutions segment had terminals in 19. Assuming current trends remain stable for the fourth quarter of 2009, we anticipate a year-over-year decline in revenue in the range of minus 10% to minus 15% and expect income per diluted share to be between $0.15 and $0.21 per share.

That concludes our prepared comments. Now back to the operator for your questions.

(Operator Instructions) Kevin Sterling, RBC Capital Markets.

Good morning, Bruce and Rodney. This is Kevin Sterling from BB&T Capital Markets. Bruce, it looks like you guys are holding your own on pricing. Would you describe the overall pricing environment, though, as still erratic?

Well, the overall market is not good. There's still a lot of green light specials, as we like to say out there. We have taken the approach that, number one, we had to stem the downward tide of the yield erosion. Secondly, get it stabilized, and then thirdly, develop a pretty comprehensive plan where we start working on improving the yield. There are a number of ways we do that. We are certainly not going to come out in next few months with a general rate increase, so that's one end of the spectrum.

The other end of the spectrum is we just become more selective in what we will in fact spot rate or give a temporary rate to. And then just take other prudent steps to get this yield back. As we see our volumes increase, regardless of what the industry is doing, we are going to take a pretty hard approach to yield.

Okay, great. Thank you. Along those lines, have you seen any new competition come into your core line haul business?

No, we haven't. It's relatively the same.

Okay, thank you. And the sequential firming that you talked about that you are seeing in October in your core airport-to-airport business, any specific type of freight pickup that you are seeing or is it just across the board?

It appears to be across the board. It appears to be across geography.

Okay, thank you. And when you talked about the pickup in pool distribution and you are adding new pool locations, what part of the country are you looking to add new locations?

Well, if you look at our existing map on the Solutions current geography, what you see is a hole in Memphis and New Orleans. And since we have Forward Air, the airport segment facilities already in those locations, we think we can expand into each of the two cities without adding hardly any costs and can bring additional opportunities to the table from our existing customer base. So it will be minimal outlay of money to do this, but we think it fills in an important part of the geography and helps us give an even better product to the customer.

Great, Bruce, thanks. One last question, how does the acquisition pipeline look and where would you like to make some acquisitions if that's on your radar screen?

In today's market, there are a number of acquisitions out there and typically what you see is if there is an acquisition -- let me turn this around. If you owned the company today, would you sell it? And I think the answer to that is no because for the most part, you are not going to get a good price. So we're very skeptical of any company that comes on the market today because why would you be selling it in this down market? That doesn't mean that we automatically preclude viewing of any acquisition opportunity. We are just very tentative when we do look.

Okay, great. Thanks so much for your time today.

John Barnes, RBC Capital Markets.

Good morning, guys. Bruce, in terms of the pricing and competition, can you just talk from a geography standpoint? Is it -- I think in the last couple quarters, it's been very aggressive off of places like the West Coast. Is it still like that or have you seen any regions that are beginning to firm or maybe capacity has gotten tighter or something like that.

Basically I think you can say across the board it's a little bit tighter, capacity is. So that's a positive for us. Probably the toughest area right now in terms of aggressive pricing is the Northeast. There are a lot of stupid people up there that won't be around probably a lot longer, so that one is tough. The West is still difficult. But not as bad as it has been. So we will -- overall just in general, a tightening of capacity that we have noticed and so as a result, we will tighten our pricing.

Okay, have you seen -- I guess back to Kevin's question on new entrants into your core market, have you seen any -- let's take it from the opposite standpoint. Have you seen any shippers that have begun to -- that have tried to make the move and take some of their product out of maybe an airport-to-airport type of model and try to put it into either LTL or truckload as a means of maybe garnering a little bit cheaper rate? Has that impacted you at all?

Well, I think six months ago or nine months ago, John, that's a very good observation. We are actually seeing a little bit of the opposite now because of the demand. As we all know, inventory levels especially at the user point of the chain, there simply are none. So we have actually seen an increase in the need for expedited services.

Okay, very good. From a cost standpoint, do you feel like maybe you've kind of -- you have done all you want to do from a cost perspective? There's always things you could do, you would be a little bit tighter here or there, and I know you are always going to focus on that. But for the big bucket items and the big cost reductions at this point, are you kind of where you need to be? This is the footprint, this is the infrastructure, and we don't want to do anything more that might impact us when volumes begin to recover? Or do you think that as you get into 2010 that there's maybe another modest round of cost reduction that you can achieve?

No. Your initial statement there is exactly where we are. We like where we have the Company from a cost structure standpoint. We believe strongly that as the economy recovers that we have to have a good team in place. We have to have good processes in place. We have to have good IT. We have to have all those things in order to really get the returns that we want. Today to simply lack for the benefit of $0.01 in a one-quarter environment just doesn't make sense to us. We like to think a little bit longer term. We really like how we have the Company structured.

Okay, two quick things. One, Rodney, you talked -- or either one -- you talked about the volume getting a little bit better at the end of the quarter, firming up a little bit. Could you just give us some idea of how that progressed during the quarter, tonnage July to August to September and now into October?

It was really a very linear ramping up, John, over the course of the quarter, and actually a bid of the same but perhaps a bit exaggerated on that line into October. It has continued -- it has been steady improvement.

Okay, then last question, on the free cash flow generation, kind of uses of cash now, do you -- as a primary focus with the free cash flow, is it debt reduction from here or how would you divide the buckets up?

As we're looking at it, we would probably tackle debt reduction first, barring an acquisition opportunity that did in fact look good and was appealing to us. And at some point in time, share repurchase comes back on the table as well.

All right, very good. Nice quarter, guys. Thanks for your time.

Ken Hoexter, Bank of America-Merrill Lynch.

Good morning, Bruce and Rodney. On the Solutions side, I just want to see what are we seeing in terms of he -- on the retail side? Have you seen a pickup as you have entered the fourth quarter? Seasonally obviously we normally get the rebound. I just want to see how the business is seeing the volumes right now.

Yes, we are as you might imagine, that's one of our daily tasks. We want to see where they are. Throughout the third quarter, Ken, it was not a pretty picture. But surprisingly -- and let me back up even again. They -- most of our customers had told us that peak would be pushed back to the end of October, that there would -- and even then it would be minimal. Well, in fact what has happened is it hit us really the first week of October almost to the point of catching us off guard it was so strong. It has kind of maintained that level. What we would describe as almost a normal peak. So in fact what has happened is it has hit us sooner. It has continued, and we are hoping it continues all the way up to Christmas.

Okay, great. And then we hear a lot about volumes picking up out of China. I just want to see as you look at the Forward Air side on the airport-to-airport business, are you seeing a recent pickup on the heavy freight coming in from Asia?

I'm not sure we can tell you exactly how much of the increase of business that we've experienced is from Asia. We can tell you that there is obviously more activity especially in the port cities. So is it better? Yes. How much better we can't give you an exact number.

Right, thanks for the time.

Todd Fowler, KeyBanc Capital Markets.

Good morning, Bruce. Good morning, Rodney. Bruce, what would be your expectation based on previous cycles with the pickup that you seen here at the end of the third quarter and into the fourth quarter, how much of a tail do you think you get on in the airport-to-airport business going into the first part of next year? I would agree with your comment that inventories are lean. Do you think that that's something that continues? Do you see some replenishment? Or kind of once we get past the peak issue, holiday selling season, that some of that freight works its way into other networks?

You know, really from our perspective and we try to view this as -- I am biased as possible, but we believe in inventories at the user level will always stay. We've entered a new era and as a result, the demand for expedited or our type of transit will if anything continue to increase into the future. That doesn't mean we can charge outrageous prices or our customers can charge outrageous prices. It just means that people value and will continue to value companies that fundamentally provide high levels of service and service that is reliable and consistent.

And service goes beyond just transit time or days in transit. It also means that when that product arrives at the store, it's not torn up. And our people have done a great job in this area. And we think that continues into the future.

And then a couple of questions on the cost side. Where would you guess that network capacity is at right now? I guess one thing with how quickly do you think that some costs that you guys have taken out would have to come back if you continue to see a ramp in tonnage in the airport-to-airport business?

Capacity and the issue in our system is totally dependent upon the geography, so we have the ability to add capacity. We have the ability to take down capacity. So that is never a big issue to us in terms of can we move additional traffic? Basically the only costs that we would add back if we saw a big influx of traffic, the number one cost we would add back would be dock labor or people who actually handle the freight. We would also see a slight increase in terms of dollars in our office side.

And really beyond that, we believe we don't have to add back anything. We believe our facilities are in good shape. We believe we have a strong management team. We have a great purchase transportation network, so we think the Company is positioned to handle quite a bit of additional business with limited incremental cost.

And then are there still costs? Looking at operating lease expense, I know this is something that we've talked on in the past, continues to trend down here sequentially into the third quarter. Is that something that -- is that the right run rate to use going into 2010 or are there still renegotiated leases that are going to work their way into the cost structure that are going to take even some more costs out sequentially?

Todd, by and large, that's probably a good run rate. We are continuing to negotiate leases on a one-off basis as they come due and as we are able to do that, but we have taken just about as much out of there as we're going to for the near term.

Okay. And then one last one. Bruce, what would be your expectation? You are looking at net revenue margins here. Even though pricing seems to have firmed a little bit, net revenue margins really held in nicely. Would there be an expectation that your capacity costs start to move up a little bit if you continue to see the firmness and volumes, or do you think that that's an area where you can also hold the line as far as what you're spending on PT?

You know, we're at a point we hope. The question is how long do volumes stay where they are and we're all a little bit tentative there. But we are at a point where the volumes are sufficient enough that there is no point in giving away dollars on the yield side. And as we tell our people all the time and they fully subscribe it, we are not interested in practicing moving freight. If you're going to do it for nothing, there's no point in doing it.

So all of these other idiots out there who want to give away price and who want to just simply practice moving freight, we hope they do well. We are not going to do that. There's just no point. Now again, I would also stress the other side of that equation. We are not going to get back to 2007 yield levels overnight. The important thing for Forward Air and our team is that we get stabilization of rates and we get modest improvement of rates in certain areas where it has been beaten down too far, to use a trucking term.

So that's where we are on the price side. We think we can hold our cost structure in check. We've shown we can do that and we are comfortable as we move forward with adequate volumes that we will hit margin levels that we are used to.

Okay, then just lastly I guess on the yield or the rate discussion, is the conversation any easier with your customers now that they actually -- inventories are lean and they need that expedited shipment? Or is it still an uphill battle in getting them to realize the service and what they are paying for?

I don't think there is ever been a lot of issue on what they are paying for. We have always provided value. The question is what can they get away with? So we have worked hard to understand what their needs are to make sure that we position the Company with our customers so that we are meeting all those needs.

Now bring that back to pricing. At some point though, if it's just a game that's being played where because they have a shipment today and it's going to move from A to B, that they can call up and try to get a spot price just because they can doesn't mean today that we have to give them that at spot price.

So our whole point is to continue to sell the value of the Forward Air product, as you pointed out, and we believe as the inventories continue to tighten and as there is more and more pressure to hit the user level in the chain, that we will end up getting this where we need it to be.

Okay, thanks a lot for the help this morning.

Alex Brand, Stephens Inc.

Good morning. I guess I will just go from that last question, ask another one on yields. Let me understand this, Bruce. So yield -- pricing environment is still not great. But it sounds like you are confident that it is the right time to pull back on selective spot rates. And -- your core yield is only down 2.4, so can we get back to flat yields and get yields maybe up even early in 2010? Is that realistic?

Our goal is to -- again as I said earlier -- is the stabilization and then get back to where its flats from our past. Now can we improve that? Only time will tell. Obviously if volumes were to continue to be strong and we were able to continue to grow the network, you would see us move on yield because yields needs go up, not only for us but for the industry. So that's where we are today.

So this is just really indicative of you are not as worried about now protecting share. Things feel a little bit better. Let's move back to focusing on profitability.

Correct.

Okay, now Solutions still lost a little money in Q3, but it sounds like it's maybe even got a tail wind in Q4 and I think I remember that the goal on that was a 10% EBIT margin. Is that something that is achievable now in the current quarter?

We would hope so.

Okay. And then seasonally you go back to losses in the first half of next year but your cost structure is better, so the losses you think will be less?

Actually their goal -- and we will finish their budget in the next few weeks for 2010, but their goal is never to lose money. You know, realistically what has happened there is if you took their existing base of business and pick a retailer that uses us, where we used to deliver 500 or 1000 pounds to a store on any given day, that business is off 20% to 30%. That drive, that is a tough thing to overcome because obviously you're getting 20% to 30% less revenue. And you basically still have to make the stop and you still incur the costs from doing so.

So if you -- if we get any kind of improvement there where we have a return in normal shipment size and the ability to generate what I call normal -- not better than it has been, but normal revenue into the store, then they stand to make -- be able to get -- our goal is to get them to 95 the first half of the year initially, and then in the second half to get them back down into double digits. A lot of that depends, though, on what I just touched. It's very difficult to overcome a 20% to 30% decline in same-store deliveries.

In the core business, I think it looks like either the wait for shipment started going back up in the third quarter and I am wondering if what you are seeing -- it sounds like most of what you are seeing improvement wise has been in the last few weeks. Are we seeing wait for shipments start to really move or is tonnage being driven more by shipment count at this point?

Well, we've actually seen an increase in the shipment size. Now, that is new enough and we don't have a good enough sample yet, Alex, meaning enough weeks to where we are comfortable saying that is an upward trend. Because that number can be very sporadic, as you might imagine. But hopefully, we are going to see that climb. As that climbs, as you well know, that is critically important to us in terms of our ability to produce a good margin.

Right, that's why I was wondering, because if -- it seems like you are on a trends now where you December comps get really easy, so you should start to show tonnage growth, we hope. And is there anything now that for I don't know how long, but a while that needs to move on the cost side other than PT? So about 40% of whatever that revenue dollar is has to come out and the rest of it is mostly profit?

Depending on [lane], yes.

Okay, one more question for me. It seems like you have been trying to get traction in the PU&D Wednesday business, the Complete business, for I don't know, has it been three years now? Two or three years?

Yes.

And suddenly seems like it is getting more traction. I mean really you had a nice growth quarter. Is there something that you think has changed there? Is it the big international forwarders that finally see the value proposition, they finally trust you not to compete with them? What is it that you think is moving this and how does this impact your margins overall if this growth continues?

I think it is a combination of all the factors that you just stated. I think we have demonstrated that we are not going to back sell anybody. We have demonstrated that this group is really good and day in and day out we will do what they say they're going to do. We have perhaps -- and I don't know this to be actual fact -- I do know it to be fact that a few companies where if you look at a forwarder, they spend money managing PU&D and during difficult times, if they are able to cut heads and let us manage their PU&D, it is a big savings for them. So I think that in some cases has been beneficial to us.

And I think lastly, if you look at how we have positioned this product, it's -- if every forwarder used us or 50% of the forwarders used us, it obviously gives us buying power with the cartage provider. It also gives the cartage provider economies that he or she did not have in the past, so it's really a fair exchange. But the bottom line is we've made the process more efficient. We no longer have arguments over claims. You know, did Forward Air damage it or did the cartage? Because the cartage, it is now our responsibility all the way through.

So it has just been a number of things, but I think the bottom line is it has been the performance. They've just done a really good job.

All right, sounds good. I appreciate the time, guys.

David Ross, Stifel Nicolaus.

Good morning, gentlemen. Sorry I hopped on a little late, so if I ask a question that has already been asked and answered, just say so and I will catch the transcript. But just to follow up on Alex's question about the P&D, how much of the P&D is handled by Forward Air? Is it 100% cartage operators or do you guys still do some?

In our Forward Air Complete, David, --

In the Complete product, yes.

Yes, it's -- that number changes weekly, but I would guess it to be an average would be about 90% would be cartage and 10% we would add that to our existing PU&D network.

Okay. And has that changed much through the year? Have you used more Forward Air or more cartage kind of-- ?

It's fairly consistent from that standpoint.

Okay, and then in the deferred airfreight side of things, you guys are the dominant player because of the massive capital it takes to run the network every day. Is there any more capacity that's left to exit from the industry or any that may be coming into the industry for some reason as they look to grow into an area where they are not?

We've not seen any change in our competitive environment. It's basically the same people there have been for the past year or so. We have not seen any exits nor have we seen any new entrants.

Okay, and then domestic airfreight has always been kind of a specialty which you have just been growing with the international clients some. Can you talk a little bit about I guess the growth in international versus domestic and how you see that over the next year?

Well, first of all, realizing that domestic is such a large part of the market, it will always be the dominant segment of the business that we have. We base it off of customer input, believe that the domestic side will have decent growth next year. Our real opportunity though continues to be to grow the international part. We have had a lot of success especially considering the environment that we have operated it in the last year. But we will push that very hard as we go into 2010 because we believe it's the biggest opportunity.

Okay. And am I correct in hearing that you guys expect to be fully profitable in the Solutions business in the fourth quarter?

We do.

And that's due to a function of increased volumes during the retail peak season?

And hopefully increased efficiencies and a better overall cost structure.

Okay, and then the technology platform that you rolled out for Solutions, is that fully implemented and where you want it or are you still making tweaks?

Certain -- it's actually a four-page rollout, David. Certain portions of it are up and running and doing very well. Other portions we are still relying upon the customer to make those connections, if you will, for simplicity terms. So we will probably spend the balance of the year getting that 100% rolled out, but we are close and it has been helpful.

Okay, excellent. Thank you very much.

At this time there are no other questions in the queue. Ladies and gentlemen, thank you for joining us today with Forward Air Corporation's third-quarter 2009 earnings conference call. Please remember the webcast will be available on the IR section of Forward Air website at www.forwardair.com shortly after this call. You may now disconnect.