Forward Air Corp (Delaware) (FWRD) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for joining Forward Air Corporation's third quarter 2010 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 a press release announcing third quarter 2010 results, which were furnished to the SEC on Form 8-K 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 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 these statements may be affected by the important factors, among others set forth in the filings with the Securities and Exchange Commission and in the press release issued yesterday. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events, or otherwise.

And now, I'll turn the call over to Bruce Campbell, Chairman, President, and Chief Executive Officer.

Thank you, operator. And to each of you joining our third quarter earnings call good morning, and thank you for your interest in our Company.

Overall, we were very pleased with our performance during the third quarter with our team producing revenue growth of over 17%, which helped to create operating income of $15.5 million and an operating margin of 12.5%, almost doubling last year's margin.

In our airport-to-airport segment, we showed strong revenue growth of 22% with each product line, including our newer segments of TLX and Forward Air Complete, growing in the double digit range.

We continued to be pleased with our team's ability to grow not only the airport-to-airport segment, but also all of our new product line offerings.

While our Solutions team came just short of producing a profit, they did make significant improvements on the cost side of the business, validating the various initiatives we have in place to help us consistently produce profits in this segment.

With all the changes we have made in these product line offerings starting to work, we feel more comfortable than ever we will soon have them where they need to be, regardless of the economic climate.

I want to close by once again acknowledging the great efforts by all members of our team, both our employees and our independent operators. Thank you very much.

And now here is Rodney Bell, our Chief Financial Officer.

Thank you, Bruce and thank you all for joining us this morning. Operating revenue for the third quarter was $121.5 million, an increase of 17.8% from the third quarter of 2009.

In our Forward Air, Inc. business segment, airport-to-airport revenues were $105.3 million, an increase of $19.6 million or 22.9% as compared to last year.

This resulted from nearly a 16% increase in network tonnage and a 5.9% increase in yield. The yield improvement consisted of 3.9% from line-haul processing to 1.4% benefit from net fuel surcharges, along with a 0.5% positive impact from the growth of Forward Air Complete.

Logistics revenues were $16.9 million, an increase of $3.6 million, or a 27.1% improvement compared to Q3 2009. In our Forward Air Solutions segment revenues were $16.5 million, a decrease of 7% compared to Q3 2009.

New business wins were not enough to offset the loss of a major customer that contributed to the Q3 2009 revenue base. And additionally, specialty retail sales have continued to suffer through the quarter, hopefully picking up with the seasonality that comes with Q4.

Moving to expenses for the third quarter, our operations and line-haul teams did another outstanding job managing load factors and network miles. Total PT was 42.1% as percentage of revenue, compared to 42.2% last year.

Salaries and wages were up $3.3 million or 11.5% but were down 150 basis points as a percentage of revenue. The dollar increase resulted primarily from $1.2 million increase in third quarter performance based incentives and $1.9 million increase in volume driven variable wages.

Operating leases, depreciation and amortization, and insurance and claims were down 110, 60 and 70 basis points respectively.

Other operating expenses were down $1 million or 220 basis points. $680,000, or 60 basis points, of that was related to a one-time gain related to the termination of a capital lease.

Our operating ratio was 87.2% for the third quarter compared to 93.5% last year, an improvement of 630 basis points.

Operating income was up 131.3% or $8.8 million on $18.4 million of additional revenue.

Net CapEx for the quarter was $1.8 million and $10.5 million year-to-date. Cash increased in Q3 by $15.3 million to end the quarter at $63.2 million.

We ended the quarter with $50 million outstanding on our line and $38.2 million available.

Lastly, we anticipate the fourth quarter revenues to be in the range of 12% to 17% compared to the same period in 2009 and expect income -- pardon me, per diluted share to be between $0.35 and $0.39 compared to $0.22 in Q4.

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

Thank you. (Operator Instructions). Our first question is from the line of Kevin Sterling with BB&T Capital Markets. You may proceed.

Good morning, Bruce and Rodney.

Good morning.

Hi, Kevin.

Bruce, how much more do you think you can push pricing? When we look at your yields this quarter, they were quite impressive. And along those lines, are you seeing more rational actions by the competition?

A number of things have happened in that environment that's helped us. Obviously, demand is better than it was a year ago.

Secondly, the LTL's finally woke up and found out that more freight doesn't necessarily mean more profits. So we've seen stability on the LTL side, which does affect your customer base.

And I think the big thing is our customers were kind enough to us to accept the rate increase knowing that a year, to a year and a half ago, we did the exact opposite and helped them get through tough times by lowering rates.

So we're pleased with where our rates are today. We continually assess when it's appropriate, if it becomes appropriate to increase rates again. But as we sit here today, we're happy.

Okay. Thank you, Bruce.

And when looking at your Solutions business, are you pretty much done working through some of that low margin business, because I think you indicated you expected to return to profitability in Q4, is that correct?

That's correct. We rid ourselves of the customer that was really hurting the operation. The final part of it left in July.

So we had really two months of not having that, and were, in fact, able to validate it was the right decision long-term. Those are decisions you have to make, you don't enjoy making -- that sets you back temporarily. But it's similar to not treating an injury. If you don't get it treated, it's going to get worse.

So we feel good about how we finally have Solutions positioned. It's taken a lot of hard work by a lot of people to get to it this point and we're excited about what we can do with it in the future

Great. Thank you. And not to leave Rodney out of the fun. Rodney, when you look at your SG&A this quarter, it declined sequentially. Do you think that's a sustainable run rate going forward? How should we think about SG&A?

Essentially, there's a couple things there Kevin. The one thing was we -- on the performance based incentives in Q2, it was pretty much a layup for our people that participated in that, because of the generate increase, along with better than expected tonnages. We made that more challenging in Q3, so the payout was less.

We had better experience in Work Comp in Q3. So that's a crap shoot whether or not that's going to be the same going forward. And to a lesser extent on the Solutions side, that particular customer that Bruce was talking about was about twice as labor intensive than our average customer on the Solutions side.

So to answer your question, a portion of it is, Kevin, and a portion of it isn't.

Okay. Thanks a lot. That's all I have. I appreciate your time this morning.

Your next question is from the line of Alex Brand with Stevens Incorporated. You may proceed.

Thanks. Rodney, I just want to pick up on that for a second. Are you saying that in the second quarter you paid out on GRI in the third quarter, and going forward you're not paying incentives on GRI?

We factored the GRI in. That was beyond the control of the participants to be influenced. So we dialed -- we basically raised the bar to not pay them on the GRI in Q3.

Okay. And what about -- it looked like other operating expenses were a lot lower than we expected. Is there anything one time in there?

There's the one one time, Kevin. It was $600 --.

Alex (inaudible) --.

Pardon me, Alex.

What was the one time again?

You got me rattled a bit. Pardon me. $680,000, it was related to the termination of capital lease and re-upping on operating lease in a facility. And the rest of it was just good cost controls.

Okay. All right. And when -- you talked about in the release about the -- that there was a lull in the quarter and then it was now more peak like. Can you give us a little more color on how it trended during the quarter and just how strong that trend was later in the quarter and into October?

Well, if you recall, we went back -- if we go back, Alex, to -- towards the end of the summer, everybody was jumping up and down that the world was coming to an end for the second time.

We tend to want to deal with facts. And if you look at the facts, we like to look at tonnage per day.

So in July our tonnage per day was just over seven million pounds. And the average shipment size, which we believe is a great indicator, was 736 pounds.

In August, that number fell to 6.5 million per day and the average shipment size dropped to 717.

So it validated what people were feeling. But then what happened in September was it jumped back to 7.148 pounds per day and the average shipment size jumped to 734.

So while there was, indeed, a lull in August, it came back to a really good month in September. And year-to-date -- or pardon me, month-to-date, and remember, it's month-to-date. We're not predicting the future here. It's even higher. It's just shy of 7.5 million pounds per day on average, with an average weight per shipment of 739, which is one of the best it's been in quite a while.

So all of that having been said, we believe we're going to have a pretty good fourth quarter. The numbers indicate that it will be. But now, we thought that two years ago and the bottom fell out on us and everybody else. But as we sit here today, it looks very good.

Okay. And just one more. When you get into 2011 and it's maybe more or whatever sustainable or normal is going look like, if it's still a pretty slow environment and you've got, let's say, mid single digit volume growth, or pick a number, is it going to -- is that a strong enough environment to continue to push price and drive the operating leverage and drive the bottom line?

Any help you could give us on how to think about that would be appreciated.

I think if we follow your scenario, that we are having some growth and we are experiencing decent volume levels, what I call decent volume levels. Then, in fact, we can continue to improve the profitability of the company.

The leverage will continue and things will be good. Perhaps not as dramatic, obviously, next year as the change has been so far this year over a year ago. So can we continue to improve? Without question. But, obviously, a key part of that is we need to continue our revenue growth.

Okay. Thanks, Bruce

Thank you.

Your next question is from the line of Todd Fowler with KeyBanc Capital Markets. You may proceed.

Thank you. Good morning, Bruce. Hey, Rodney. Bruce, as a follow-up to Alex's question, I guess thinking about the trends that you saw during the quarter, it seems like it's a little bit different than what we've heard from some of the truckload carriers who have reported to date. And, obviously, the business is going to be a different model.

But if you could talk a little bit about what you think that you're seeing relative to maybe some of the overall freight trends that we've seen recently, maybe that could help reconcile some of the differences in your volume activity.

Well, first of all, thank you for getting Alex's name right. As we sit here today, again, just simply looking at the facts, I mean, business is good and we have even seen a pickup on the Solutions side, which we were scared to death that wasn't going to happen because of the market conditions of retailers. But they've actually bounced back fairly nicely, too.

How long does that continue? Again, we aren't economists, but all indicators tell us it's pretty good. It's not great. It's not what I would call robust. But it's good. I mean we're having solid numbers across the board that aren't being contaminated by say certain unusual activities. Maybe one customer goes wild, because they won something and that's only going to last 30 days.

So overall, just in general, it's a pretty nice market today. And we understand what you're saying about the truckload guys, but even when they had their peak, or they -- things got really tight on that side back in May, June, we were still chugging along.

So I'm not sure you can draw very many comparisons between our product offerings and their product offerings and their product offerings.

Well, I guess, does it feel like you're picking up some share from some of your competitors as they change their business models or their approach to the market, or do you think that there's maybe a little bit of a fundamental change in what's going on in shipment patterns as people are trying to be more cautious with inventory levels? Just kind of any thoughts on those trends?

What we've been saying probably for a year now, first of all, we have competitors and like to think we know what's going on there. But it's very difficult to identify, did we take this away from so and so. With few exceptions, that's just difficult to do.

On the general trends, as we've said in the past, we believe a change occurred in the industry where a year, to a year and a half ago, and two years ago, the only thing that mattered to any shipper of freight was how low could you get the price? And then the other thing that mattered was, they had to get their inventory levels as low as possible. In some cases they risked, as we all know, stock outs.

Well, when you get your -- when you get the inventory levels as low as they are today, and even with some rebuilding, they're still at, what I consider to be, record low levels.

Then when something has to be replaced, it can't just ride on a truck that gets there sometime next week. It has to be put into an expedited system. It has to arrive. If it's scheduled to be there on Tuesday, that's when it has to be there.

And the other side of that equation is people say well, wouldn't they use more air freight. Well, some air freight, yes. But as a good friend of mine who runs a very large logistics department in a very large company says, any time they put something in the air, they regard that as a mistake.

So we believe expedited trucking, time definite trucking, whatever you want to call our product line offerings, is absolutely the right place to be in this economy.

Okay. Got it. That's helpful. And then I guess more specifically thinking about the fourth quarter revenue guide. It seems like the yields are going to be firm and you probably keep where you've been running through the third quarter.

What's really implied in the revenue guidance from a tonnage standpoint that comps becomes a little bit more difficult? And then what are you thinking about on the pool side now that there's been some shift in the revenue? What should we expect from pool revenue in the fourth quarter?

There's a couple things --.

Todd.

Todd.

It's early I know.

It is early. There's a couple things, Todd. The normal seasonal trends that were -- we started experiencing coming out of September and going into October, we expect those to continue. On the pool side what's implied in the guidance is that the same contribution to the operating income line item that we had in Q4, we have at least that good of a contribution in Q4, 2010.

Okay. And then the last one that I have is, thinking about the pool business again, what should we expect at this point for some organic revenue growth into 2011 now that you've gotten rid of some customers and kind of changed the business?

What's the expectation for what that business should grow on an organic basis next year?

Again, Todd, we've got that model was in the mid teens.

Great. Okay. Thanks a lot, guys. Good luck.

Thank you.

(Operator Instructions) Our next question is from the line of Michael Fountaine with RBC Capital Markets You may proceed.

Good morning, guys. How are you doing?

Good, thanks

Good. I just wanted to follow up on Todd's earlier question. You shed some of the, I guess, non-profitable business, finished getting that out of the network in July.

Has there been any change to your thoughts on getting the [FAS-E] segment profitable for more than three quarters -- or, I guess, for three quarters of the year? I know you worked at it this quarter. I know the first quarter is generally weaker. But can you just give me a little update there?

We are consumed with those thoughts. I mean we've worked so hard. Our team has worked really hard to get that operating segment to the levels of profitability that are acceptable to us.

Unfortunately, we've had to go through some difficult decisions and some difficult situations, but that's the price you have to pay. We think we now have them -- we like to talk at Forward Air that we are highly disciplined. That we understand how to operate. That we understand how to fundamentally operate a business.

And quite candidly, there have been times that's been a disappointment on the Solutions. Part of that we caused and part of that was caused by the -- just the environment, the economic environment.

We think, as we sit here today, we've got most of the bad out and we're ready to really get this group going in the direction they need to go where they consistently produce a profit.

Okay. Good. And then as a last follow-up to that, when you say that you expect the division to contribute the same as it did last year, is that on a dollar basis or just on a margin basis?

That's on a dollar basis.

Okay. Thanks so much. I'll let somebody else have it.

Thank you.

Your next question is from the line of Ken Hoexter with Bank of America Merrill Lynch. You may proceed.

Hi. Good morning, Bruce and Rodney. It's Wilson sitting in for Ken.

Morning.

Bruce and Rodney, if I could get a quick question in about just the CSA 2010 regu -- rulings that might come out at the end of October or November.

I mean have you guys heard just in terms of signals from Washington what you guys could expect from that? And what are you doing in terms of just preparing your own owner operators for the likelihood that the hours of service and kind of regulations that are going to be enacted for them?

Well, joining us this morning is our Chief Legal Officer Matt Jewell. And one of his very important initiatives has been, and will continue to be, to update us on CSA.

So I'm going to let him answer that question.

That's a great question. We've, actually, spent a lot of time since finding out about CSA 2010 gauging our fleet as it currently stands, and how it would stack up under the new requirements of CSA 2010.

We've actually engaged a company who was tracking the CSA scores to model what that would look like once it's actually rolled out. And we think we're very well positioned in the marketplace. And we think that it's not going to affect our fleet.

I think it's going to affect the fleets of lots of other companies. That, in some way shape or form, may be a positive in terms of the environment and available transportation out there. So right now we feel like we're in the right place.

A lot of things are unsettled in Washington. They're continuing to look at some of the different basics that are involved in the CSA 2010 process, one of which is whether you count all accidents the same, whether they're preventable or not preventable, etcetera.

And so there are some unsettled things. Some of the things they have changed have helped the companies get better visibility as to how they're going to stack up once 2010 is rolled out, which we don't really know when that's going to happen. But we feel like we're in a good place. We've done a lot to get there, and we think we're going to be well positioned

Sure. Thanks. I guess my follow-up to that is, just in terms of the TLX broker service. I mean do you guys foresee if CSA does get passed through and then results in kind of increased costs for the purchase transportation that you guys have to purchase, are you going to be able to pass those costs on to your customers or will you kind of have to take the hit to maintain those relationships that you guys have mentioned?

The answer is how devastating is the impact of CSA and if it affects supply, then, obviously, the pricing that we pay out to carriers is probably going to go up.

We do feel that any type of external event like that, we can go back to the customer base and get some type of help in that area. But as soon as I say that, then we have to remember, if the economy is in the doldrums at that point, it doesn't matter what happens. We're just going to have to live with it. So as we sit here today, we watch it very closely. We -- we're, obviously, aware of it.

But we're -- as Matt said, we're in really good shape and we're not overly worried about it.

All right. Well, that was my last question. Thanks.

Thank you.

Your next question is from the line of Matt Brookler with Piper Jaffrey.

Good morning, guys. And forgive me if my question is redundant. I'm jumping on a little bit late here.

But have you guys provided yet an update in terms of October volume and pricing trends within the airport-to-airport business? And also, if you haven't yet, talk a little bit about where pool stands from a profitability perspective here in October.

What we said earlier Matt was that our tonnage per day levels through this much of September are up, sequentially over September. And our average shipment size, which we believe is a key indicator, is also up. So both of those bode well for us as we move forward.

The pricing environment has been good for us. We're in good shape there, and have enjoyed some of our best weeks of the year in the past month or so.

On pool, as we've touched on before, we continue to correct a -- and make some very difficult decisions, but we now feel that we have it positioned where it needs to be.

We think that, obviously, in the fourth quarter we will make profits comparable to what we made in the fourth quarter last year. And then we're trying to position it the best we can so that we don't go through the doldrums on a profitability side through the first half of next year.

So we think we have it very close to where it needs to be. We've done a lot of hard work there and, hopefully, it's going to pay off here.

Okay. And also, and, again, forgive me if I'm being redundant here. But you mentioned going through a strategic review process of diversifying the pool business.

Where are you in terms of that analysis and should we think about Forward Air starting to diversify potentially doing acquisitions in pool outside of the specialty retail, that business is currently concentrated in?

Yes, that's a great question and that's a key initiative for us. And today as we sit here, we are working that very hard. Now, to diversify, it's one thing to say you're going to do it. Pardon me. But it takes time. And we have had some limited success already. We have a lot of things in the pipeline. So we're hopeful that that will come through.

But everything we're pointed at now in the sales side primarily is to diversify so that we are not 100% dependent upon retail specialty. And I would emphasize, having said that, we still like the retail specialty business. We just want some diversification in there.

So a lot of hard work has gone into that and is going into it

Okay. Thanks for the time, guys

Thank you.

Your next question is from the line of David Ross from Stifel Nicolaus. You may proceed.

Yes, good morning, gentlemen.

Good morning, Dave.

Just a follow-up more on the pool side of things. You talked about mid teens organic growth in pool and that you would like to diversify away from retail.

As far as acquisitions are concerned, you don't have full U.S. coverage yet. Do you need to get your pool distribution to a certain level of profitability before you continue to add on either bolt-ons or tuck-ins, or do you actually need some bolt-ons or tuck-ins to help out with the density and the profitability of pool?

Yes, we would love to have more to stick into our existing network simply to improve the density. So we are constantly on alert to -- for that opportunity, if it were to come along.

We will -- you know, if the right opportunity came along again in terms of expanding it geographically, it would, again, would have to be, not to be redundant, the right opportunity, because we don't want to rescue somebody that's about five minutes from going out of business, and going through all that pain again.

So we will approach that very judiciously. But if the right opportunity, again, came along, we'd jump it.

You guys have said before this is a highly fragmented market and there's not a lot of large players. Are there enough opportunities out there or is this really going to be more of an organic growth story?

I think, not to be redundant, there are a lot of opportunities out there, but there are a lot of really poor opportunities out there that we simply don't want to go through that pain, if you will.

So if we were to find the right one, as I said earlier, we'd jump it, but today we don't know where that is.

And then in your core airport-to-airport business you mentioned pricing's firming up and the environment's decent. Have you seen any competitors enter the market or are we too early for that yet?

We're probably too early. I mean it's a good question, David but it's -- let's say the environment stays as it is, it will probably be six months or a year before another one comes in and gets to fail too.

Thank you very much.

Thank you.

And gentlemen, there are no other questions in the queue.

We'd like to thank you for joining us today for Forward Air Corporation's third quarter 2010 earnings conference call. And please remember the web cast will be available on the IR section of Forward Air's website at www.forwardair.com shortly after this call.

You may now disconnect and have a great day.