Forward Air Corp (Delaware) (FWRD) 2012 Q3 法說會逐字稿

Thank you for joining Forward Air Corporation's third-quarter 2012 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 CEO Bruce Campbell, and Senior Vice President and CFO Rodney Bell. By now you should have received the press release announcing third-quarter 2012 results which were furnished to the SEC on Form 8-K and on The Wire yesterday after market closed.

Please be aware that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements, among others, regarding the Company's expected future financial performance. For this purpose any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements without limiting the foregoing words such as believes, anticipates, plans, expect and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors among others set forth in our filings with the Securities and Exchange Commission and in the materially press release issued yesterday and consequentially 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.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to Bruce Campbell, Chairman, President and CEO.

Thank you, operator, and thanks to each of you for joining us this morning. As usual I will be brief. As we previously announced, our third-quarter results did not measure up to our expectations driven primarily by softer-than-anticipated market, especially the month of September. While this was disappointing to the entire Forward Air team, we continue to apply our best efforts in spite of the economy to once again achieve the revenue growth and income generation that we are known for.

I would like to quickly highlight the significant progress we have made and continue to make with our Solutions team. We have had many positive initiatives occurring, both operationally and from an increased marketshare standpoint within this group, and look for to even better results from them in the future.

And now Rodney Bell, our CFO.

Thank you, Bruce. I'll start with revenue. Airport-to-airport volumes including Forward Air Complete was up 4.2% for the quarter. This resulted from tonnage being essentially flat, a 4% increase in yield, and complete growth at 33%. Average weekly tonnage was for the -- which was up [4.7]% for the quarter progressed as follows -- July plus 6%, August was essentially flat and then September minus 5%. You should get those comparable months in the third quarter of 2011.

The yield improvement consisted of 0.9% from linehaul pricing and you recall that we did our general rate increase at the beginning of September so we will get the full benefit of that in Q4, a minus 0.5% drag from net fuel surcharge along with a 3.7% positive impact from Forward Air Complete. Clearly linehaul volumes came in lower than originally anticipated and yield was for the most part what we expected.

As mentioned in our preannouncement, we did see a firming in our volumes this past week with tonnage being down only 1.8% as compared to the same week in 2011. Also since the preannouncement, we have seen a steady improvement in linehaul yield which was up 4.4% compared to week 41 last year. Again, we realize that one week doesn't make a trend, but it is good to see those numbers firming up. not.

Logistics revenue grew 12.4% while solutions revenue was up 12.8% for the third quarter.

Moving on to expenses. Overall PT increased 270 basis points compared to Q3 year ago and was sequentially flat as a percentage of revenue compared to Q2 2012. The primary reason for this was higher proportion growth of both Forward Air Complete as well as logistics, both of which have a higher PT component as a percentage of revenue.

In addition, we had -- we used a higher percentage of more expensive third-party miles to support our logistics product. We continue to experience lower load factors as a result of customer mix and the impact of lower net fuel surcharges which impacted the denominator in the percentage of revenue calculation.

Salaries, wages, and benefits decreased $1.7 million and 270 basis points lower compared to the prior year quarter. This was a result of primarily two things. First was the result of a $1.2 million or 100 basis point reduction in employee centers and the year-over-year better group health and workmen's comp insurance which contributed, combined benefited the quarter by $1.4 million and 230 basis points.

There was nothing remarkable in the operating lease or the D&A line items. Insurance and claims was up $978,000 and 60 basis points. This was due to higher cargo claims, one of which was over $100,000; increased vehicle accident repair cost; and an increase in professional fees as associated with litigation and claims.

Other expenses were up $2 million as compared to the prior year quarter and up $754,000 sequentially compared to Q2 2011. The increase was a result of a number of things.

First, there was $500,000 was attributable to the previously planned customer marketing event. Another $0.5 million of this variance resulted from a successful property tax appeal which took place in Q3 2011.

There was a $200,000 swing from a gain on sales revenue equipment last year to a loss on sale of revenue equipment this year and the balance of the variance were items of lesser consequence. Compared to Q3 2011, our tax rate was 1% higher at 37.1%. Both quarters were impacted by our normal Q3 return to provision adjustments. We expect the fourth-quarter tax rate to be approximately 38.75%.

Net CAPEX for the quarter was approximately $2.2 million and we are essentially done with our 2012 capital expenditures. We ended the quarter with $93 million in cash, less than $1 million in debt and $140.7 million available on our $150 million line of credit.

Lastly, we anticipate that fourth-quarter revenue will be in the range of 5% to 8% compared to last year, income per diluted share to be between $0.48 and $0.52 per share compared to $0.50 for Q4 2011.

And that concludes our comments. Now back to the operator for your questions.

(Operator Instructions). Scott Group, Wolfe Trahan.

Good morning. So, Rodney, I think you mentioned that linehaul yields were up around 4% over the past week or two and that is more than we would have thought with the 3% GRI. Maybe can you -- what's driving that strength in the yields and do you think that is sustainable? And maybe what have you assumed in the guidance for fourth quarter on the yield side?

What's is going on, Scott, I think we were a little slow to realize the full impact of the GRI. We initially thought it would come in about 2.8%. That is probably the benefit. The rest of that's we started a program at the beginning of the month. We are just being [death] on spot quotes. So our people are being very cognizant when asked to discount shipments. That gives us some positive impact there and the rest of it is mixed.

As far as sustainability, 4.4% is probably a bit high but a number between 3% and 3.5% is probably good.

And you think -- do we need to sustain that 3%, 3.5% rate to get the numbers for the quarter or have you built in some cushion there? Just trying to understand what you guys have assumed for yields for the quarter.

3% would be a good number.

Got you. That's helpful. So in terms of the Forward Air Complete, still really good growth year over year, but took a big step down sequentially. And just trying to understand if this is seasonal, if this is just the economy or maybe some of the BAX business has started going away from you. What happened in terms of the sequential drop-off at complete and how are you guys thinking about that growth rate going forward?

There -- some of the BAX business that we are seeing a little bit of that that we originally enjoyed in second quarter, some of that is in fact -- has, in fact, gone away. But growth rates going forward should be in the 20% to 25% range.

Okay. Do you have a sense on where that business is going or why it is going away?

The typical reason for business like that going away is price.

Okay. In terms of the cash, so $93 million of cash near record high. What is the plan for that cash? Do you feel like there is finally an acquisition that could be coming or at what point do you think about doing something in terms of a buyback?

We've said this before the number one way for us to deploy cash is good acquisitions. The pipeline is pretty good right now. We are looking at some interesting things and hopefully you'll see us acting on that in the near term.

And then just a last couple of things. With the Forward Air Complete that growth rate is starting to slow. Should we start to think about the weight persimmon also been starting to flatten out? It has been down a bunch the past few quarters. Does that moderate now?

I'm sorry, Scott, that does in fact moderate.

Okay. Great. And then the last thing, talk about maybe the relationship that you guys have with FedEx. So they are doing a restructuring of their domestic express business. Are there any opportunities or benefits for you guys related to that if they cut some capacity? Or maybe as with the post office contract that they have could some of those volumes end up in your network? How do you think about that?

We think about that in these terms. We certainly hope it is an opportunity. There is nothing concrete that we can tell you today.

Fair enough. Thanks for the time. Appreciate it.

Bill Greene, Morgan Stanley.

Good morning, gentlemen. This is Alex in for Bill today. I was curious as to what particular volume trends you might be seeing by end market or geography. And the extent to which you might be seeing strength or weakness in one particular geographic area or end market that you would like to comment on?

Probably the largest increase that we've seen -- and this is nothing to write home about, but if you look at our network in total, the West Coast is doing really, really well. We have no other areas within the Company that are extraordinary, either good or bad.

Are you able to sort of give a sense or the portion of maybe potential strength in the West Coast coming from shippers and related to the ILA strike and shippers sort of moving their shipments away towards the West Coast?

I think you could make that conclusion, Alex, but we don't know that.

Okay, that's fair. And with respect to the other operating expenses being a bit higher during the quarter, how should we think about that going forward or is there any sort of way we should particularly model that particular line item going forward?

I will tell you how we are modeling it. About half of that -- half to 60% of that is kind of it is what it is and that will continue. But the rest of it was our items that we shouldn't see again next quarter.

And you are referring to the $2 million year-over-year increase? Half of that?

That's correct.

Okay, perfect. Thank you very much.

Nate Brochmann, William Blair.

Good morning, gentlemen. Wanted to talk to two quick things. One, obviously, seeing a little bit better performance in the polling business. Can you talk a little bit about the trends there and what you're seeing at the customer level? And then also just an update on the ongoing efforts to continue to diversify in terms of the pipeline?

Overall, now obviously every customer is a little bit different. But overall we are seeing shipment sizes that are better than we have experienced in the past. That is critical to our profitability. If you deliver 500 pounds, it costs as much as if you deliver 1,000. So it is really critical that that happen.

Additionally we brought on new wins. They've done a really good job of doing that. Especially at this time of year it is unusual to see changes occur, but they have done it.

As far as diversification, we still have opportunities there although they are very specialized. But we think we have some pretty good opportunities especially going into the first of the year.

That's great. And then, two, I know it is hard to say, but obviously you said kind of coming out of September that you have seen some encouraging numbers here recently to give you a little bit more confidence. And are those trends still really volatile week to week? Are you seeing any consistent patterns? Are there any customer discussions going into the end of the year here that gives you any confidence in that stability continuing?

We are hopeful that it continues, but we certainly wouldn't sit here and tell you that it will. But we do think it will.

When we really broke down where our revenue softness was missing, what was causing that, it really was nothing greater than distributions. Or what our customers call project work, which is when they will have a large -- the example would be Best Buy. And one of our customers is doing a huge distribution for them in a new product or whatever the case may be. They are all over the board in terms of product and who the customers are and all that. That project work, as we call it, basically went away in the latter part of August and into September. That is now coming back.

So if you ask me what is a good indicator for what is going to happen in the future, we are working a lot of proposals there right now and that is very encouraging.

Great. Thanks.

Jack Atkins, Stephens.

Thank you for taking my question. Just a couple of things here. Most of what I had have already been asked and answered. But when you think about the dynamics in late August, September and then early October, do you think part of it was also inventory destocking? Was that playing a role as well or was it just simply a function of, Bruce, as you said that project-related revenue drying up?

I think you could draw that conclusion. You and others on this call would probably be better at that than we are. But I think that is a fair conclusion.

And it is interesting, we have been hearing anecdotes that some of the high-tech shippers have sort of changed their domestic supply chain this year versus last year using more -- sort of moving away from the expedited ground services. Do you think that may have been part of it as well or --?

In all our conversations I have never heard that.

Okay. And then, when we think about the M&A pipeline you guys seem to be getting closer to a deal than you have been in the past. Could you maybe talk about what in particular you think may be driving that for potential sellers to get acquisitions closed by or announced to close by year-end?

I think with all due respect, Jack, we really don't need to be commenting on acquisitions.

Okay. Okay. Understandable. And then I guess the last question for me, when we think about the benefits from the complete attachment rate, what is sort of the near and medium term goals when you think about year end? And then for the next year what sort of attachment rate do you want to have, your complete business at, by the end of this year and then when you think about 2013?

Well, the number we are shooting for would be a number somewhere around 30% for this year. And a lot of things change in there, but that would be good. It may not seem like much of a stretch, but from where we have come, it's really quite good. And then next year if we really pushed and really did a good job, we would like to see that 50%.

Great. Thanks for the time.

Todd Fowler, KeyBanc Capital Markets.

Good morning. I might have missed it, but did you give the attachment rate for complete here in the third quarter?

Todd, we didn't give that, but it was in the release. It was 25.6%.

Thanks, Rodney. And then I guess just with the Solutions business, I know you have talked about it strategically in the past couple of quarters. What is the expectation in the fourth quarter? What sort of OR can the business hit with where the mix is at and with what it seems like you have got some visibility into the topline growth releasing to the revenue stream here for the fourth quarter. What is your expectation on a near-term basis? And then as you look out into 2013, what are you thinking about from a profitability level for the business and how does it trend through the year?

We would stand by what we have said in the past and think we are well on the way to doing that. We should be sub 90 OR in this business during the fourth quarter. And then the big push and not making light of that, that would be a great result, but it is also somewhat easier because you have so much business. But the big trick is as we go into the new year.

So the first quarter as we have said before we would like to see them at break even. We would like to see a second quarter with an OR of somewhere in 95, in mid 90s. We would like to see the third quarter somewhere around 90 and then we would like to see the fourth quarter again because of the push that occurs then to be sub 90. And we think they are well on their way.

Well, and Bruce, I know that we have seen a lot with this business over the past couple of years, but obviously the economic outlook is a little bit uncertain. How confident do you feel in that, given what you have done with the business? I mean is that something that you can see if we see a continuation of the current economic environment into 2013? Is that realistic I guess is what I am asking?

Well, again not predicting the future in terms of economy. They brought on some new business. They have a very vibrant or robust pipeline going on now and so a lot of positive things happening. Part of it has already been put on the truck and part of it we anticipate putting on the truck. So we think it is a realistic view.

Great. And then, Rodney, I'm not sure I followed the comments on the expenses. I think you said that there was about a $1.2 million of employee incentives here in the quarter and $1.4 million of group health. Can you talk about what the impact was? Is the $1.2 million of employee incentives, is that adjusting accruals on a year-to-date basis for the performance? Or what was that? And the same sort of question on the group health. I kind of missed what the impact was on the quarter. Was that a positive or a negative?

It was a positive. The incentive, Todd, it was taking down the accrual for executive comp as well as not hitting the numbers for the folks who get paid out on a quarterly basis. So it was both of those things but the majority of it was the accrual for executive comp.

And then on the group, and that was a benefit on it. We had better group experience than we did last year as well as better work comp experience.

So the group health is a year-over-year change and the employee incentive piece is a year-to-date adjustment or true up?

Right.

And then the last one I've got then I will turn it over. I know that in 2008 and 2009, you guys did a really good job of looking at the network and taking out cost and giving the network to a very lean place. If things do slow down going forward, can you talk a little bit about some of the opportunity that you have to adjust the network and obviously the comments about the first couple of weeks here in October are encouraging, but if things do slow down what would be some other things that you would be able to do to react to that? Thanks.

You're welcome. We do that everyday. Our people are constantly watching our network. They are looking at -- I mean, we get an e-mail every day, Todd, that says here -- and hopefully it is very abbreviated -- but here are some soft loads, what we call soft loads are lacking in adequate tonnage to justify running it. There are a lot of things you can do. As you said, we did it in '08 and '09 and that is basically where we start pulling down some directs of the week and shoving it through the hub. Or we may shove it through a regional hub. There is a litany of different things that can be done as the business pulls back. We are hopeful that it doesn't. But even if it doesn't, we are watching that everyday.

Okay, I got it. Thanks a lot for the time.

David Ross, Stifel Nicolaus.

Good morning, gentlemen. Last year your logistics business shot up nicely in the fourth quarter, up about 17% sequentially from 3Q to 4Q. Was there anything one-time back then? Or should we expect another big ramp in the fourth quarter at TLX?

That was primarily some new business wins that came on. We are not in it -- United Airlines Bruce is telling me specifically. But, Dave, we won't see that kind of ramp up in Q4 this year.

Okay and then you mentioned earlier in one of your comments that better shipment sizes were critical for profitability in the Solutions segment. Is that also the case in the linehaul segment?

Yes, it is.

And if I'm correct, also the weight per shipment, the big decline we have seen although it is up slightly sequentially, does that have a positive impact on reported yield?

It can -- when you get in the yields and it goes all over the book -- the spectrum. So the answer is it can if that makes any sense. It can also be a negative.

Yes, I guess it just depends on how much of your business runs on the minimum.

Yes, exactly. If you are running a lot of minimums, your yield will be very high.

Yes. And you guys don't run a lot of minimums?

We try not to.

Excellent. Thanks very much.

Ben Hartford, Baird.

Good morning. Bruce, could you provide some perspective on the pricing environment, generally speaking? We had the pocket, it sounds like, in the third quarter and things have firmed up here into the fourth. But generally speaking, how rational is the pricing environment? I guess more specifically how receptive are shippers to rate increases understanding the constraints of the industry is facing from a capacity standpoint as we look forward over the next several quarters?

I think in general, when we implemented the rate increase it went without much of a hitch. You always have people who don't want to pay more, and we understand that. But for the most part, our people did a really, really good job of implementing it with solid reasons why we needed it. And in general, it is the same as always. There's always idiots out there that will do something for nothing. But that's the norm. We are used to that. And we press on.

And I guess to that point if the environment is going to remain rational, trends are stable. It sounds like we ought to expect modest margin expansion in core going forward. What is a realistic level or benchmark to think about this cycle for margins and core now that trends have slowed down, but appear to be stabilizing?

We can, first of all, we are always looking for improvement. So let me start there. We want to be able to improve every quarter both sequentially and year-over-year. Especially as the year starts to wind down. If you said what's our ultimate goal? Our ultimate goal would -- to get our margin somewhere around 18% in total. And if you looked at just the airport-to-airport volumes, we would like to get it down to 20. For that to happen, all kinds of good things have to happen to us. That won't happen just by sheer effort, but it is going to require a lot of environmentally positive things to occur.

That's helpful. Rodney, a couple of loose ends. CAPEX in the fourth quarter, I don't know if you gave any sort of target there and then also 2013, what should we be thinking about for CAPEX?

I did. It was CAPEX for the quarter was $2.2 million, I think, and that completed our CAPEX in total was call it $20 million. We are in the process of really finalizing our CAPEX for 2013. And as you might imagine, it is going to have a lot to do with, is this defined in volumes, something that is going to say itself or to your point is this just a pocket? So if things are better, you could see us replace a bunch of trailers if they're not. If it's not we will probably run with a lot of what we have got.

Thanks. And then tax rate, just to put it in place, a little over '13?

For '13?

Yes.

38.5%.

Great. Thanks.

Ryan Bouchard, Avondale Partners.

Last quarter, you talked about a new high-volume customer. I was just wondering if you could talk about how their volumes were for this quarter and if those will add to peak Q4 volumes or if that is a counter seasonal customer? You make have touched on it last quarter, but I don't remember what you said.

It is truly a counter seasonal. So you won't see me -- kind of exceptional volumes there.

Okay. And then as far as average weight of shipment, normally in the fourth quarter there's about a 20-pound drop down. Is that expected for this quarter?

And you are fairly new to the story, but normally fourth-quarter volumes per shipment get better weight per shipment I should say. Although that has not been the phenomenon lately. So when we saw a little bit of a turn there, at least a stabilizing of the average weight per shipment over the past month, that's a very positive sign for us. So we are hopeful it continues as we go through into the fourth quarter.

Okay. That is all I've got. Thanks.

That concludes our questions for today. Thank you for joining us today for Forward Air Corporation's third-quarter 2012 earnings conference call. Please remember the webcast will be available on the IR section of Forward Air's website at www.forwardair.com shortly after this call.