Forward Air Corp (Delaware) (FWRD) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for joining Forward Air Corporation's fourth-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 fourth-quarter 2012 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 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 and 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 our filings with the Securities and Exchange Commission and in the press release issued yesterday, and consequently actual operations and results may differ materially from the results discussed in the forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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

Thank you, operator, and thanks to each of you for joining us this morning. My comments will again be brief so we might quickly reach the Q&A session.

While we saw many good accomplishments in the fourth quarter, most of those were blunted by a very weak closing to the month of December. Nevertheless, the accomplishments have positioned us well for 2013, not only from an operational standpoint but also giving us a very strong balance sheet to start the new year with. And now Rodney Bell, our CFO.

Thanks, Bruce. Airport-to-airport revenues inclusive of Forward Air Complete was up 6%. This resulted from total tonnage being essentially flat for the quarter and a 6.5% increase in yield which includes Forward Air Complete growth of 21%. Average weekly tonnage, which was down to 2.2% for the quarter, were dressed as follows -- October minus 6%, November up 5% and December was flat against comparable months in 2011.

The yield improvement consisted of 2.8% from linehaul pricing, a 1.3% benefit from net fuel surcharge along with a 2.4% positive impact from Forward Air Complete.

With the weakness experienced in October tonnage for the quarter and -- with the weakness experienced in October, tonnage for the quarter came in as anticipated and with full quarter benefit of the fall, which was in September, general rate increase yield also came in as expected.

Early in the quarter, we experienced the loss of a medium-sized customer that we had added earlier in the year. Most of this customer's shipments had a complete pickup and/or delivery element. Beyond the impact of network tonnage, you can see in our complete operating statistics lower sequential revenue growth, lower attachment rate and reduced yield benefit. This particular customer had a much lower than average shipment size, so we did gain operating efficiencies as a result of this price-driven defection.

Logistics revenue as a result of a concerted effort to regain margin loss earlier in the year declined 4.7% compared to Q4 2011. Sequentially from Q3 2012, logistics margins improved 90 basis points. On primarily new business wins, Solutions revenues increased 12.5%.

Moving onto expenses, with the departure of the aforementioned Complete customer and the culling of lower margin logistics business, purchased transportation as a percentage of revenue included 210 basis points sequentially from Q3 and 20 basis points year-over-year. Solutions from PT was up nearly 15% as result of new business startup cost.

Salaries, wages and benefits increased $2.3 million or 6.5%. This was primarily the result of one additional business day, Solutions startup cost and a negative workers comp compensation actuarial adjustment. There was nothing remarkable in operating leases or depreciation and amortization.

Insurance and claims expense were up $519,000. This was due primarily to a negative development of one vehicle liability claim and one large cargo claim.

Other expenses were up $1.2 million as compared to last year. The increase was primarily due to higher maintenance on an aging trailer fleet and a positive prior-year adjustment to bad debt expense.

Our tax rate was 33.2% for the quarter compared to 38.5% in Q4 2011. This improved tax rate relates primarily to a benefit derived from a change in our propane tax treatment and is attributable to refunds on prior years. The improved tax rate provided approximately $0.04 per share for the quarter. We expect 2013 tax rate to be approximately 38%.

Net CapEx for the quarter was less than $1 million and full-year CapEx for 2012 was $20.4 million. We ended the quarter with $112 million in cash, less than $1 million of debt and $138.7 million available on our $150 million line of credit.

Lastly, we anticipate that first-quarter revenues will be in the range of 5% to 8% over the comparable 2011 period, income per diluted share to be between $0.36 and $0.40 per share compared to $0.35 per share last year.

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

(Operator instructions) Scott Group, Wolfe Trahan.

Good morning, guys, how are you doing? Bruce, can you give us a little bit more color on the customer that you said that you started to lose in third and fully in fourth quarter? Maybe you can help us give some sense on why they left, if it's pricing or something else. And is there a way to think about how much revenue you had with that customer in 2012?

It was strictly a pricing issue. The business itself is somewhat unusual compared to our normal business, which doesn't necessarily make it bad. It just makes it more difficult to handle and push through our network. But it also drives a higher cost component and we had to meet it to adjust our rates, and they were able to find somebody who would not only do it for what we were doing it for, but even cheaper, which is, in our opinion, not a good thing.

So you have customers like that through the years. Sometimes they come back and sometimes they don't, but we maintain our value proposition and we are not going to change that. I mean, Rodney (multiple speakers) got the exact number.

Scott, in order of magnitude, the top-line impact for Q2 and for Q3 was approximately $5 million each quarter, and the total EPS impact was about $0.03.

Okay, so it's a revenue headwind, but less of an operating ratio headwind?

Exactly.

Okay, that's helpful. Can you give us some sense on -- you said December ended pretty soft -- what you are seeing in January and so far into February?

January started off slow, but we have been on a really nice trend until the storm hit this past weekend. So we're pleased with where we are at today.

Relative to down slightly in fourth quarter, how is January-February combined shaping up?

It's what I would put in the okay and maybe okay plus category.

Is that -- I'm not sure. Is that down or up?

No we're (multiple speakers).

Okay. And last two things -- one, the yield looked pretty nice in the quarter. Can you give us a sense on how the GRI is doing and how you are thinking about the likelihood of another GRI this year?

The GRI that we implemented back in September to full hold in fourth quarter, obviously. And then I think the other thing that is distorting this a bit, Scott, is our West Coast operation -- they are just doing terrific. And anytime you have business increases off the West Coast, the nature of the business is that it's going to go further and that it will have a higher yield. So that has also helped our yield picture.

As far as addressing another GRI, we look at that typically at the end of the second quarter, and as a management group we will make a decision probably in June of this year.

And $112 million of cash -- you have been talking about acquisitions for a while. Do you feel like something is coming, or do you start thinking about some alternate uses for that cash?

We are pleased that we have that much cash and that we have options.

Okay, thanks a lot; I'll pass it to somebody else.

Bill Green, Morgan Stanley.

This is Elizabeth in for Bill. Quick question -- it seems like some of the top-line trends slowed in the second half of the year and first-quarter guidance was in line with expectations. What are some of the drivers that we should be watching in terms of getting back to peak margins? Is that all macro driven?

Primarily, yes. We have a number of cost initiatives, as we do every year to help us improve our margins. But as we have said before, to get to our optimum operating margin that we reached back in 2007. A whole lot of things in the world have to be right, and hopefully we will start seeing that this year, but who knows?

Okay, that's helpful. And then in the quarter, were there any -- besides the customer loss, were there any other one-time items related to Sandy or the port strike that you could point out to?

We went through Sandy like everybody else did, so we really don't put a lot of emphasis on that. That's just life? And did it hurt us? Yes. Was it meaningful? Probably not, in terms of the whole quarter.

Okay, thanks, that's it.

Jack Atkins, Stephens.

So I guess first of all, if we can go back to the customer that you lost in the quarter, you mentioned you lost that, I guess, partially on price, or primarily on price. Could you maybe talk about the competitive environment out there right now? Are you seeing competitors get more aggressive on price, given the market fundamentals?

The reason I hesitate -- it's all over the place. Literally, geographically, it's all over the place. So in certain pockets, we have local competitors, if you will, that will go cheap. Nationally, we have one carrier that's always cheaper than we are. We just don't -- we look at pricing from the standpoint of providing the value to the customer, being able to sustain that value over the long-term in terms of us making investments to provide the best in service. So we're just not going to bend a whole lot on pricing.

Sure, that's totally understandable. As a follow-up to that, what has been your experience in the past with customers that you have lost on the basis of price, given your higher service levels? How often do you see those guys come back and say we want to do business with Forward Air just because of the intangibles that you provide?

It really depends upon the product, Jack. There are commodities being shipped in this day and age, launchers and things like that, that we understand why they can't pay a higher price. We also understand that they destroy our load averages and do other less than good things for our Company. So they have to make a good decision for their company and we have to make a good decision for ours. Sometimes, I'd say 50-50, they come back.

Okay, that's helpful. In the logistics business, you saw much slower growth this quarter than what you experienced really for the past number of quarters. Just sort of curious if you could maybe talk for a minute about what is going on there whether from a market standpoint or just from a strategic standpoint internally to drive that slower growth.

Probably a combination of the two. The market itself -- it's okay; it is not as strong as it has been. But as Rodney touched on, we started looking really hard at the margins because they were evaporating, and just not to a level that we wanted. So we started working; our team in Columbus started working on improving that. They did a good job. Our margins are better, which sometimes means that you walk away from business. But in the long-term, it's the right thing to do.

Okay, okay, great. Just one more question from me and I'll jump back in queue. When you think about the volume or tonnage assumptions in the airport-to-airport business that's baked into the guidance, could you help us frame that out?

We are being pretty consistent, Jack, on either side of the range of guidance. It's anywhere from flat to slightly up.

Okay, that's great. Thanks so much for the time.

Jason Seidl, Dahlman Rose.

Piggybacking on another question that was asked, you guys mentioned that there's more stuff coming from the West Coast, and that distorted yield a bit. How would yield have looked like if you took that business out?

We would have been up a really nice number without it. We are getting good pricing now. We are hoping to protect that as we go through the year, and so it's good.

And from your commentary, it seems like pricing is pretty good. Is that the right interpretation?

I think our best reaction to the pricing discussion that I can give you is we ignore all the -- whatever you want to call it -- stupidity that goes on out there, and we run our Company.

Fair enough. If I could go to pool a little bit, another company on their conference call talked about that they saw the retail business really tighten up in terms of inventories, more so than usual, in the quarter. Could you give us some color on what you guys saw in the market on the retail side?

I think that's a fair conclusion. They went pretty strong all the way through really Thanksgiving. I think, based on what we have been told by the customer, is that they realized they had plenty of inventory in their stores and it slowed down fairly quickly.

Have you seen any restocking efforts thus far in 2013?

Yes. We're seeing a -- it's not a huge number, so I don't want to leave that impression. But it's pretty good right now.

Okay, gentlemen, thanks for the time again.

Todd Fowler, KeyBanc Capital Markets.

Just to follow up on the customer defection, I guess the first question I had is, is this the customer that I think came on in late 2011 or early 2012?

Yes.

Okay.

Staying the same.

They started coming on, they were full strength by the beginning of Q2, Todd.

Got it, okay. Rodney, just to follow up on the numbers you gave, it sounded like the revenue was $5 million in the second quarter and the third quarter, but you are saying the total earnings-per-share impact was $0.03 on the portion of the year that you had them in the mix.

That's correct, Todd.

Okay, got it; that helps. And then, Bruce, any color on the West Coast as far as the strength that you are seeing there? Is that something specific to West Coast markets? Do you think that that relates to improvement in -- off of the West Coast, or is there something else going on specific to your business that is driving some of the strength?

I'd like to think, first of all, that we have a really good team out there. They have done a terrific job in building our business to the levels that we are really happy with. And beyond that, there's nothing we can put our finger on, Todd, specifically that would answer that question.

Okay. And then just a couple of last ones -- just thinking about costs into 2013, I guess I'm curious to hear any comments that you have on your independent contractors as far as your rates with them, if those are locked in, or if we should expect any sort of change in your linehaul pricing, and then availability of independent contractors as well.

So far, the availability has been good. We've got a good team recruiting and a good team putting them to work. We will address any costs increase there. Typically, we do that sometime in the second quarter. We won't touch it in the first quarter.

Okay, and then just the last ones -- it sounds like from the prepared remarks that there's something unusual with operating leases or D&A. Should those be the right run rates to use going forward?

And then secondly, with the tax rate, we are hearing from some of the other LTLs that the propane tax credit is going to carry forward. So I guess I'm surprised that you are still factoring a 38% tax rate for 2013. Is there something different that we should be thinking about?

First question, on the operating leases and the D&A, that's about where it's going to be, Todd. That's how we model that. A lot of moving parts -- not all that benefit in Q4 was related to the propane. Not hardly half of it was also, not to get too down in the weeds, but our return to provision reconciliation, which we do at the end of the year every year, and typically turns out to be somewhat beneficial because of our conservative nature.

So if we think about the $0.04 in the quarter, how much of that would be for the propane piece?

About half of it, but that comes from prior period --

Right.

-- amending of returns and refunds, Todd.

Okay. So that would be like a five-quarter catch-up or something like that, all in the fourth quarter, for $0.02?

[Yes].

Okay, good. Alright, thanks a lot for the time. I'll talk to you guys soon.

Ken Hoexter, Bank of America.

Rodney, you mentioned October down 6, November up 5. That's pretty strong volatility. Is that unseasonably different than what you would have expected? And talk about some of the drivers of that volatility.

It was, Ken. We rolled out of Q3, we started experiencing weakness in August, going into September, up until about the time of the call in October. And, as Bruce mentioned, we saw some improving trends over until the middle of December, then it kind of fell off. It was somewhat volatile, but it was a continuation of that doldrums we experienced in the late fourth quarter, and then we saw some good weeks and then your typical fall-off after Christmas.

So that's more demand-side; that wasn't competitors getting maybe more price reactive during the quarter, or is that just straight up on the demand side?

That's very well put, yes.

Okay. On the Complete, can you talk about, Bruce, what the take rate for Complete is now? And is that accelerating? Has that gotten to be steady?

We took a step backwards with the last of -- the one customer we've talked about ad nauseam here. But now, we are back on building it. We finished the quarter I think 18 --

19.4

-- 19.4, to be specific, and we think we can grow that substantially going into 2013.

What would be your goals?

Rodney is saying 25. My personal goal would be somewhere close to 30, but we would be happy to settle on 25.

Okay, and then back on the synergies -- on the Solutions business -- are there further room for synergies now that you have had the business in place for a couple of years, through almost a cycle here now in terms of making it more efficient with your core operations?

There are always opportunities. They probably are not substantial. What could change that is if we brought on a new customer there that had different requirements in addition to just pool, where we could utilize both operating networks. But outside of that, if it's a normal pool customer, outside of our overhead costs and structures like that there's not a whole lot of benefit from a synergy standpoint.

Wonderful, appreciate the insight. Thanks for the time.

John Barnes, RBC Capital Markets.

Two quick questions -- number one, as you look at 2013, can you talk about the progression of profitability of pool? Should this be the year that we see profitability every quarter, or is there still going to be that trend where it's a little unprofitable early and then it gets more profitable as the year progresses?

We are off to a good start there. They are bringing on a large customer next week I think it is, John. We think it's going to take -- and any time you do a start-up, you've got a lot of costs involved, but it's worth it. It's a good investment. So we'll probably get -- we would love to get it to a breakeven Q1 but would not be surprised with the start-up that would be a little bit of a loss.

And then after that, they should be rolling. They are getting to a point where they have a really good base, so they have what we call an opportunity to make money. And we don't have to rely on the fourth quarter from now on.

An opportunity to make money -- I like that. Can you talk a little bit about the customer that you are bringing on? I know you have tried to diversify away from retail. Can you share some details there?

It is a retail customer, which we are okay with. It's a business and that's what we need, so a pretty large piece of business that affects us, primarily in Texas, and then also in some what we call off-location points.

Any success there with expanding into other verticals? I know healthcare is something you've targeted. Any update there?

The honest answer is, it has been very difficult.

Okay, alright. In terms of your comments around pricing, you have had various comments around the competitive environment for several quarters now. Can you just elaborate a little bit? Is this more of just a continuing macro issue, that the volumes are at least volatile enough that maybe your customer base has not had a chance to be rational, or is this just the normal thing you see regardless of what the environment looks like?

I think there could be so much business out there that none of us would ever cry again, and they would still be discounting.

Okay, alright. Lastly, your comment around glad to have the cash and glad to have the opportunity -- can you just elaborate a little bit as to maybe what has been the impediment to doing an acquisition? Is it lack of quality of target? Is it purchase multiples? Is it all of the above?

Actually, the first filter that we have to go through, John, is to make sure we don't have channel conflicts with our existing customers. So if you think about that, that eliminates probably 75% of the acquisition opportunities, because we don't want to be (technical difficulty) East Tennessee, stick our finger in our customers' eye.

On the other hand, things have kind of loosened up there and we have had some opportunities come forward that get passed what we call our litmus testing for it. So, number one, it cannot be a channel conflict. Number two, it has to have a reasonable margin. Where people will go out and buy these companies with 2%, 3%, 4% margins, we won't, unless we think we can turn it pretty quickly. It has to be light asset. Again, you've just eliminated a lot of companies.

So we are very, very particular about who we will buy and how they will fit into our long-term strategy.

Okay, alright. And just a last question -- in terms of your independent contractors and the like, as the market has tightened up, have you seen a greater degree of companies trying to poach your independent contractors? Has there been any step up there, and has that resulted in any real increase in retention or recruitment cost?

No, it -- we have owner-operators leave us because they are independent and they can't. If they get a better deal somewhere, we support them in going there. But if you stop and think about what we have to offer and how friendly we are to the owner-operator in terms of trying to take care of all their needs, we are in really good shape there.

Alright. Any change in the recruitment or retention cost?

It should be pretty stable through the year.

Guys, nice quarter, thanks for your time, Bruce.

Ben Hartford, Baird.

Bruce, I'm wondering, can we get some perspective from you on average shipment weights within the core business? They are down 12% or so from 2007, and even down 8% to 10% from the 2009 levels. So I'm wondering if it's a product of your customers' customers reducing package weights, or is the reduction influenced by mix? Is it purely economic forces? Can you provide some perspective as to what has driven that contraction?

Ben, it's probably almost every one of those things you just said. The good news is we are on a pretty good run rate right now into the new year, so we are happy to see that weight per shipment pickup. As you know, that is a huge positive for us.

Now, having said that, the normal product that we handle, as you might imagine, high-value electronics and products similar to that -- they are getting smaller and weigh less. So, will we ever return to 750 pounds that we used to have? I doubt it. I hope we do, but I doubt it. But we will probably, hopefully, be able to get it back up to 650 to 700 pounds.

The second thing, or another thing that influences that, is one of the products we do via our Complete group, is what we call distributions. And it's great business; it's very good business for us. It's very complicated. We have a great team that handles it and it carries a good margin. But, typically, that business is very small shipments, not always, but typically. So that has had an impact on our size -- shipment size, I should say.

So part of it is good, that we are smaller, but we would really like to see it go back to the 700 level.

When you say -- we getting it back to 650 or 700, is that anything that you can do internally or, is that just simply likely economically driven?

Likely economically driven.

And so, in the past, you have talked about overall margins close to 18%. I know that the 2007 levels are likely behind us from a mix standpoint. If you think about that 18% threshold within core, is that assuming a stable shipment weight basis and continued pricing gains in kind of a stable demand environment with optionality or upside if shipment weights were to return or be greater than you expect?

Could we get to 18%?

Yes, if we think about that pathway to 18%, I'm just trying to think about what influence could shipment weights or higher shipment weights this cycle potentially play on that 18% margin that you have talked about within core?

It definitely has an impact. It's as easy to handle a 750-pound shipment as it is a 650-pound shipment, and then you get all the good things that go along with 100 extra pounds. But are we totally reliant on that? No.

Okay, that was the question; that's good. And then, Rodney, 2013 CapEx -- did you provide a number there?

Approximately $30 million.

Okay. And then I guess one last question, sort of jump around on Solutions -- last quarter, you talked about project work being weak in August and September, starting to improve in October. Was that healthy in November and then softened in December, like the trends in the core segment? Can you talk a little bit about that, Bruce?

It's exactly as you said.

Okay, great, thanks for the time, guys.

David Campbell, Thompson Davis.

One of your customers -- I think he's probably a customer -- but announced today the acquisition of East Coast Air Charter. I wondered if that was a company that used your services

No, I think -- and I certainly don't want to speak for them, David, but they are based in Statesville. I actually know the owner, or have met him. They are a true air charter company, which means strictly on demand. And it's true air freight; it's not freight that moves on the truck.

So being on demand, they would not use your services?

No. It's really kind of a one-off -- and, again, I am making some assumptions here. But I would not be surprised if some of their business wasn't in automotive, where they are taking a product that has to be somewhere for a line down or something along those lines. But it's a very specific, very niche-y business.

Right, right, right, right. And, in terms of your purchase transportation costs, your airport-to-airport costs, the revenues will go down in the first quarter. How can you adjust those costs down without reducing service?

There are a number of ways. If you recall, we basically have three methods of moving freight. We also -- and we move freight either through the national hub, the regional hubs or on directs. So what you see us do during slow times, David, the normal first of year business levels is we will adjust some of those routes so that we are running fewer miles.

Okay, great, thank you very much.

(Operator instructions) Ryan Bouchard, Avondale Partners.

In the Solutions business, you said earlier that you were hoping that it would be breakeven in the first quarter, and you did a great job of ramping that business up in 2012. It looks like the operating margin was about 2.5% in the year. Is 5% in 2013 achievable? Is that heroic? Can you help me about that?

Well, it's achievable, but it might take a heroic effort. But, no, they can do it. They are on a roll; they should be able to do it.

Okay. And then my last question -- the other expense line was a bit higher. Rodney, you had said that there was some maintenance. Is this a new run rate that we should consider in our model?

It shouldn't be. That's primarily on aging trailer fleet. We're in the point in our replacement cycle where we are essentially doubling our trailer order from 300 to 600. That's the reason the CapEx number I mentioned earlier is a bit higher, so the offset to that is we will be replacing units that are costing us a lot of money. So that's the gives and the takes on that.

Got you, okay. Thanks for the time, guys.

Matt Young, Morningstar.

Most of my questions have been answered, but I know your brokerage operations tend to be a bit differentiated, and that the TLX is more focused on the specialized, expedited freight. Would you expect you branch out to expand that business over time, perhaps to the point where you would become more of a competitor in the traditional highway brokerage?

Only if we could sustain margins that are acceptable to us. As you know, in the brokerage business, right now that's pretty tough to do.

Would that at all affect some of your other customers? I know there are some highway brokerage companies out there that also do the freight forwarding. I know that, for instance, CH Robinson and Phoenix and so forth. I don't know if that would have an impact, or there would be competitive considerations there.

No, we actually do business on the LTL side with them, so we just don't compete in that type of brokerage world.

Great, well that's all I had, thanks.

Ladies and gentlemen, thank you for joining us today for Forward Air Corporation's fourth-quarter 2012 earnings conference call. Please remember that the webcast will be available on the IR section at Forward Air's website at www.ForwardAir.com, shortly after this call.

That does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.