Forward Air Corp (Delaware) (FWRD) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for joining Forward Air Corporation's first-quarter 2013 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 first-quarter 2013 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, expects, and similar expressions are intended to identify forward-looking statements.

You are hereby cautioned that these statements of the 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 will turn the call over to Bruce Campbell, Chairman, President, and CEO.

Thank you, Operator, and good morning. Thanks to each of you for joining our call. While our first quarter results were not what we wanted, I would like to focus on some positives from the quarter. First of all, while volumes, and in particular, the volumes during the second half of March were disappointing, volumes since the end of March have been good. We are hopeful that the many sales initiatives we have in place are going to continue to lead us to stronger volumes throughout the second quarter.

Secondly, while still having a loss, we are pleased with the progress in our Solutions group, who landed a major account in the latter part of February, and while costs have been implemented, it is now producing solid returns. Additionally, we are bringing on, next week, another large customer, which will firmly position Solutions for the balance of the year.

Finally, as announced in early March, we were able to complete the acquisition of Total Quality, Inc., which is a premier refrigerated truckload carrier. We are pleased to have their excellent team as part of Forward Air and look forward to their many future contributions. Now, Rodney Bell, our Chief Financial Officer.

Thank you, Bruce, and good morning. As Bruce mentioned, we closed on the acquisition of TQI, which will be reported as a new business segment. In Q1, TQI had a partial-month revenue of $3.9 million, and that rolls up under other -- under logistics on our consolidated income statement, and had operating income of approximately $200,000.

Airport-to-airport revenue, inclusive of Forward Air Complete, was down 0.3%. This resulted from total tonnage being down 3.8% for the quarter and a 3.8% increase in yield. Here's how the average weekly tonnage broke down for the quarter -- January was plus 5%; February was down 5%; and March was, which is typically the strongest month of the quarter, was down 9%. And as Bruce mentioned, some pretty positive trends going into April after that dismal end to the quarter.

The yield improvement consisted of 2% for linehaul pricing, a 0.7% benefit from net fuel surcharge, along with a 1.1% positive impact from Forward Air Complete. Complete revenue growth, which only grew 4.7%, suffered through the same difficulties as did our core linehaul business. Additionally, Complete faces a difficult prior-year comp from the loss of a large customer. This comp will persist through the third quarter.

Logistics revenue, again which included $3.9 million from TQI, grew 7.8%. Factoring out the impact of TQI, logistics revenue declined approximately 10%. This resulted primarily from soft customer demand for both airline and integrator customers, as well as a challenging prior-year comparison for the loss of a large customer late in Q1 2012. On primarily new business wins, Solutions revenues increased 16.1%.

Moving on to expenses, purchased transportation in total was up 3%, but down 10 basis points as a percentage of revenue. FAI PT improved in both dollars of expense as well as percentage of revenue, while Solutions PT, driven primarily from new business start-up costs, was higher. Salaries, wages, and benefits increased $778,000, or 2.3%. This was primarily the result of Solutions start-up costs and fixed network salaries, offset in part by reduced employee incentive accruals.

There was nothing remarkable in operating leases or D&A for the quarter. Insurance and claims expense improved $138,000, or 4.9%. This was due primarily to better year-over-year cargo claims experience. Other expenses were up $2.5 million, and 24%, as compared to last year. The primary reasons for this increase were $900,000 of TQI transaction costs; $300,000 of Solutions start-up costs from new business; our national meeting that we did back in January, which was $300,000; and a $200,000 write off of bad debt.

Our tax rate was 30.8% compared to 38.7% in Q1 of 2012. This improved tax rate relates primarily to the reinstatement of a 2012 propane tax credit, along with the tax benefit derived from the exercising of the incentive stock options. The improved rate provided approximately $0.04 per share of year-over-year benefit to the quarter. We were not anticipating the magnitude of benefit received in the ISO exercises. We expect our Q2 2013 tax rate to be approximately 38%.

CapEx for the quarter was $12 million against the full-year CapEx budget of approximately $35 million. We ended the quarter with $71.6 million in cash, essentially no debt, and $138.4 million of availability on our $150 million line of credit. Lastly, we anticipate that second-quarter revenue will be in the range of 12% to 18%, with approximately 9% of that coming from the TQI acquisition. Income per diluted share is expected to be between $0.51 to $0.55 per share, compared to $0.48 in Q2 of 2012. That concludes our comments. Now, back to the Operator for your questions.

(Operator Instructions)

Kevin Sterling, BB&T Capital Markets.

Bruce, you mentioned a new customer you just signed in Solutions. Should we expect higher start-up costs initially associated with that new customer?

There will be some, but we don't, as we sit here today, Kevin, don't think it's the magnitude that we went through earlier with the customer we brought on in February.

Okay, thank you. Bruce, it seems like for the past couple of years there has always been some squirrelly pricing for some time, but was it kicked up a notch this quarter?

I think it is fair to say that. From our vantage point, we have a little bit of a slower economy, and whenever that happens, then people get stupid. They swallow their stupid pills and start doing stupid things, and that's what happened to us. We maintain, as we always have, that we are going to protect our yield, because in the long term, that is the right thing to do. So, we had a little bit -- actually, we had a lot of it, but we are okay with that.

Right. You have always had that strategy -- you maintain your pricing discipline. So, it is mainly because the volumes weren't there, you just saw some squirrelly activity --?

Yes, I think our volumes were probably reflective -- I don't know this with great accuracy -- were reflected in our competitors' volumes, in terms of, they suffered through some tough times, too. We, again, don't want to maintain -- or don't want to lose that strategy of protected yield, and we did not.

Right. Let me think about this, historically, those that discount price to chase share don't always offer the best service. I think, if I recall, over time, some of that business will eventually migrate back to you. So, while it may be a near-term headwind, do you anticipate that you have service levels deteriorate at some of your competitors, you may see that business come back at the yield you want?

Yes. That is exactly right. Typically, this goes on for a period of time -- who knows how long -- then, typically what happens, beyond what you suggested, is they go out of business. If you run freight out of Atlanta into the Florida market at $0.05 or $0.055 a pound, I assure you, unless you have very deep pockets, you will soon be broke.

All right. Okay. Bruce and Rodney, thanks for your time today.

Ben Hartford, Baird.

The 24 terminals in pool, I assume that's a function now -- it's up 5 from the end of the year. I assume that's a function of one or both of these new customers coming on board. Is that right, Rodney or Bruce?

Yes, it's basically, two of the areas of where we are actually picking up the freight. And then, three of the areas are additional delivery points for us that we are handling on a little bit different methodology than we have in the past, primarily through the utilization of other providers to do the delivery.

Okay, so that 24 terminal count -- will it only grow if you win new customers? Is there an organic growth number to it? And I guess, the final question in that part would be, is there a steady-state number that you think the terminal size will be at maturity for pool?

I think the quick answer is that is going to depend on customer demand. We certainly are not out looking to buy additional pool companies today. You never know how that could change into the future. The terminal count, as in this case, Ben, was driven -- the additional terminal count, I should say, was driven by the customer needs. And in each case, it was a good move for us.

Okay.

Rodney, when we think about the second quarter guidance -- first-quarter results, weaker than expected in the airport-to-airport segment. You've got the full benefit of TQI in the second quarter. If we were to break down, I guess, what is embedded in the assumptions there, is it just that TQI on a full run rate, Solutions benefiting from these new contract wins and being profitable in the second quarter, and then some firming up in the margin on the core side? Is that a fair way to think about how you are looking at the second quarter?

It is, Ben. On the low end of the guidance, as what you said, is the benefit of TQI and the Solutions -- the new business wins and the incremental profitability there. So that, coupled with not a whole lot of help coming from a steady-state Forward Air, Inc. on the lower end of that; and then, on the higher end of that, getting a little bit of help, which we started to see. I think you are exactly right.

Bruce, can you provide some perspective in terms of the optimism in April. And then, I guess, characterizing the air freight environment out of Asia as weak is fair for the first quarter, which probably explains why March was disappointing. Plus, you had the calendar timing and all of the other nonsense in March. But, April sounds like it is firming up and there is some optimism that late April and early May we can have a normal spring, once weather starts to improve here. I am curious, what you think of -- what you make of this early April trend, relative to March, and what the expectations are for the balance of the second quarter?

You touched on it, and you are quite accurate in talking about the West Coast. The big change we saw going into March was the West Coast really slowed down. Based on information from all our people, we did not lose any share, it simply -- the business volumes fell off.

Now, what we have seen in the last two weeks is a much stronger West Coast. Night before last, West Coast, on a year over year basis, was up 400,000 pounds. We are encouraged by that. We want to see that continue. We think it will continue; perhaps, not to that degree, but we think we can continue to grow that area of our country and things will be, hopefully, on the positive side throughout the quarter.

Okay. Then lastly, can you -- separate from that, can you talk about your eCommerce business, and give us a sense for how much of it might be related to either B-to-C or eCommerce? How much opportunity might there be, whether it's in the existing core business or Solutions to provide that type of offering? Is there an interest in that type of offering, from your standpoint, relative to your customers and what they need?

We do a lot of that today. I could not give you an exact number. We do that primarily through our Forward Air relationships, where we, in some cases, will not only linehaul the business, but then, through our complete product offering, we will actually deliver the business. And, that can be both to a business or to an actual end-user consumer. Solutions does some of that.

It really depends on which one of their customers that we are talking about. So, it is kind of across the board, we participate in today. We were told by a major TV manufacturer that we haul more flat screen TVs than any other provider in the US. We have done it for a number of years. We know how to handle them without damaging them, so the more that develops, the better we do, and hopefully, the better our customer does.

Okay. That is helpful. Thanks, guys.

(Operator Instructions)

William Greene, Morgan Stanley.

This is Liz in for Bill today.

I wanted to ask you about trade downs. We are seeing a lot of negative mix effects out of FedEx and UPS. How does that affect your business? Does that get passed through on the pricing side?

Actually, no, we basically have one price for product moving throughout our system. We do not provide a deferred -- an even later deferred pricing for our customers. And candidly, we've never really dealt with that at all. I would back you up and say, years ago, we benefited from the beginning process of various shippers downgrading from using airlines and integrators to going on ground. While we don't see the big benefit, today, that we did then, we continue to benefit from it. Again, if we have a customer who has good supply chain management software, they are just not going to put it in the air, they are going to put it on a deferred carrier like us.

Okay. Then, a second one, on the driver side, we are hearing tightening driver market from our truckload carriers, does that affect Forward? Is that something you are -- is that a headwind for you going forward?

It is a good question, but we traditionally have been able to recruit and retain our owner-operator fleet. We continue to have good success there. But, we do work very hard at recruiting the right owner operators. I would tell you, it is a little bit harder, but they are still available, and we certainly do not have any shortage of them from that.

Okay. Do you think that has to do with your scheduling -- just being more scheduled than maybe a traditional truckload carrier?

I think you are exactly on the money, and it is a big advantage to us to be able to offer that.

Okay. Thank you.

Scott Group, Wolfe Trahan.

The new pool customers, can you give us a sense of how much revenue you are expecting from those guys? Are they the traditional retail customers, or is it something that maybe helps smooth out some of the margin volatility throughout the year?

They are traditional retail customer, but they tend to delve in a different market, if that makes any sense, Scott. We are hoping that it tends to be a little less volatile than the current customers we have.

In terms of the magnitude they are at?

I don't have those exact numbers in front of me. I would say the one we put on in February will become our third-largest customer. The one we put on next week will probably be our fifth- or sixth-largest customer.

Okay. That is helpful.

We can shoot you some numbers.

Yes. I will follow up off-line, great. Can (inaudible) do you both feel any better, [relative] down 9% in March, how is April actually tracking?

April, so far, has tracked pretty well. We are pleasantly surprised; we are pleased. We put in a number of initiatives across the board in all of our businesses and it appears they are paying off. And, I also think we are benefiting from a better economic environment, and in particular, off the West Coast.

Are the yields holding in around that 2% level with the better tonnage? I know it is early, but how are thinking about a GRI for this year?

We will address that, Scott, later in the year, probably in late June, early July. If you ask me now, based on where business is today, it would probably fairly tough to implement one, but that could change by May.

Yes. Last couple of things -- in terms of TQI, because we don't have much history with it, how should we think about the seasonality of the revenue and margins --?

It is fairly comparable to any truckload carrier that you would follow. They tend to get busier in the second half of the year, but their business is not nearly as volatile as we experience with Solutions.

You would expect better than a [95 OR] in that business in the second quarter?

We went through, obviously, some transaction costs, some implementation issues, just the various things that you go through when you buy a company. So, I don't think that one is indicative of what they can do in the future. We will be implementing a new technology system for them at some point in the second quarter. We think that is going to help them greatly. We have other things we can do, and they are doing a great job too. It will get to where it is operating better than [95].

Great. Then last thing, what do you do with the owner operators and EOBRs, have you started rolling those out yet? And, what kind of impact do you think that has on the owner-operator base?

We actually implemented that two years ago in January. It took three or four months to get it done. We had a lot of trepidation going into the program; but the truth of the matter is, they ended up -- the owner operators ended up really liking it. We may have had one casualty from that out of 900-and-some owner operators. So, we are really happy with where it is at, and we are positive on EOBRs.

Great. Thanks for the time, guys, appreciate it.

Jack Atkins, Stephens.

First off, we talked about the soft macro and the competitive issues, but I am curious if you all would be willing to maybe quantify the impact weather and the more challenging weather conditions we faced this year versus last year -- any effect that had in the first quarter?

Let me be real candid and tell you that, internally, we never look at weather as an excuse. Every winter, we go through bad weather. Let me counter that by saying, this first quarter is probably the most unusual in my 23 years here, in that every single week, we had a deflection somewhere, until we got to, I think it was, mid-March. It is very hard to quantify.

I can tell you where really hurts us is, any time you are in a network and you get shut down in part of that network service area, it throws your balance -- where our inbound and outbound is working, it throws our equipment way out of whack. And, the only way to fix that is to immediately reposition it. Most of the times when you do that, what happens is you are going to incur higher empty mile costs, or you can run a lighter load average, simply to get the equipment in place. We could throw a number on it, but I would not feel comfortable doing that.

Okay. That makes sense. That is helpful commentary, Bruce. Also, when we think about the industry verticals that you serve, just curious if you could talk about the relative strength and weaknesses for your various industry verticals, if you would be willing to share any thoughts on that?

On the airport-to-airport side, it remains pretty constant. It is the same as it has always been. Where we are having a lot of, what we call, electrical equipment -- that is a broad category, but that's, in fact, what it is. All of those normal things, it is very difficult for us to give you an exact number because we don't require the customer, unless it is a hazmat, to give us an exact number. I will tell you what we see creeping up are more and more home-delivery type products, so that runs the gamut of whatever is in your house. If we look at the retail side, which is primary solutions, their overall business for the quarter was pretty good, even if we take away the effect of the new customer. Perhaps retail -- consumer retail is a little bit better than others, including us, anticipated in the first quarter.

Okay. That is great to hear.

And then, last couple of questions from me. On the TQI acquisition, just curious if you could talk about it? I understand it is early days, but just curious if you could talk about the integration process there -- how that is going so far? And when you think about TQI, it is the opportunity for cross selling between your legacy airport-to-airport business, and then you have the new life-sciences verticals that you are bringing in here with TQI?

The implementation and integration process, Jack, was fairly simple. We do operate them as a separate entity. Although, we do work between their group and the group that handles truckload, traditionally, for Forward Air, so they share some loads if it works from a balance standpoint. You'll have to remember we have limited cross selling because much of their product requires temperature control, which in our traditional truckload business, we don't have.

Can we expand that beyond? Yes, we think we can. That's going to take some time. We have to gain the confidence of their shippers, and we have to do a little bit more work in terms of expanding their fleet, which we are underway in doing. And, just upgrading their technology side from the standpoint of an operating system. Once we get all that done, we are excited about the opportunity. We think we have a great team up there, and a lot of good things will come out of it.

Bruce, is there maybe an opportunity on the cost side with TQI. If I remember correctly, a good chunk of their power was from third-party transportation providers. So, just curious if you could think about shifting the owner-operator model that you utilize in your core business?

That will occur. Not so much of a shift, but we will go in and complement their existing company fleet with owner operators. We are starting a few next week to run for them. We probably will always have a need to have some fleet, not a huge fleet, but a representative fleet, lack of a better word, to run company-owned power for TQI. I would tell you that most of our growth there, as we go into the future, is going to come from owner operators.

Okay. Last question from me -- on the M&A side, I know you just made a fairly sizable transaction for you all with TQI, but just curious about your appetite for additional M&A going forward? Is it a function of maybe trying to put TQI onto your platform and integrate that before you look to get more active? Or, are you still looking to pursue M&A opportunities in the current environment?

I would tell you, in general, TQI has been a fairly easy acquisition and integration. So, with that having been said, we are certainly continuing to look at opportunities into the future.

Thanks for the time, guys. I appreciate it.

Matthew Dodson, JWest.

Congratulations on a great quarter. I have a quick question for you. Can you help us understand why you think March fell off, and then why you think April has bounced back so sharply?

The quick answer to that is no. Because honestly, it caught us a little bit off guard. You can talk about the Asian influence on the West Coast. You can talk about Easter was earlier this year. But honestly, as we sit here today, we could not quantify that or give you accurate sourcing to support that.

Perfect. Thank you.

Todd Fowler, KeyBanc.

I was wondering if you could talk about the revenue guidance for the second quarter? The range is a little bit larger than what you typically give. And I'm curious, does that reflect the volatility that you've seen in the volumes in the past couple of weeks or the acquisitions? Or, how do we think about the range that you've given on the revenue side?

It really is both of those things, Todd. On the lower end, we are really assuming no additional volume growth on the airport-to-airport side, just pretty flattish. Based on what we have seen thus far in April, it could be a little bit better than that. With pricing staying consistent is the other assumption. And then, flipping to the acquisition, we are still not sure exactly what -- how good TQI can be. We are going from a baseline of what they did the first month we operated. We think that is a low end to a bit higher than that, which we think is more realistic. Then, Solutions with the new business wins coming on, there is a little bit of a question mark on just how good that can be.

Okay, but Rodney, you have got the earnings-per-share guidance pretty consistent with that $0.04 spread. I'm guessing that if all the stars align and you see something closer to that 18% revenue growth that the high end of the guidance would be very doable, if not something north of that? Or, are there other costs that need come in to support that revenue that I'm not thinking about?

That is correct.

Okay. I guess to follow-up on the comments on TQI, if I take the 9% growth that you are talking about, or that is embedded in the guidance on a revenue basis, and this is just some rough math, so my numbers may or may not be right, but that annualizes basically close to the $55 million of revenue I think that they did in 2012 that you talked about when you announced the acquisition. Is there something going on there, or something to think about why the growth rate -- why they wouldn't be showing more growth or a better growth rate than what they had last year?

Actually, in the core business, Todd, it is all 9% growth. What we have not discussed, which we knew about going into the acquisition, was they had a significant customer, which was a warehouse customer, so they provided labor and they provided various warehouse-type activities for that customer. The customer told them, back in late fall, that they were going to shut that warehouse down.

So, your numbers are exactly on the mark. We are going to replace that business with more traditional core business. And, it really had no impact on the deal. We knew about it, and we knew how we were going to recover from it.

Okay. Bruce, how much would that revenue have been -- the warehouse customer?

About $6 million out of that $55 million.

Okay. On the yield side, I understand the comments, and we've heard this song before. When I look at your yields in the quarter, though, they were actually, I would say, relatively good yields. Is the tradeoff that you made here that, given you were disciplined with price and you were able to keep your yields where they were, and you gave up some volume as a result of that? And, had you been more aggressive with your pricing, you would have seen a better volume number, here, in the quarter?

Yes.

Okay. The last one I have, when I look at solutions -- and, I'm not asking to speak to our assumptions or our model, but really the delta versus what we were looking for in the quarter was purchased transportation was higher than what we were looking for, and essentially, net revenue margins were lower. Is that a function of some of the new business that came on during the quarter, or is there something else that was going on in the purchased transportation side within Solutions?

The number one component was we had to position equipment. Which, in this case, was two fairly remote locations, so that was fairly costly. You also see some of their -- that is a blend number that -- and we can talk to you offline on this because it gets a little bit down in the weeds. It is primarily the start-up costs is the best way to answer it.

Okay. Do you have an idea of how we should think about either -- should we see net revenue margins back 200 basis points higher from where they were? Do you have an idea of to ballpark what the start-up costs would have been in the current quarter?

In total, the start-up costs were about [$0.01], Todd.

Okay, and all of that was in the PT line, Rodney, or was some of that in some of the other costs?

[It would be] salaries and benefits and other operating expenses, Todd.

Okay, good. I will get the details of that offline, but thanks for the time.

Ladies and gentlemen, thank you for joining us today for Forward Air Corporation's first-quarter 2013 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. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.