Forward Air Corp (Delaware) (FWRD) 2013 Q2 法說會逐字稿

Thank you for joining Forward Air Corporation's second-quarter 2013 earnings release conference call. Before we begin, I'd 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 second-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 maybe 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 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.

I will now turn the conference over to Rodney Bell, CFO, who will provide certain financial comments on Forward Air's results. Please go ahead.

Thank you, Operator, and thank you all for joining us this morning. I'll make some brief comments regarding results, then we'll go straight to Q&A. Starting with our Forward Air Inc. reporting segment, which we break out on page 7 of our earnings release, total segment revenues were down year over year by $6.4 million, or 4.9%. The loss of a large customer resulted in an approximately $6 million loss of revenue, that was about 50% in linehaul and about 50% in Forward Air Complete. Additionally, continued pricing challenges in what we view as a tepid economic environment combined for lower than expected revenues and results. Airport-to-airport revenue, inclusive of Forward Air Complete, was down 5.1%. This resulted from total tonnage being down 2.1% for the quarter and 3.1% -- and a 3.1% decrease in yield.

Average weekly tonnage, which had the same year-over-year number of business days was down 2.1% for the quarter and progressed as follows. April was plus 2%, May was flat and June, which is typically our strongest month of the quarter, was down 6%. The yield decline consistent -- the yield decline consists of negative 0.4% for the linehaul pricing and negative 0.3% for net fuel surcharge and was down 2.4% from the impact of Forward Air Complete. Complete revenue declined approximately 18% as a result of the previously mentioned loss of a large customer. This comp will persist through the end of October.

FAI Logistics revenue, which is primarily TLX Xpedited truck load business, declined $1.2 million, or 5.5%. This was primarily due to lower demand from our core customers. In the past few weeks, we have seen a reversal of this trend. Other revenues were flat with the prior-year quarter. For FAI, we were able to match the 4.9% decrease in revenues with a $5.2 million or 4.9% decrease in operating expenses maintaining last year's 82.3% OR. Approximately 50% of the FAI year-over-year $0.04 EPS decline was due to higher share count.

Moving to our Solutions segment, on the strength of new business wins, Solutions grew by $5.9 million, or 32.3%. Unfortunately a handful of locations experienced costly operation difficulties. This was primarily from the integration of a new customer and resulted in a loss of $240,000 for the quarter. Structural as well as personnel changes have been made in order to improve operations in those locations. With these changes and increased volumes from back-to-school -- from the back-to-school season, we anticipate Solution to be a contributor to 2002 -- pardon me, Q3 earnings.

Lastly is our TQI segment, which is our newest reporting segment. On revenues of $12.2 million we dropped $806,000 to the operating income line, posting a 93.4% OR for Q2. Each month of the quarter saw improved operating ratio with a 92.7% OR in June. While TQI integration in additions to new business have come somewhat slower than expected, we have made good progress and continue to be pleased with our expanding margins and potential for profitable new business growth.

Wrapping up my comments, these are on a consolidated level, our tax rate was 38.2% for the quarter compared to 38.4% a year ago. Net CapEx for the quarter was $15 million for the quarter and $27 million year to date against a full-year CapEx budget of approximately $35 million. We ended the quarter with $81.1 million in cash, essentially no debt and $138 million available on our $150 million line of credit. Lastly, we anticipate the second quarter -- lastly we anticipate third quarter revenue will be in the range of 10% to 15% with approximately 8% of that growth coming from the TQI acquisition. Income per diluted share is expected to be between $0.43 and $0.48 per share compared to $0.41 last year. That concludes our comments. Now back to the Operator for your questions.

Thank you. The floor is now open for questions and comments.

(Operator Instructions)

Jack Atkins, Stephens.

First off, could we maybe talk about the volume assumptions that underpin the 3Q guidance, and any color you could give us, Rodney, on how July has been trending so far?

Sure, Jack. Volumes or assumptions on the low end of the range are essentially flat, on the higher end of the range are positive 3%. Thus far in the quarter, which is relatively early in the quarter, volumes have been choppy. I mean last week they were up 3%, they're flattish this month. So there's still a fair amount of choppiness out there.

Okay, okay that's helpful. And then on the customer implementation issues at Solutions, how long do you think that that's going to be a headwind there? It sounds like you guys are taking some pretty aggressive actions to right size that. And have you all given any consideration to maybe slowing the growth rate down at Solutions a little bit to absorb what you've won in recent quarters, or is the growth trajectory still pretty stronger there?

You sound like us talking the other day concerning Solutions, and that's number one we don't need any additional business although that's a hard thing to say. We continue to cultivate our customer base and look for new opportunities. But for the next two or three months, we need to settle in and get these -- and it's really isolated to two terminals, because the rest of them are doing a great job. We need to get them fixed, if you will, and start showing a really good return, and that's our whole goal for the next foreseeable future.

Okay that's great. And last question for me and I'll jump back in the queue, it seems stuff like the competitive pricing behavior that you all have seen over the last couple quarters really isn't sustainable over the long term and curious how long do you think these pricing -- these competitive pricing trends can continue, and do you think you'll be able to get a GRI through this year?

That's going to be questionable, we evaluate that. We've got to look at that in the next few weeks, but probably unlikely. We will fight the battle as we have since the idiots started pricing the way they do. We're able to make our rent payments, which evidently some of our competitors can't make. So we'll just continue to press forward, provide quality service to our customers and know and understand how to price.

Okay thanks again for the time, guys.

Ben Hartford, Baird.

So in the context of some of the volume weakness this quarter, Bruce I'm hoping you can talk a little bit, you can talk strategically about whether the airport-to-airport product sits. I know that there's some irrational pricing. We know that volumes generally in the industry were tough in the second quarter. But if you think about Forward Air's value prop as it relates to some of your customers, and specifically in the effort to go more door-to-door away from just the port-to-port moves, how should we think about the -- any opportunity to offset some of the volume weakness, given your attention on service and your customers' attention on final mile, and capturing more of that door-to-door type move against what is still a lumpy demand environment, very competitive pricing environment, as well?

Well overall we would view that for the probably next six months it's going to be a tough market. That having been said, we're in great position to do many of the things you just suggested. So our team's out working hard, they're focused on not only providing the airport-to-airport product but also the Complete. We know by pulling out the large customer that we basically walked away from a year ago, that they had made significant strides in terms of adding more and more complete attachment to our product line. So we're happy with that. Obviously, the loss of a large customer distorts it. But through the let's say the next six months, we'll ride this, as Rodney calls it, the choppy waves, and then we'll come out stronger than ever.

Okay. Three months ago we were talking about a weak first quarter with some improvement off in the first two or three weeks in April and it sounds like there's a similar type of cadence today, and I know the environment's weak and choppy. But generally, Forwarders have talked ever so more optimistically about the back half of the year from an air freight perspective. I'm wondering, I know your visibility is limited, but the level of confidence of second half peak as you sit here today in the third week of July?

I think it would be extremely difficult to say that, for anyone to say, gee we're going to have -- not only us, but the industry in general is going to have a strong second half. We all hope for it, obviously, but you certainly won't hear it come out of my mouth.

Okay, and then Rodney, thinking about balancing the acquisitions and the hearing Bruce talk about wanting to shore up some of the terminals within certain acquisitions that you have executed versus some opportunistic share repurchase opportunities. What -- how do you think about the two over the next three months?

We've said this before, we continue to look hard for acquisitions. Obviously, within the core business would be the most advantageous. It's accretive in the first five minutes and typically we can integrate those pretty quickly. But as we've demonstrated with TQI we'll look outside the core for quality companies where we can bring value, so that's number one. But we've also shown in the past that we're very -- we're prone to go back in and be opportunistic repurchases of the shares. So -- and if we see the pullback in the stock and we feel very strongly about our own story, and we would do that.

Okay, great. Thanks fore the time, guys.

David Ross, Stifel.

A clarification question, Rodney when you talked about the volumes for April and May and June, was that shipments or tonnage?

That was tonnage, Dave.

Okay, linehaul tonnage?

Yes.

And then with the Forward Air Solutions business, what exactly were that difficulties on boarding those locations where they had problems? Was it technology integration, was it labor, damages, deliveries?

The answer is yes.

Okay. Was one of them the biggest issue?

Simply they -- first of all the volume was more than we originally anticipated and then things went bad from there. Once a facility gets overwhelmed, it's very difficult to get that caught up and get everything in place. We brought in -- our people responded and they did a good job of cleaning it up. We've got a good team in there now and they continue to get us where we need to be. But once it occurs like that, it's very difficult to just snap your fingers and make it go away.

Understandable. And then when you talked about the irrational pricing environment, how does that compare to prior periods when you talk about gutter level pricing?

Well it's below the gutter this time, they're down the drain.

Are these new entrants or existing competitors doing things differently?

I think it's a lot of really desperate people. So they do what they have to do. We certainly stand there and look and say, really. Even to the extent of sending out e-mails that give them $0.05 price from Atlanta to anywhere in Florida, that's amazing, that's just amazing. So good for them, they'll stand at the bankruptcy court probably one day and we'll look at our bank account and say we've got $100 million in cash.

That's been the way it's worked in past cycles, of course.

Exactly.

And last question, the relative strength at the core airport-to-airport business between what I would call the International Distribution business and your Domestic Deferred Air Freight business?

We've seen a little bit of comeback on the airline side, it's certainly not something that makes us jump up and down and scream. But they've probably best hit bottom and have started to come back a little bit, so that's encouraging.

Excellent, thank you very much.

Todd Fowler, KeyBanc Capital Markets.

The 6% decline in tonnage in June, I guess I'm curious, we've heard some mix things about how June came together. Does that feel like that that was more the economic environment, or did some of the competitive factors specific to your business today heat up for you in June?

The best answer, Todd, from our standpoint, is a probably a combination of the two.

And then Bruce are there any areas where you're seeing, given some good color in the past about some areas that have been stronger or weaker? What are you seeing -- what did you see in the second quarter and what are you seeing right now as far as pockets of strength or weakness?

That's a great question, and typically in the past we could pinpoint weak areas. What we experience today is across the board. Our Southwest region will be booming, and then all of a sudden it'll go soft and that's comparable with all our other regions for the most part. So, it's really across the board, sporadic. Nothing you can put your finger on, nothing that you can say, okay we're going to be heavier or we're going to be light out of a certain region, it's just really difficult to pinpoint.

And I'm not trying to ask something that I know the answer to, but in environment to me it sounds like that that's probably the most difficult for you to manage the Business. It seems like you probably have to keep staffing at a certain level and you can't probably fully flex down in the variable cost aspect if this week's going to be better than last week. Is that the right? And, I guess, in that context I look at the margins here in the airport-to-airport business and that they were very good considering that environment. Is that part of the challenge, though, is that it is inconsistent and that impacts the variable cost piece?

Yes you're right on the money. And I thought our people, considering that type of variability to demand throughout the quarter, did a -- I thought they just did a great job. The bigger cost that we have to deal with is our purchase transportation, because if you're expecting 25 loads out of Dallas tonight and you get 10, you've got people who are upset, obviously. And the reverse is true, if you plan for 10 and you've got 25, now we're scrambling to cover the loads. Typically when you scramble to cover load it's costly.

Right.

So, I really thought our people did a great job throughout the quarter.

Okay, a couple of quick ones on TQI. Rodney, I think you made the comment that the revenue was a little bit below expectations here in the quarter. Do you have any comments as to why that was? And do you have a number for maybe what the growth rate would have been on a year-over-year basis in the second quarter?

Yes, part of that was by design, Todd. This is high levels of service, high levels of security. So we want to make sure that we've got qualified good capacity in place and that's been a little slower to come on, recruiting of owner operators and we've had to a certain extent do a little recapitalization of some worn out equipment, and you can't get that in overnight. Additionally we're in the process of putting in our operating systems. So, to a certain degree it was by design, but the other part of that is that the sales cycle and the qualifying cycle once you get the business in this particular business is slower than our core. So this solid growth,15%, 20% and once we get all the pieces in place.

But overall, if I could add to that Todd, I thought they did a great job. Every single month, they've improved their operating ratio, and then that's highlighted by the fact that we are now starting to bring on new customers. Terry and Arnie and their group did a great job. They just brought on a large pharmaceutical company the last two weeks to add to their existing business. So, we really think TQI has done a good job, and we look forward to seeing what they'll do for us in the future.

Okay and then so if I think about TQI on the cost side, if I look at the second quarter, are there any unusual costs related to integration or bringing on board, or are these numbers I should think about as a run rate going forward? And are there any additional costs that you're going to have for TQI as you continue to invest in that business and get it up to where it needs to be?

I think overall we're about where we anticipated being in terms of an operating ratio. We will continue as we bring on business to leverage our existing cost structure and make it even better. So if you use second quarter and built in some slight improvement throughout the balance of the year I think you'll be good.

Okay. Thanks a lot for the help and good luck, guys.

Kevin Sterling, BB&T Capital Markets.

Rodney, you mentioned a stock buyback, can you -- do you have a buyback authorization in place right now?

We do, it's just -- there's just over 800,000 shares remaining.

Okay, all right. And Bruce, not to beat a dead horse on pricing, but maybe I can ask a question a different way. We've been seeing the squirrelly pricing for some time, and as you know desperate companies look to make a market share grab, that strategy is not always sustainable in the long term. And usually what happens is service deteriorates. And so my question is are you having some customers come back to you who may have left because of pricing, but coming back to you because the service was so bad?

We've had some occasions where that occured. Typically what our customer base, what we see them do, is if they have a shipment that is deferred that they don't need expedited delivery on, then they'll tender that shipment to the low -- whoever gives them the lowest cost. But if they need service, then they're going to give it to us because they know we'll do it. So we -- as you said, we've been through it, we'll continue to go through it, and in the end we'll have money in the bank.

Right, right. Well that's all I have for today and my other questions have been answered. Thanks for your time.

Scott Group, Wolfe Research.

Hi, good morning, guys. It's actually Reena Krishnan on the line for Scott Group. And I apologize if you guys may have already answered this, but in terms of the guidance, if you could give us a sense, given what happened in Q2 in terms of the miss, how much conservatism is built into your expectations here? Given what your comments on the pricing environment and how tenants trends were last quarter, in terms of how they ended up in June relative to where they started? Is the expectation that tonnage levels can stay positive? And if you're not implementing, or it doesn't sound like you're planning to implement a GRI, trying to understand what maybe are some of the underlying points here, and how conservative those could potentially be?

Sure, on the low end of the guidance, it's -- we're assuming just flat tonnage, as well as yield. And to your point, typically when you come out of a miss like we just did, it's -- I think it's somewhat human nature to attempt to under promise and, hopefully, over deliver. So maybe that helps.

It does, thank you. And I guess if you could maybe comment on what the impact of fuel was, in terms of being a headwind last quarter and what your expectations are for 3Q?

Sure, net fuel was a slight headwind, it was just a negative 0.3%. So -- a lot, of course, fuel will actually help us, but on a year-over-year basis it did hurt us just a bit.

Great, and then in terms of the lost customer volumes, are you expecting a similar magnitude of impact this -- in third quarter versus Q2, or does that get better?

It'll be about the same in Q3. And then we had that -- that customer started phasing out in October, and then from November on, the comp is without that customer.

Okay, thank you, that's helpful.

Matt Young, Morningstar.

On the Solutions pipeline, it sounds like you guys might pull back a little bit on some new business, but looking longer term, are you still seeing more opportunities outside those traditional specialty retail markets? I know that some of your recent, last quarter and the quarter before that, some of your recent wins have been still in retail. They might be in a little different niche, but are you finding it harder than you originally thought to move into some of those new markets?

That's very difficult unless you can find the right customer, Matt, who has the density, store density or delivery density in a particular geographical area. And that's very difficult to find outside of retail.

Fair enough. Do you think some of those new retail niches that you talked about with these new customers would help the volatility in profitability for quarters outside the traditional peak season?

One of them in particular should be a big assistance to us in terms of flattening that revenue over the course of the year. They're not perfect in terms of, gee, they've got as much business in the second quarter as the fourth, but they do have a little bit more evenly spread out business, and so that's helped us.

Fair enough. All right, thanks.

David Campbell, Thompson Davis & Company.

The Logistics business was so strong in the quarter and the airport-to-airport was so weak, you're sure there's no reclassification of business in revenues from Airport-to-Logistics, or is there some -- what is going on?

David, I think it'd be helpful if you look at page 7 of the release, we've got it broken down by segment. There was $12 million that rolled up in consolidated Logistics that's due to an acquisition that we did back in March. So $12 million of the consolidated is related to TQI or the acquisition that we did.

Yes, I realize that, but still --

I which we could reclassify some of it from Logistics into airport-to-airport, but that's not the case.

So it's the -- so TQI is in Logistics, is that what you're saying?

That's correct.

Okay, I didn't realize that. Okay, thank you.

Ryan Bouchard, Avondale Partners.

In the Solutions business, salaries wage benefit line was up 19%. Was that new staffing levels associated with the new customers, or was any part of that one-time associated with on-boarding of new customers?

There's a little bit of both, Ryan. Probably the way to think about it, two thirds of that is going to be an ongoing thing, but you do tend to over staff when you bring on a new customer and make sure that you get it right.

Okay. And then in both the Forward Air and the Solution segment insurance and claims were up quite a bit year over year, one-time things or -- ?

It's a little bit of both, part of it's an ongoing thing. We had our insurance renewal period starts April 1, so slightly higher premiums on the insurance line. As far as claims, there was one actuarial adjustment for $0.5 million.

Okay.

We had a year ago that we don't have this year.

Yes.

So last year was probably better than we deserved, and this year's probably a little bit worse than we deserve.

Got you. Okay, thanks, guys.

Thank you for joining us today for Forward Air Corporation's second-quarter 2013 earnings conference call. And please remember, the webcast will be available on the IR section of Forward Air's website at www.forwardair.com shortly after that -- shortly after this call. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.