Forward Air Corp (Delaware) (FWRD) 2013 Q3 法說會逐字稿

Thank you for joining Forward Air Corporation's third quarter 2013 earnings release conference call. Before we begin, I 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 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're 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 with a summary of Q3 results, Rodney Bell.

Thank you, operator. Thank you all for joining us this morning. Starting with our Forward Air, Inc. operating segment which we break out on page 7 of the earnings release, total segment revenues increased year over year by $4.3 million or 3.5%. This increase was in spite of the loss of a major customer that represented approximately $6 million in the prior-year quarter. Airport-to-airport revenue inclusive of Forward Air Complete was up 4.2%. This resulted from a total tonnage increase of 5.5% offset in part by 1.1% decline in overall yield.

On one additional business day, average weekly tonnage was up 3.8%. By month, this quarter progressed as follows, July was up 1.5%, August was up 5.5% and September was up 10%. The yield decline consists of negative 0.8% from linehaul pricing, a positive 0.2% for net fuel surcharge, and a 0.5% negative impact from Forward Air Complete. Complete's revenue increased approximately 1.6% in spite of the previously mentioned loss of a large customer. This prior-year comp will persist through the end of October of this year.

Forward Air Inc. Logistics revenue, which is primarily TLX Xpedited truckload business, declined $525,000 or 2.5%. This result is due to a lower demand from our core customers. Logistics gross margins did improve 140 basis points compared to Q3 of the year-ago. Other revenues increased approximately $600,000 or 9.1% for the quarter. Operating income increased $1.1 million or 5.8% improving our OR by 30 basis points to 84.1. However, on just over 1.3 million additional shares outstanding, our EPS was flat with the prior-year quarter.

Moving to our Solution segment, on the strength of new business wins Solutions grew revenue by $10.3 million or 52.8%. With the majority of this new business startup and related expenses completed in the quarter, operating income increased $1.2 million and EPS increased $0.03 per share from $0.01 in Q3 of 2012. Lastly is our TQI reporting segment. On revenues of $12.4 million, we converted $534,000 to the operating income line posting a 92.5% OR compared to a 93.4% in Q2 of 2013. While we are pleased with the continued operating improvement, we're anxious to get our operating system up and running in order to maximize profitability on the existing as well as new business coming online. We expect to go live in the next 30 days.

Wrapping up my final comments on the consolidated level, our tax rate was 37.6% for the quarter compared to 31.1% Q3 a year ago. Net CapEx for the quarter was $4.7 million and $31.6 million year-to-date against a full CapEx budget of approximately $35 million. We end the quarter with $98.6 million in cash, essentially no debt, and $138.4 million available on our line of credit. Lastly, we anticipate the third quarter revenue will be in the range of 17.21% and approximately 9% of that growth coming from TQI. Income per diluted share is expected to be between $0.53 to $0.57, compared to $0.54 in Q3 in 2012.

We feel that it's meaningful to note that the prior-year Q4 quarter included a one-time tax benefit that had a $0.04 positive impact on the quarter. Also impacting the comparison is an estimated $1.8 million of additional shares outstanding with approximately a $0.03 negative impact in Q4 2013. While our outlook for earnings per share is essentially flat compared to Q4 2012, we anticipate operating income growth of approximately 15%. That concludes our comments. Now back to the operator for your questions.

Ladies and gentlemen, thank you. The floor is now open for questions and comments.

(Operator Instructions)

Bill Greene, Morgan Stanley.

Hi, there. Good morning. Rodney, I'm wondering if can you comment on little more or offer a little more color on some of the macro comments you've made? A number of the transports have actually given us a little more of a moderate kind of outlook, even suggesting that demand is a little bit tepid among some of the trucking names. Maybe you can comment a little bit more on what you're seeing there?

Sure, Bill. It's hard with the insulation between us and the actual shipper with the freight forwarded. But our sense is that typically our demand runs 2 to 2.5 times the domestic GDP. With tonnage in excess of that, we think we're winning share for the balance of that, so about a 50/50 split between that. Again, versus folks who are hauling general commodities. We are hauling high-value freight stuff going into the Christmas season, whether it be electronics, or what have you, it seems to have a higher demand.

Do you have a sense that you'll get a pretty good fourth quarter peak because of what you're hauling?

Right now, that's our sense. Thus far into Q4 that's what we're seeing.

Okay. Then, when you look at some of the strategies you apply, owner-operators and that sort of thing, is hours of service having any significant impact on your ability to achieve your goals?

Not as much as it would some folks, simply because we run a large majority of teams which the hours of service has a diminished impact on.

Okay, fair enough. Last question, M&A. When you look at some of the targets, because I know you say you've looked at a lot from time to time, what are the key attributes you're really trying to solve for? A lot of your peers in the logistics space have done a lot of acquisitions. These guys say it's been tough with valuations that were there and what not. What's the difference between their strategies and yours? Thanks so much for the time.

Sure, Bill. We stick with the [asset lot] model. We want to achieve double-digit margins either immediately, if not in the very short-term. We're cognizant of channel conflicts with our customer base. That's a big attribute there. We look into areas where we can provide value. We don't want to be a general commodity. We want to differentiate ourselves through service. That's really the attributes.

Jason Seidl, Cowen and Company.

Good morning, guys.

Hi, Jason.

The first question, you say you're going to get your operating system live here by the end of the month. Can you talk a little bit about what you see the impacts from both a cost savings side and potentially a revenue side with customer facing?

The main reason we're going to implement the system is simply for additional controls over the business as we see it today. The reason for that, paramount reason, is we're not hauling dog food. We're hauling refrigerated loads of pharmaceuticals, et cetera, that require extreme temperature monitoring, extreme security measures, et cetera. As our friends at TQI hit a certain level of business, it becomes paramount that they have an operating system that they can rely on to run their business every day.

We're very close to having that implemented. When we do have it implemented, I think you're going to see us pushing really hard to improve the revenue from their current business plus additional opportunities that they have. On the operating side, you're just able to better track the equipment. You're better able to track the various expenses as they go along, and you want to make sure that we're doing everything the best possible way.

On the airport-to-airport side, could you just talk a little bit about the pricing environment? It sounds a little bit from your lack of commentary that it's gotten a little bit better than it has been in some of the prior quarters?

Volume cures a lot of pricing issues. We approach it from the two-step manner. One is we'll slow down spot rates, what we call spot rates, which are temporary rates that the field gives to our various customers. That has been implemented for the last three weeks, and we're seeing very positive results on that. Assuming that volumes continue, and we think they will, you will see us taking additional steps in the near-term.

Okay. Piggybacking on one of the prior questions, obviously, you do have a little bit of a different outlook than some of the other transportation providers that are more direct, if you will, with some of the customer facing. Are you seeing some of the impacts at all from some of these electronic rollouts that have been coming along here in the quarter? Or are you guys immune to that?

We actually see them very closely. One of the ways we can look and see that firsthand is via our distribution business which has been extremely busy. We're experiencing that. We like it.

Okay, fantastic. I'll turn it over to somebody else. Guys, I appreciate the time as always.

Jack Atkins, Stephens.

Good morning, guys. Thanks for taking my questions. To start off, Rodney, if you could go back to the volume progression through the quarter, it seems like volumes really ramped in the second half of the quarter. Could you talk about what was driving that? It seems like it's a mix between the macro and taking share. But could you maybe highlight a couple of the items that's helping you guys take share in the current market?

Sure, Jack. Going back starting with July, it was up 1.5%, it went to 5.5% in August and then 10% in September. Thus far through October, we're seeing weekly volumes up, anywhere from 6% to 8%, so it's remained good. From the macro standpoint, again, to the previous question, we think it's the type of goods that we're hauling that's helping us. Somebody with a focus on general commodities may not be getting that benefit. The other thing, Jack, is we hear from our customer base that some of our competitors are not as good as securing capacity as we are, and they're not providing the level of service that we are. With these high-value goods, service is paramount.

That makes a lot of sense. Just to follow-up on that, we've heard of some international freight forwarders who are maybe looking to get bigger in the domestic market by offering some time-definite, door-to-door white glove services. Our first sense when we hear that is maybe that's an opportunity for you guys, given your national footprint to take more share in the deferred air freight market. Is that something that you think is an opportunity for you guys over the course of the next 12 to 18 months?

Absolutely.

Let me put this color on it. We've been doing this for 23 years. Probably for 22 of those years, we hear this over and over that the internationals are going to get into the domestic market. That does occur on some occasions, but typically it's not a long-term project. There are exceptions to that. Certainly we support them, and it's good for our business. But it's nothing that we're going to jump up and down about until we see their total commitment to it.

That makes sense. Bruce, following up on your commentary on the competitive landscape and pricing, it sounds like things may be getting a little bit better on that front. Would you expect core linehaul yields to stabilize in the fourth quarter? Given that you're lapping your GRI, maybe you'll see those linehaul yields declines accelerate in the fourth quarter? How should we think about that?

We're looking strictly at stabilizing a map, and then we'll have a second step in the near-term.

Okay, that's also very encouraging. Last question for me. Bruce, your cash flow remains very impressive. You guys are almost back to $100 million in cash on the balance sheet. I understand that M&A remains a top priority for your cash, but is there some thought given how difficult it can be to find source and close acquisitions, not to mention integrate them, maybe looking to step up your share repurchases, or maybe increase the dividend, to pursue both avenues? I think you've got the cash flow to support both.

That's our exact strategy. As we go into the fall and we prepare for 2014 is to look at those various options. As you've stated, number one is any time we have a good acquisition target, we're happy to spend money on it. Number two would be, what are the other alternatives? That's basically what the management group and the Board will decide in the near-term.

Thanks for the time, guys.

Todd Fowler, KeyBanc Capital Markets.

Great, thanks. Good morning. Just a question on the airport-to-airport business, the purchase transportation costs, the net revenue contracted a little bit on a year over year basis in the quarter on both sequentially. Is that a function of the re-acceleration in volumes and having to rely more on third-party capacity to move some of the freight with the pickup that you saw in the quarter? Or is that something more on the cost side with your owner-operators?

You answered the question, Todd. That's exactly what it is.

The other thing that jumps in there, Todd, as we talked distributions earlier, sometimes they will occur in an area of the country that will drive the PT to be a little bit higher for that business than the normal airport-to-airport. Not to confuse it or get too far in the weeds, when you have a lot of distribution business, you will see our PT in most cases scoot up just a little bit.

Okay. Rodney, how long does it take you to get your arms are arms around that? Is that something that when you see this big increase in volumes in September that it normalizes as you move into the fourth quarter? Or can it be a quarter or two impact to get the network to where you need it to be?

It'll impact the fourth quarter. By the nature of the business, then the first quarter will come down. It's really just a simple -- I say simple -- displacing those third-party miles with recruiting owner-operators.

Okay. Do you have any concerns on the capacity side, either your access to capacity, or what you're paying for capacity, based on what we're seeing in a broader truck load market at this point?

The quick answer is no.

Okay. I'll take the quick answer. On the pool distribution side, Bruce, I'm curious. We've heard some very mixed things about more of the specialty apparel retail environment going into the fourth quarter. My impression is historically that business has been dependent on that, but I know you've done a lot to improve the mix. How do you feel about that? How do you feel about that business into the fourth quarter, given what we've heard on more of the apparel side of the retail world?

Number one, we're extremely pleased with the progress that they've made. We've got more work to do. We're confident that they're going to do that work and get this business exactly operating the way we want it to. On the various retailers, you almost have to look at each one individually. Some are doing very, very well, and some are doing okay. A few are not doing well. We can't tell you probably anything that you haven't read about the retail market. We know who the good ones are and the ones are that are struggling.

Okay. Then, what would the expectation be for solutions as you move into 2014 at this point? Do you think the business is to the level where you can see profitability every quarter during the year? Or is there still seasonality in the first half of the year and expectations for profit in the second part of the year?

As we've said from the beginning, our base thought on that is breakeven Q1 because it's an extremely tough quarter. Retail business and operating ratio of 95% in the second quarter, and operating ratio of 92% somewhere in the third quarter, and then a normal, strong fourth quarter. This overall will give us and operating ratio we are hoping of low 90%.

Okay. Then the last one I had, do you have a growth rate for TQI year over year in the third quarter? I know that there was some business that you didn't take when you made the acquisition or the plan that you are going to walk away from. I'm trying to get an idea for what that business is growing year over year. I think somebody earlier had asked about ability to grow that business going into 2014 and I wanted to get a sense of how you think but the growth rate for the going forward.

Our market position there is we think we have a true leader in terms of quality of service. We don't have a true leader in terms of percentage of the market share. We think there's obvious opportunities to grow. We will go out in 2014 at a minimum of 15% year over year improvement, but we actually think we can do better there.

From a comparable business standpoint, do you have a number for the third quarter?

It's really fuzzy because of the business that we knew going in, before we consummated, we knew was already off the table. It was going out the door. It's flattish.

Flattish with the business, or flattish if you adjust for the business that you were not going to take?

Flattish for the business going out.

All right. Thanks a lot for the help.

David Ross, Stifel Nicolaus.

Good morning, gentlemen.

Good morning, Dave.

Back to pull distribution, looking at the 55% growth there, how much of that was from new customers versus existing business? I knew you had some new business wins earlier in the year.

Almost all of it, David, was from new customers.

Okay. And back to TQI, we saw the margins improve little bit sequentially from Q2 to Q3. The seasonality in that business, what's the most profitable quarter of the year for those guys? Or are all four quarters relatively within 100 basis points of each other?

Relatively within 100 basis points. They did go through flu season. They go through allergy season, those types of things, but it's not anything radical.

Okay. Then, the volume growth that you're experiencing on the airport-to-airport side, is that coming from any specific geographic region? Or were there any patterns to develop throughout the third quarter, in terms of demand?

Our answer to that, David, would be it's pretty much across the board. If you pushed us to give a stronger region, we would probably look at both the Midwest and the West as being the two strongest. You can even throw in the East a little bit.

Okay. The last question, why were there no share buybacks in the third quarter? Acquisitions weren't done. There's still a good amount of shares remaining under authorization. Just curious to why nothing was --

It's really just a matter of valuation, David.

Okay. What valuation do think share buybacks increase?

We're not going to touch that.

The answer to that question is it's a decision made by the Board in conjunction with us. We're meeting Thursday, and hopefully we'll have something to come out of that. We may, or we may not.

Excellent. Thank you very much.

Kevin Sterling, BB&T Capital Markets.

Good morning, Bruce and Rodney. You talked a little bit about you're always looking for acquisitions. What are you seeing out there in terms of opportunities? Are multiples still too high in your opinion?

Let me put it this way. The few that we've looked at recently have been very realistic, have been very good opportunities for us. We're pleased with that. At the same time, there's probably countless others that are at best severely overpriced. We're just not interested in doing that type of deal. We are interested in buying a quality company. TQI is an example of that. There are other opportunities as we move forward this year. Overall, the market I would say is okay. It's nothing special. It's nothing bad.

Okay, thank you. Bruce, you talked earlier about winning back some business because of service. When that happens, do these customers that come back to you, are they a little more sticky when that competitor maybe comes around with a rate that doesn't make sense? What I'm asking is maybe the next time the customer may not jump ship so fast. Does that make sense?

Your thesis is sound, but we also know that if somebody comes along three months from now, and hits them with a gutter rate, they'll probably take it at least once.

Right. So they have a short-term memory, but one service fails they come back to you, is what I am hearing?

Right.

Okay. That's all I had. Most of my questions have been answered. Thanks for your time this morning.

Scott Group, Wolfe Research.

Thanks. Good morning, guys. Bruce, I think you mentioned that step two on pricing is coming in the near-term. Should we be thinking about a GRI? Do you think that's realistic in the first half next year, or do we have to wait more towards the back half next year?

First half.

Do you think that could be similar with what we've seen in past years, from a percentage standpoint?

I'm sorry, Scott. Yes, that's a fair assumption.

Great. Now that we're lapping the back stuff that impacted Complete, how should we think about growth in Complete shipments going forward? Do you think that's a big growth opportunity, or is that going to be just track more in line with the core Forward Air business?

Scott, it should be a bigger opportunity than the core business. With the customer that we've talked about, the attachment of Complete was 100%. So, the impact on the prior-year comp was pretty dramatic. With that out of the mix, starting first of next month, Complete should grow in the 15% to 20% range.

Do you think that's what you've been seeing the past few quarters ex this one customer?

Yes, Scott, certainly in Q3.

Great. That's all I had. Thanks, guys. I appreciate it.

David Campbell, Thompson Davis and Company.

Hi, Bruce and Rodney. I just wanted to ask you on the TQI business, any of that can use network capacity in the airport side?

We typically, David, have been working for the last month six weeks utilizing some of the TQI business to backhaul in. We put them into the Forward Air system for a leg or for one link. I'm just making this up. They may end up in LA with a load of pharmaceuticals. We'll load the truck at our airport-to-airport facility, back to Columbus. As we get more and more into the integration, we're seeing some big positives out of that. That's a good pickup on your part.

Given the fact that your operating ratio, or your purchased transportation percentage of airport businesses, I thought there'd be more leverage. I thought that percentage would go down as the network revenue went up. Now you're adding TQI in some places. 42%, I think it was, I am not sure. It seems high. I remember when it was below 40% for a while.

I think what you have to do there, David, is break it out. What you're looking at is a combined PT. If you look at just our airport-to-airport segment, it runs somewhere between, on a really good quarter, 36%, and on a not-so-good quarter 38%, on just airport-to-airport.

Okay.

Does that make sense?

Yes, so some of the business is not the traditional lower --

What happens is part of that PT reflects our TLX charges and our complete charges. Purchased transportation for a truckload is a higher component than for the airport-to-airport. What you'll see in Q1 of 2014 is we will break that out differently so we don't have that confusion.

You're going to have that broken on next year. Okay. The logistics business seems strong. Any reason for that? Anything you've changed?

David, on the consolidated level, that's the impact of TQI rolling up under that logistics line item.

That's right. Your labor costs seemed relatively high in the quarter. Of course, the revenues were, too. Are profit-sharing and bonus provisions adding to that cost?

I wish they were. David, it's labor to service that increased Solutions business as well as the higher than the prior-year group insurance cost, and just a little bit of higher field incentives, to your point.

So, we should see more leverage there in the fourth quarter when the Solution business peaks?

We should.

Right. Thanks, I appreciate your answers.

Matt Young, Morningstar.

Good morning, guys. Again, regarding the cross-selling opportunities at TQI, I think you've also mentioned in the past that some customers have a material amount of [dry van] freight as well. I don't know if that's what you were referring to before with some of the opportunities. I was just wondering if you've been able to capitalize on that for the TLX business, or if you still see that as an opportunity?

It's still a big opportunity. We believe a lot of changes are going on at the various pharmaceutical companies that will help us with that. We have some of it, but minimal at this point. It's definitely a goal as we move forward.

Quickly on the airport-to-airport business, have you guys been increasing the driver pay at all? I know you've mentioned increasing pay for drivers. I think it was for those that purchased new tractors to help them out. Have the increases moved beyond those kind of --

No, they've remain the same. If you do purchase a new tractor, we up your rate.

Okay. That's all I had. Thanks.

Ben Hartford, Robert W. Baird.

Good morning, guys. First, can we get just a little bit more granularity in terms of the Q4 dynamics, first from a government shutdown perspective. We've been hearing about some ship delays that had started early in October because of the shutdown. I'm wondering if you're seeing any uptick in expedited-related demand, as a result of that towards the end of the month, as you work towards a backlog, or if there was any concern about the impact of the government shutdown, and therefore greater utilization of air freight as a result? That was point one. And point two, I'm wondering if there's any impact whatsoever from the six fewer selling days from a retail perspective between Thanksgiving and Christmas, on behalf of your customers and the need or demand for expedited services as a result?

The answer to question one is we have not identified that phenomenon happening. That's not to say that we necessarily would either because that would be a customer-specific thing.

On the second question, which is really an interesting one this year, in our discussions with the retailers, obviously they're well aware of it. They truly don't have, what I would say, a really good grip on how they're going to handle it. I think you'll see that as we play through November, depending on who the retailer is, and how their business is, you're going to see them respond in ways that they haven't in the past. But that remains to be seen.

Yes, okay. Then on TQI, as you get the system rolled out, I know you'll have it done by the end of the year, should we expect the margins in that segment in 2014 to be full-blown? And by that, I mean representative of what you guys can do. Or is there still more work to be done from an integration standpoint, and we should look to 2015 all things equal before we see whatever OR level you have targeted for that unit?

We'll be good in 2014.

Okay, thanks for the time.

At this time, there are no further questions in queue. Thank you for joining us today for Forward Air Corporation's third quarter 2013 earnings conference call. Please remember that 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 the AT&T Executive Teleconference Service. You may now disconnect.