Forward Air Corp (Delaware) (FWRD) 2013 Q4 法說會逐字稿

Thank you for joining Forward Air Corporation's fourth quarter 2013 earnings release conference call. Before we begin, I want 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 2013 results which were furnished to the Secretary 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. And now I'll turn the conference over to Bruce Campbell, Chairman, President, and CEO.

Good morning. Thank you for joining our fourth quarter earnings conference. I would like to just emphasize a couple points that went on during the quarter and then turn it over to Rodney Bell for our financials. First, we based beginning -- pardon me, beginning in November basically running through the end of the year, fought weather week after week and we have continued to fight whether. And it's been a most extraordinary winter for us and our team, but it think overall had that not occurred, we would have been in much better shape.

Secondly, we are extremely pleased to have the CST acquisition finished. We are extremely pleased to have that team on board and we think we will have a wonderful platform to grow our business and the drayage segment of the market into the future. And with that, Rodney Bell.

Thanks Bruce. Starting my comments with the Forward Air, Incorporated operating segment, which is broken out on page 7 of the earnings release, along with our other two operating segments. Total segment revenues increased $3.7 million or 2.9% compared to Q4 of 2012. Airport to airport revenue, inclusive of Forward Air Complete, was up for 3.2%. This resulted primarily from a tonnage increase of 5.9%, offset in part by a 2.5% decline in overall yield. With the loss of a large customer out of our prior-year comparison for the majority of the quarter, Forward Air Complete grew approximately 8%.

Average weekly tonnage was up 5.9%. By month, the quarter progressed as follows: October plus 5.5%, November was up 5.9%, and December was up 6.3%. In spite of the continuing challenge of weather, January tonnage increased 5.1% compared to January 2013. The Q4 yield decline consists of a 1.9% decline in linehaul pricing, a 0.9% decline from net fuel surcharges, offset in part by a 0.3% positive impact from Forward Air Complete. The decline in yield moderated down to approximately 1% in January and a headwind from net fuel surcharges expensed in Q4 had a neutral impact for January. Our now announced March 1 rate general increase will more than offset this yield decline. We are anticipating an approximately 2.75% net benefit from the GRI.

Forward Air Logistics revenues, which is primarily our TLX Xpedited Truckload business, declined 0.8% for the quarter while other primarily fee-based revenues were up 9.1%. Total operating expenses increased by $5.5 million or 180 basis points as a percentage of revenue. As Bruce mentioned, weather related expenses and the year-over-year decline in yield were the primary reasons for this. Hit hardest was our purchased transportation line item due to the costs associated with inclement weather which got our network out of balance and the cost to get it back into sync.

Also hit hard was our other operating expense line item, which includes cost from things like snow removal as well as the impact of cold weather on equipment and facility maintenance. To a lesser degree, staffing and labor costs are -- also become challenging in bad weather. Operating income decreased $1.8 million as a result.

Moving to our Solution segment, as a result of new business, [FASI] grew $9.1 million and 32.3%. Disappointingly, we were unable to convert any of this increase into revenue to the bottom line as a result of poor operational execution in servicing the seasonal increase in volumes. As Bruce mentioned in yesterday's press release, we have implemented a plan solely focused on improving 2014 operating income. As a part of this plan, we have already implemented an across the board general rate increase which will net approximately 2% across all revenue for Solutions. Other operating initiatives are such that their impact should be measurable within the first half of the year.

Lastly in our TQI operating segment, on revenues of $13.3 million, our operating income was $1.7 million. Approximately $600,000 of this was the one-time benefit of taking into income an accrual for an earn-out which we view as unachievable. With net operating facility -- with new operating systems finally online, as well as new capacity for both new company equipment as well as continued success recruiting additional owner-operators, we feel encouraged for our 2014 TQI growth prospects.

At the consolidated level, our tax rate was 32.5% for the quarter, compared to 33.2% Q4 year ago. With the expiration of a tax credit related to propane usage and not being able to accurately predict the benefit produced by the exercise of incentive stock options, we are modeling our 2014 tax rate to be 37.8%. Net CapEx for the quarter was $1.9 million and $33.5 million for the full year. We have 2014 net CapEx budgeted at $34.5 million. We ended the quarter with $127.4 million in cash, essentially no debt, $140.6 million available on our $150 million line of credit. Subsequent to year end, we funded the CST acquisition with approximately $92 million of cash on hand, leaving us at that time with $47 million of cash available.

Lastly, we anticipate first quarter revenue will be in the range of 19% to [23%]. At the midpoint, we expect the January and February benefit of TQI purchased in early March, to be approximately 6.5% and we expect the February and March benefit of the recently closed CST acquisition to be 6%. The income per diluted share is expected to be between $0.36 and $0.40 per share compared to $0.36 per share in Q1 of 2013. We expect the EPS benefit from CST to be neutral for Q1 as the deal cost will offset any resulting operating income.

A few additional items. Yesterday, in addition to announcing our 2013 results, we announced the Board authorized a new $2 million share repurchase authorization along with a 20% increase in our quarterly dividend. The share buyback authorization will be used to offset the accelerated dilution brought on by our option exercise as a result of expiring option grants. The change in our quarterly dividend resulted from our routine Board evaluation of the adequacy of our dividend. These are actions that should be viewed as a change in our primary strategy to identify and close on quality acquisition candidates. With our cash on hand, projected cash flow this year, and our availability of debt, we simply see no reason we can't do all of the above. This concludes our comments. Now, back to the operator for your questions.

(Operator Instructions)

First question comes from Bill Greene with Morgan Stanley.

Good morning. This is Alex Vecchio in for Bill. My question is just with respect to -- obviously, weather was an impact for you guys as well as most other transports in the first quarter, rather the fourth quarter as well as into the first quarter.

I was wondering, can you parse out, excluding weather, how underlying core demand has been trending and the broader macro picture in terms of whether that's improving or staying stable? We've heard some incrementally positive commentary from other transports so we just wanted to get a sense for what your take is on this broader macro trends.

I think Alex, if you heard Rodney's commentary on our volumes for the entire quarter and then how the first quarter began, volumes in our opinion are almost shockingly good considering the weather. We have been positive each of those weeks and many of those weeks, we were literally shut down in cities like Atlanta, Dallas, other very large contributors to our Company. So if there's anything positive that comes out of both the fourth quarter and now the first quarter, it's things seem to be really good from a volume standpoint.

Okay. That's helpful. Do you have a sense for whether you are maybe taking some share from your competitor in the A2A business just given the declining service levels there?

All I can do is give you a couple facts. One is we do know one of our larger competitors has basically reconfigured and shrunk their network, and we know that's factually. And then we do believe that in other situations that we are taking some share away, but that's always -- that's a very difficult to put in black-and-white but we do believe that.

Sure. Okay. That's helpful. And then just lastly, more of a technical modeling question. I think you had maybe addressed some of the items, but just curious for just more color on the $4 million year-over-year increase in other operating expenses. It sounded like most of that was weather related but I just wanted to clarify what's in that. Thanks.

Alex, a fair amount of that I would say the majority is weather-type related and -- call it 60%.

Okay. Perfect. Thanks very much.

Our next question comes from Jack Atkins with Stephens.

Good morning, guys. Thanks for your time. So I guess a couple questions here.

Rodney, you've kind of touched on this a little bit, but could you maybe expand on the -- just quantify the impact that weather had in terms of EPS because it sounds like it was more of an OpEx impact than a volume impact in the quarter? Could you maybe expand on how much of an impact that was in the quarter in terms of the hit to earnings?

And also, what you are you assuming in terms of weather impact in your first quarter guidance because I don't think weather has helped you guys any this quarter either?

That's a lot, Jack. You are exactly right, starting off with it was more of an operating expense impact than it was a top line impact. There was some of that too but more meaningful was the expense that -- the additional expense.

Jack, the expenses that roll up in other operating expenses, that's pretty easy. You can go in and pick out this was snow removal; this was additional maintenance because of this. But when you get to the PT line item, it gets really fuzzy because the expense getting your network back into balance gets tough.

Our best guess is somewhere between $0.02 and $0.03 was the impact on Q4. In the first quarter guidance, we've got that between $0.01 and $0.02 on the low and the high end of the range. But you know it's -- there's bad weather again in the South today. So I'm not try to hedge but maybe I am.

Okay, understood. Glad to see you guys announce that the GRI that's going to go in place in the first week in March. Could you maybe talk about what's taking place in the market over the last couple of months to give you guys the confidence to go forward with the GRI because it's certainly a change in tone versus, call it, six months ago.

Yes, without question it is. If we go back -- if we could do things in reverse, which is always nice or in hindsight, we made and then in particular, I'll take the blame for not taking a GRI effective in September of last year.

We had to make that call in mid to the end of July, and in our best opinion at that moment, it was not the right thing to do at that time. In retrospect, it would've been the right thing to do because the volumes did come back. In some cases, surprisingly came back.

And as a result of that, and as a result of the volumes continuing to hold a nice level thus far in the quarter, we are very comfortable that we can get the GRI in. It's not an outrageous GRI so it's not like we're going to try to put people out of business. It simply one that helps us to recover incurred costs that we can't offset in our normal operations. So we feel it's earned.

There's one other important area on the rate side that we look at on a daily basis and that's what we call spot rates were we give discounts. One what you could call a one-time discount to one of our customers because they have a large shipment. They have a shipment going in the lane that we need it in. That type of thing. And we have really tightened that down, so it's kind of a two-pronged approach to try to get our rates in tune with the volumes and the capacity requirements.

Okay, great. And then on the Solutions business, I know you touched on in the prepared remarks that you all are focusing on profitability there in 2014. But in addition to the GRI, could you maybe address some of the other initiatives that you got in place there to improve margins in 2014 and how should we be thinking about the profitability of that business in 2014?

Let's back up and go through the quarter. We completed November in the Solutions segment with the best -- a record month for them. They just did exceptionally well.

And then in December, they got hammered also in weather situations. They got hammered with the shortened retail cycle because of the way Christmas fell this year. So December hurt them, and it shouldn't have hurt them.

So that was, to us, disappointing. However, going forward, we spent a great part of our planning process for the new year to really tighten them down and when you ask for specifics, I can take you down to dock costs if that's what you'd like to see.

And in fairness to them through the January month, they had a really good controllable expense month and so our whole focus is on those expenses that we control. And then the other focus was in many cases, we had rates that are what we consider to be under water and we had to have those rates increased and it wasn't one of those situations where we went through a lot of negotiations. It was a simple matter in order for us to make this a viable long-term business, these rates had to come up. And fortunately for -- because our team did a good job, we were able to get that pushed all the way through.

Okay, that's great. Last question and I'll turn it over. Bruce, as far as the Central States acquisition, congrats on getting that acquisition sourced and closed.

But can you talk about what attracts you guys to the drayage market and the opportunities that you see there? I would think that there are opportunities to leverage Central's capabilities with your legacy business, and the first thing that comes to mind there is what you guys do in the complete service offering of yours and do you expect that the Central acquisition will allow you to do more of your own in-house drayage, Bruce?

It should and let me back you up a bit here also. Within Central States Trucking revenue profile, they do a small airport-to-airport operation that's based primarily in the Midwest. So we're going to be able to do a lot of things together there to improve both their operation and ours and we look forward to getting that done soon. They also run a CFS operation in most of their terminals in the Midwest, with the big one being in Chicago.

And it's an extremely well-run smaller operation, as CFS is a container freight station where basically you are taking business from airlines and clearing it for the various customers, so it's a perfect business for us. We have CFS stations across the US. It's just never been a real push and so hopefully we are going to use this as a platform to help us expand the CFS business across the US.

And then finally the dray, we've always wanted to get into this market, as you may or may not know. We have a nice drayage operation today in Houston and they do very well. And it's a model that we really like using owner-operators, and so as we got more and more into that type of business, it was a business we decided that strategically could take us places into the future. But we had to find the right platform.

And there are many bad platforms out there. In Central States' case, it's just really well run. It's a great management group, good people, and surprisingly good margins for this type of business. So when you look at that and you look at what they've been able to do, how the two companies fit together, we think we can get just a really good head start in this business and then be able to use it to continue our expansion into drayage.

Okay. Great. Thanks again for the time.

Your next question comes from Todd Fowler with KeyBanc Capital Markets.

Great. Thank you. Good morning. I guess I wanted to start with a high-level question about the network. With tonnage now growing in the mid-single-digit range from a facility standpoint, how is capacity within the network? I guess aside from weather, are there any issues as far as needing to expand the network given the increase that you are seeing with tonnage?

No. How is that for a quick answer?

Fair enough. Bruce, how much more tonnage do you think you could handle? Do you think you can go through another couple years of growing mid-single digits and you wouldn't have to do significant expansion or do get to a point where you're seeing some pinch points in certain parts of the network?

Typically what happens, Todd, is we'll get a single terminal or maybe two terminals out of the 89 where we have a capacity issue. So it tends to not be across the board. And you know, we may or may not run into that this year. As I tell our people all the time, that's a great problem to have.

Okay. And then I guess on the rolling stock side of the question, it sounds like that some of the issues in the quarter with the net revenue margins or the purchase transportation costs were predominantly weather-related. How do you think that you are set up with your owner-operators from a capacity standpoint with what you're seeing on the tonnage side as well?

It has not been an owner-operator issue as much as it has been you simply get out of balance and that occurs because -- let's use the most current shut down, Atlanta. You know Boss in Chicago and other cities are still picking up freight and we eventually have to get it there. In the meantime, you get your power completely out of whack, and the only way you can fix that is to either run empty, which is expensive, or to go to outside carriers to try to offset the empty miles and that's also expensive, especially when they know that they are in demand.

That's also part of our life. We have had to deal with that our entire existence. But it's just never been over and over and over again like it has been recently.

So let me take you back to total owner-operators. We continue to grow our owner-operator fleet. We continue to have people who want to work for us and so you'll see us start to expand our owner-operators as we can get our network back in balance and then we can efficiently utilize them.

Okay. So if we continue to see these mid-single-digit increases in tonnage, we should be concerned about any sort of mix where you had to go outside of the network more and rely more on third-party capacity to handle the incremental volume that you're bringing in?

Actually, we're hoping for the opposite effect.

Okay. And then just two last ones. You're looking at total quality here in the quarter. It sounds like that there was $600,000 of benefit running through the P&L from the earn out adjustment, but if we take that out, is that an appropriate or is that the right way to think about the margin profile that business, or is there anything seasonal in the fourth quarter where maybe that's a little bit stronger than what we should expect for the first couple of quarters of 2014?

I would say normally, they're no different than most transportation companies and that is the fourth quarter is typically a strong one for them. Now here's what happens with their business in particular. We will see business fall off fairly hard during the Christmas period because pharmaceutical shippers will not ship and let a load lay over. So we do get hurt a little bit on revenue from that standpoint.

But typically, again, the fourth quarter will tend to be better than the other quarters. First, second, and third are all what we call adequate to good quarters. Again, they don't have quite the swings that other businesses do but they do have some heavier demand in the fourth quarter.

Okay, and then the target there is for double-digit operating margins on a full-year basis in 2014?

Yes.

Okay. And then just the last one I had and I'll turn it over. Thinking about taking up the share buyback, doing the acquisitions, I know you still have capacity on the balance sheet, but is the message that you need to be willing to take on some balance sheet debt or some leverage if the right acquisition was there or if you wanted to be more aggressive in buying back the stock?

If I could start with the buyback portion first. One is, we need to get rid of our dilutive impact that's been going on for the last two, three years. If nothing else, that's our goal.

And then secondly, if we find the right acquisition that generates good income, certainly we'd be willing to take on debt. We have just been fortunate that we can fund our own purchases. Okay. That make sense especially about the dilutive piece. Okay, guys. Thanks a lot for the time.

Our next question comes from Ken Hoexter with Bank of America.

Hi guys. This is Shawn Collins. I work with Ken Hoexter. Guys, can you just comment a little bit further on the Central States acquisition and just how it fits in with your other three divisions? And am I correct to think that that revenue will be accounted under the Airport segment?

Shawn, yes. It's in the Forward Air, Inc. segment which includes our airport to airport segment. What our intent is, and we're still having some internal discussions and debate, but our intent is to fold their airport to airport operation into ours and we already have a legacy drayage business, that Bruce mentioned, out of the port of Houston and combined those, but those would -- both of those pieces would roll up under the FAI segment.

Okay, great. Thank you. Would you be able to comment a bit further on margins? At Central States versus your other businesses, kind of what you are seeing on an operating income basis?

Sure. Post deal because we pick up some additional amortization we book in conjunction with the deal, we're looking at EBIT margins in the 12% to 13% range and then the math's pretty easy to get to EBITDA. The EBITDA margins of -- call it 18% or 19%.

Got you. Okay, great. That's helpful. And just my last question. The Solutions business, revenues certainly came in more than we expected. Is that a trend that you expect to continue and kind of what are you seeing in that business from a volume and pricing standpoint?

You know, they are extremely heavy at the end of the year so our revenues fall back in the beginning of the year. But on a year-over-year basis, they will continue to see pretty solid growth, solid meaning 30%. And then we will start hitting periods where we brought on business a year ago so the comp will reduce. But not -- it'll go down to, let's say, between 12% and 15% for the balance of the year.

Okay. Understand. That's great. That's helpful. Thank you very much for the time guys. I appreciate it.

Our next question comes from Scott Group with Wolfe Research.

Good morning, guys. It's actually Reena Krishnan sitting in for Scott Group today. A lot of our questions have been answered, but just wanted to maybe get some color on how you guys are thinking about the acquisition pipeline going forward. Following Central States and TQI, just what are some other services or businesses you are looking to maybe integrate into your current business or that you think would fit well or some of the markets that you'd like to go into?

Well, I think the first thing we have to do, Reena, is get our new businesses under solid controls and solid opportunities looking into the future. Our first initiative will be to grow to grow the CST platform as fast as we can yet still providing a good product and a good margin. So that's our number one priority. Our second priority will be to start looking for acquisition opportunities for TQI. And that may not be an additional let's go out a buy another refrigerated truckload carrier.

What we will look for is probably somewhere in the segment of [three PLs] that handle healthcare and pharmaceuticals so that we can continue to improve the opportunities they have within that product line. All of that -- none of that is in the works as we sit here today. That will be our first quarter objectives to identify and press on to successful conclusion. But that's going to be a full year's work right there.

Okay. Great. Thank you for that color.

Next question comes from David Campbell with Thompson Davis.

Thanks for taking the time. I wondered, Rodney, if you could quickly go over your first quarter comments about revenue. I think I heard you say you expected revenue to be up 19% to 20% for the quarter. And how much of that is CST?

Sure, David. We're expecting 19% to 23% at the midpoint. About 6% of that 21% will be CST for the month of February and March. And then since we bought TQI in March, the January and February benefit of that acquisition will be about 6.5%.

Okay. And you're estimating all of that produces $0.36 a share?

$0.36 to $0.40.

$0.36 to $0.40. Okay. Thank you.

You're welcome.

Thank you for joining us today for Forward Air Corporation's fourth 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 this call. This does conclude your conference for today. We thank you for your participation.