Forward Air Corp (Delaware) (FWRD) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for joining Forward Air Corporation's third quarter 2014 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 the third quarter 2014 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 may be affected by the important factors, among others, set forth in our filings with the Securities and Exchange Commission and in the press release issued yesterday, and consequently actual operations and results may differ materially from the results discussed in the forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Now, I'll turn the call over to Rodney Bell, Senior Vice President and CFO.

Thank you, operator. Good morning, and thank you all for joining us. Let me start off by apologizing for our lack of accessibility after the release yesterday afternoon. Unfortunately, it was unavoidable.

I will quickly take you through the high points of our results and move right in to your questions. Starting with revenue from the Forward Air Inc.'s segment, airport-to-airport revenue, inclusive of Forward Air Complete, increased approximately 10%. This resulted from a 4.9% increase in tonnage for the quarter and a 4.9% increase in overall yield.

Average weekly tonnage on the same number of business days was up 4.9% for the quarter, progressed as follows; July was up 2.4%, August 3.9%, and September 8.3%. Thus far in Q3 volumes have remained positive as compared to the last year, and tonnages are up in the mid-single digits thus far into October.

The majority of our yield increase was from line haul processing which up 3.3% as a result of our March general rate increase. Increased fuel surcharges contributed 0.4% with a positive impact of Forward Air Complete accounting for 1.2% of the increase. Yield has also remained constant moving into the fourth quarter. Complete revenues were up 13.9% as a result of greater demand for our services within our core business.

Since the February acquisition of Central States Trucking, it is rolled up within our FAI segment. For the third quarter of 2014, CST revenues were $21.1 million. Operating income $2.5 million, and the contribution to EPS was $0.05.

Included in the CST results, was the impact of the early September acquisition of Cleveland based RGL Trucking. In 2013, RGL had revenues of approximately $4 million and EBITDA of about $0.5 million. The purchase price was approximately $1.3 million. Albeit small, RGL represents the first of what we think will be several trucking acquisitions meant to leverage the CST platform.

Revenue in our solutions operating statement grew 2.7% as we hit the anniversary of two large business wins from a year ago. TQI revenues were down 3.2%. This was due to a change in our accounting for TQI fuel surcharges in order to be consistent with our other business units. Without regard to that change, revenues were up 12% on an apples-to-apples basis from Q3 2013.

Moving on to expenses, purchased transportation in total was up $10.7 million or 14.2%, but down 160 basis points as a percentage of revenue. An 80 basis point increase in airport-to-airport PT as a percentage of revenue was primarily due to higher reliance on more costly third-party miles to service our network. To offset this cost and to provide better service through higher quality capacity for our customer base, we are in the process of enhancing our owner operator team pay package.

The effective date of this change will be January 1, 2015. Initially, it will be cost neutral as the contractor pay increase will be offset by the reduction of more costly third-party miles. Over the next several weeks, we will be evaluating price within lanes that require team service for potential rate realignment.

Salaries, wages, and benefits increased $6.6 million and 16.6% as a percentage of revenue being up 30 basis points; $4.9 million of the increase in dollars is the result of CST, $1.7 million from higher wages, primarily due to increased handling costs from increased volumes, with the balance coming from higher employee incentives as well as higher healthcare costs. Operating leases were up $1.5 million due to additional facility leases and equipment rentals resulting primarily from CST.

Depreciation and amortization was up $1.9 million and 30 basis points, again, resulting from the acquisition of CST and higher CapEx spending this year versus last year. Insurance and claims expenses increased not hardly $0.5 million, also as a result of the purchase of CST. Fuel up $1.1 million as a result of additional Company-owned equipment, resulting from the purchase of both TQI and CST.

Other expenses were up $5.3 million and 150 basis points; $2.8 million of this increase is attributable to CST. Approximately $0.75 million is attributable to due diligence cost within the quarter, and the balance coming from various other volume driven expenses. Our tax rate was 37.2% compared to 37.6% in Q3 2013. We expect our Q4 2014 tax rate to be approximately 38%. Net CapEx for the quarter was $2.5 million. We have essentially completed our CapEx spending related to our 2014 CapEx budget.

During the quarter, we spent approximately $20 million repurchasing approximately 435,000 shares of our stock at an average price of $45.95. We have approximately 1.1 million shares left on our $2 million share repurchase authorization. We ended the quarter with $25 million in cash, essentially no debt, and $140.3 million available on our $150 million line of credit.

Lastly, we anticipate that fourth quarter revenue will be in the range of 18% to 22%. Income per diluted share is expected to be between $0.60 and $0.66. That's compared to $0.50 last year in Q4.

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

Thank you. Ladies and gentlemen, we will open the floor now for questions and comments.

(Operator Instructions)

First in the queue, Jack Atkins with Stephens. Go ahead.

Good morning, guys. Thanks for the time.

Good morning, Jack.

Rodney, we can go through the guidance for the moment, for the fourth quarter. As far as the revenue guidance, can you maybe help us understand what you're assuming in there in terms of airport-to-airport volume trends for the quarter?

Is it that mid-single digit rate that you saw or that you've been seeing so far? Is that the right way to think about that?

That's correct, Jack. [Approximately] -- it essentially stays consistent with what we saw in Q3.

Got you. In terms of what you're assuming in your guidance as far as improved PT expense, are you making any assumptions that gets better as you move through the fourth quarter? Or is that something that you would expect to stay roughly the same as you move throughout this calendar year?

Jack, we're being conservative there. We've already seen some positive impact and feedback from especially our fleet owners within our owner operator base.

We know that they're poised to bring on equipment, but within the guidance we're being conservative. We're not expecting any positive impact before Q1.

Okay. Got you. Then as far as the capacity issue, it seems like that's been a challenge for most of the year. There was an initiative to bring on owner operators, and now we're looking at raising targeted rate increases.

Could you maybe walk us through how many additional owner operators you expect us to bring on early next year? Then what portion of your miles are currently being driven by outside capacity?

Might be in Q3, 23%?

23%.

23% of the miles, Jack, were provided by outside capacity. That number needs to be 10%, 12%, so that gives you an idea of the magnitude of it. We hope to bring on 50 or 60 teams through this package in pretty short order.

Got you. Then that 23% of outside miles, how does that compare to the --

It's about 35% more expensive than an owner operator mile.

Okay, got you. Then as far as, on the just the rate side of things, you mentioned targeted rate increases in certain of these team driver lanes. But we're seeing LTLs begin to announce GRIs for early next year. Given the demand trends in the marketplace and the cost pressure, do you feel like you've got the cover to put through a GRI early next year?

Jack, it's Bruce. Let's be real clear on this. We have not made a decision to increase rates yet, because there will be a thousand Forwarders on the phone after this call.

We are looking as we always do at the end of the year, towards the end of the year, the fourth quarter, at what we're going do in terms of rate increases going into the new year. That's exactly what we are doing.

A lot of that will depend on our success, or what will determine that amount will depend on our success, to recruiting our owner operator fleet to the highest level it's ever been since we've had the Company. We need to see how that works, and if it works as we anticipate, then we will come back and address the revenue side.

Okay. Thank you, Bruce. Last question from me is on the M&A pipeline, and Rodney, you mentioned this in your prepared remarks, that you see some tuck-in acquisitions on the drayage side. Can you maybe comment about the M&A opportunities that are out there?

Is it just in drayage that you're looking? Could you maybe quantify the size of some of the targets that you're potentially looking to get across the finish line before you [move]?

Let me jump in again, Rodney. We do have a few active candidates on the CST side, and outside of that we don't want to make any acquisition comments.

Okay. That's very helpful. Thanks, guys. I appreciate the time.

Our next question is from Bill Green with Morgan Stanley. Please go ahead.

Hi, good morning. It's Alex Vecchio in for Bill.

I wanted to ask about the Forward Air operating margins. It looks like they pulled back a little bit year-over-year. I know some of that's attributable to the mix from CST, and that being a lower margin business, as well as the higher purchased transportation costs.

If we look at historical margins, I think they have peaked in the low 20%. Is that still a realistic ultimate goal for the segment in terms of margins down the road? Or does CST preclude that, and should we rebase our expectations for where margins can ultimately go for the Forward Air segment?

If you look just at the Forward Air airport-to-airport segment, we can return to those numbers. As you noted so well, if you bring in the CST, then that's going to pull that operating margin a little bit, although giving us great income. So the margins will not be, in total, as good as they were at one time.

Okay. That makes sense. Then from a risk standpoint, the owner operator versus employee contract has come up, the issue has come up with other carriers out there in terms of reclassification in California. Do you have a lot of exposure there? Is that a risk that you guys see there, in terms of just potentially having to reclassify owner operators as employees as a peer has done?

That's a fair question. It's something we look at continually, but we abide by the rules beyond belief. So we think if somebody was to come and challenge how we operate our owner operators in the environment that we operate them in, that we would be successful in defending the fact that they are an owner operator. It's also important to note that our owner operators like being owner operators.

Yes, that makes sense. Lastly, I want to jump to the FASI segment really quick. The top line growth looks like it decelerated a bit here.

Is that a function of lower volumes as you guys get more firm on pricing? How should we think about the top line growth rate for the rest of 2014 and maybe longer term?

If you recall, like Rodney said, we had the anniversary date of two large customers from a year ago, so that muted their efforts. They continue to be successful, but now we are into the fourth quarter, which is their peak, so we will not see growth.

We don't want to bring on new customers in the peak season because it's too chaotic. Fourth quarter will be a fairly large revenue increase because of peak, and then you will see us come back in the first quarter and start adding business to it again.

Okay, perfect. Very helpful. Thanks for the time, gentlemen, take care.

Our next question is from Todd Fowler with KeyBanc Capital Markets.

Thanks. Back again on the airport-to-airport operating ratio, is most of the year-over-year increase, is that pretty much related to the third-party capacity costs in the quarter?

Yes, if you look at our results, people tend to overlook we grew income 18% and other nice things, [and didn't hit] consensus. It's a single problem. That single problem is we have to increase our owner operator fleet count.

We have initiated a number of programs, Todd. Our whole focus, our operating group, our recruiting group, is to get the needed or necessary owner operators on board, so that we can get that one single number, which is an extremely important number, we can get that down to where we would call acceptable.

That makes sense, Bruce. I wasn't trying to detract from the good quarter. I'm just trying to understand.

I totally agree. It's kind of a shame because it's one cost area, and one function that we've been fighting when all the other areas, for the most part, are doing well.

That's the follow-up question that I had. Within the quarter, are there any other things that weren't working in your favor?

I know there were some comments about handling costs, employee incentives. Is labor availability on the dock side and employee productivity where you would like to be, given the growth that you're seeing with the volumes?

It's exactly where it needs to be. They've done a really good job, Chris and Tim and their teams, to keep that under control and to make it a very efficient operation. It just keeps getting back to PT.

Okay. That helps. Then just as a follow-up on the growth in some of the other segments, first starting with CST, is the strategy there that it is going to be small tuck-in acquisitions, or is there an ability to grow that organically? I guess I'll just ask it that way.

They actually did both. They've done a really nice job of growing organically, not only in terms of volume, but also in terms of getting rate increases from existing customers.

As you know, that's an area today that if you can't get a rate increase, then you probably will never have a better environment. Then we also want to do the smaller tuck-ins, but that does not preclude us from doing a larger tuck-in for them.

What would be the organic growth? What's the expected growth rate for that business, both organically and inorganically?

I think organically, they're running low side, 8%, and high side, between 10% and 12%. Then depending on the right acquisitions, we could grow it quite a bit quicker.

Okay. Then the same thing with Total Quality, you have had that in your mix for a little bit more than a year at this point. It sounds like that there's some reporting issues that maybe mask what's going on with the top line, but at what point would we expect to see that business start to grow, and how should we think about that over the intermediate term from a growth rate standpoint? Thanks.

You're welcome. Their actual growth rate prior to the change for the accounting of the fuel surcharge was 12.2%, which at their size today is good. Now, they have -- this is a very long sales cycle, is the best way to put it, but they really have great opportunities in front of them.

They have a great team assembled now, and they have a great operating package. So I think you can look for a bit more to come from them in the coming quarters.

Okay. All right. Thanks for all the help today.

Thank you.

Next we go to Jason Seidl with Cowen and Company. Please go ahead.

Thanks for taking my call. Just one quick question on pricing. I know in the past you had a problem with one of your competitors being irrational at times. It seems like the market's good for pricing based on the tightness of capacity, and we saw one of the LTL carriers take another GRI today. Can you talk about the retention of our own general rate increase, and the market on what contractual business is looking like?

Historically, we have done rate increases between 3% and 5%. We historically do them effective in the first quarter, typically March 1. We'll follow that pathway as far as today is concerned.

In terms of our retention, we normally can retain, different from the LTL carriers, 90%. In most cases, we do not have to deal with contracts, it's just a simple increase. So if we announce an increase, we tend to get between 75% and 80% of it.

The last one you had was on the linehaul. It was 3.3%. That was to the lower end of your historical range, then. Looking forward, given the market, is it too much of a stretch to assume that could potentially go higher?

No, it's not too much of a stretch. I think you will see this, and let's go back to Rodney's opening comments.

You'll see us not only look at a general rate increase, but you'll see us target those lanes where the costs due to the owner operator and the teams -- it's all about teams in our world. You'll see us target those lanes for the higher.

Now, you guys made the comment that 23% of the business was using outside capacity, which is a full 10 points or more than you want. You did say that was 35% more expensive. But I mean, if this current quarter were within your historical range, how much would that have saved you on a cost basis, dollar-wise?

Rodney or Mike, do you have that? Actually, we can get you that number.

Yes, why don't you -- you can give it to me offline. We'll talk after the call.

I don't want to tie it up for everyone else. I'll give someone else an opportunity. Gentlemen, I appreciate the time as always.

We'll go to Bruce Chan with Stifel. Please go ahead.

Good morning, gentlemen. Happy Friday. A couple of questions from me. First, I hoping I didn't miss this.

I'm looking at Solutions and wondering what the main difference was that really allowed for a profitable quarter this quarter? Was it mostly driven by volume? Was it operations-related, or was it in a customer mix, or customer attrition-related?

The quick answer is yes. They've established over the last year, year-and-a-half, a really good revenue base that's allowing the profit.

Then I think more importantly, as we grab that revenue base, Roger and his team have done a really good job in their operating efficiencies, and driven that OR down to where it is today. They still have opportunity, so we're looking for even more improvement there.

Great, thank you. Then also turning to the linehaul side, it looks like there was a little bit of a decline in average weight per shipment. I'm wondering what was driving that decline?

It hasn't been declining. If it did, I missed that.

It did a just a bit, Bruce. It's an issue of mix is really all it is. Nothing beyond that.

Okay.

We look at that every single week, and that's a critical number to us.

Okay, great. Just one final question, looking at what's going on over on the West Coast with the port congestion, and what's going on with Chicago, I'm wondering if these type of delays going into the holiday season, if you think back to 2004, 2002 timeframe, what effect this has on your business in the fourth quarter here? Any comments there?

If we go back, as you accurately recall, historically, in fact when things get a little bit congested, it helps us.

Right. Great, that's helpful. Thank you, gentlemen. I appreciate it.

Thank you.

We have a question from Shawn Collins with Bank of America Merrill Lynch. Go ahead.

Great. Hi, Bruce. Hi, Rodney. Good morning. Can you talk about the CST acquisition? Now that you're two quarters in as an owner of it, how is the integration going so far?

Do you feel like that is complete, or if it's not complete what percentage of that needs to be done? How do you feel like it has gone in general? Is it a success? Has it met your expectations?

It's actually exceeded our expectations. They're doing a great job. We have a great team up there led by Brian and Ron, and they have consistently grown their business.

They have consistently, since we bought them back in the first quarter, improved their operating ratio. I would tell you that with the exception of a few, what I would call, back office items, which sometimes take longer, that the integration is complete and was a big success. It's a wonderful platform for us to grow.

Great, that's nice to hear. Thank you. Then just thinking about the driver situation, the employment picture nationally is looking a bit better. Certainly on the truckload side, there's a lot of driver shortage and difficulty retaining drivers. Can you talk about what you're seeing in that part of the business?

We are seeing exactly what you just described. It's tough. Basically, it's always been tough, because we have such high safety standards, but we think we put together a good team and we put together a good package. We're going to be able to show some significant growth in that area.

Understand. Great. Then just the last question, and I will turn it over, can you just talk about your CapEx plans? I know you're three quarters in this year, but what you have planned for the rest of the year, and then how you think about that going forward?

We're essentially done for the year, with that $35 million, $36 million that we've spent for 2014. We're in the process of finalizing what we're looking at for 2015 right now, but it would be more or less in the same magnitude as 2014, in that $32 million to $35 million range.

Okay. Thank you very much. I appreciate it.

Thank you.

Next, we go to Scott Group with Wolfe Research. Please go ahead.

I wanted to go back to one of those earlier questions about last cycle and the margins, and where they got it. It's still just not clear to me why you aren't seeing the operating leverage like you did last cycle when you were getting 200, 300 basis points of margin improvement a year, in 2003, 2004, and 2005.

We had tight driver markets then, too. What is different this time around? Why is the cycle treating you differently?

If you take, Scott, the largest cost that we use, or the most key cost is probably a better fit, that we use for that leverage, and it increases, step by step with the increase in tonnage, then the leverage goes away. The good news is it's an area that we can pack, we can fix, and return to providing that type of leverage, and we expect to do so.

You think you can get back there next year to that kind of leverage?

Without question.

Okay. Fuel, is it a help or hurt in the quarter? How do you think of fourth quarter?

It was essentially a neutral thing. In the third quarter, we're expecting it to be about the same.

To your earlier question, back in the other cycle, we were getting relatively more of a benefit from fuel. We'd been a little more aggressive on pricing back then, and the business mix was different, too, Scott. So there's a lot of reasons that the last cycle is different from this cycle, but I agree with Bruce on what we can squeeze going into the new year.

Last one on peak and your thoughts on peak, so a couple of the rails have been saying they think peak is, at least for them, over. I know you guys have a different peak, but what kind of peak do you think you're going to have, early, late, big, or small? Any thoughts there?

Our thought, or our planning process is probably a better way to phrase it, is that peak will be moderate by business line. We still expect the solutions group to have a fairly decent peak. We expect our airport-to-airport to do actually better than last year, but it won't be an extraordinary peak by any means.

Thank you, guys.

Thank you.

Next we go to Rob Helf with Fiduciary Management.

I got on this call late, so I apologize if you went over this, but your comments really were that you're using quite a bit more outside capacity. I think you said something like 20%, versus your typical 10% to 12%.

Where do I see that on the P&L exactly? What are the lines there? Because it seems like you had leverage in a few of those expense items. Where would I see that mix hurting you guys?

Rodney, do you have that?

It's within purchased transportation, Rob. There's a supplemental page that we put that breaks out PT even further, but you're not going to be able to derive what's owner operator and what is third-party from that thought.

Okay. If I see the 14% increase in purchased transportation, what you're saying is that number traditionally should not have grown as much with your revenue growth, assume -- obviously, with acquisitions and whatnot. In general, you were saying that number should be levered more in your normal operating environment using owner operators. Is that fair?

That's exactly right.

Okay. I think right when I was getting on the call a previous questioner asked, perhaps, what that dollar amount could have been. Were you guys able to get that number? I'm curious about that.

We roughed that out, it's just over $1 million.

$1 million, okay. All right, thank you. I appreciate it.

We'll go to Pete Watson with Raymond James.

Good morning, guys. Just for a point for clarification, in TQI, you said that absent the accounting change, revenue growth would have been 12%.

That's correct.

You probably won't lap that change until third quarter of next year, is my guess?

When we get the comp, that'd be first quarter. I would be first quarter 2015.

Okay. So the optics in 4Q of 2014 are going to be depressed on revenue growth, because of that change?

That is correct. Q4 will be the last, if you will, bad comp, and then it is comparable starting Q1.

Thank you. That's all I had.

With no further questions in queue, ladies and gentlemen, we thank you for joining us today for Forward Air Corporation's third quarter 2014 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. Thank you for your participation. You may now disconnect.