Forward Air Corp (Delaware) (FWRD) 2015 Q2 法說會逐字稿

Good morning, and welcome to the Forward Air Corporation second-quarter 2015 earnings release conference call. Before we begin, I would like to point out that both the press release and this call are accessible on the investor relations section of Forward Air's website at www.forwardair.com. With us this morning, are Chairman, President, and CEO, Bruce Campbell, and Senior Vice President and CFO, Rodney Bell. By now, you should have received the press release announcing second-quarter 2015 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 beliefs, 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 our forward-looking statements whether as a result of new information, future events, or otherwise.

And now I would like to turn the call over to Bruce Campbell, Chairman, President, and CEO of Forward Air.

Thank you, operator, and good morning. While not achieving financial results we desired in the second quarter, overall we accomplished most of our long-term strategic objectives we had set prior to going into this transaction. We had five major goals and were totally committed to accomplishing them during the quarter to get the integration cost behind us once and for all, allowing us to move on to running the Company efficiently.

Here are the key areas we achieved. First, service. It was absolutely critical that we provide high levels of service during this period to allow us to retain revenue. We were successful; in fact, have provided record levels of service.

Secondly, revenue retention. Because of the excellent service performance just mentioned, we have been able to retain approximately 70% to 75% of the business, better than we had modeled.

Third, duplicate employee cost elimination. We had a goal to read remove $8 million from the combined Companies, but actually were able to remove almost $11 million on an annual basis. We have more work to do, but this was a great start for us.

Fourth was to retain Towne's independent owner-operators and, again, we kept those we wanted and those who could meet our safety standards. This will be a key factor for us as we move into the busy time of the year.

And, finally, we shuttered 35 duplicative term terminal facilities ahead of our goal of 30, and basically we are 90% finished with this important cost removal area.

Each of these strategic areas were critical for us in terms of cleaning up the transition costs so that we don't have to deal with them in the future. But, obviously, we incurred a lot of expense to make this happen causing our profits to retreat during the quarter. This was anticipated and planned. We are now in the refinement phase of the transition working on the following critical areas.

First, reducing our labor costs further as we originally overmanned to make sure we provided top levels of service. We are currently fine-tuning our labor costs.

Secondly, rate reviews. We knew going into the transaction that we would have to overcome a lot of bad rates and low we have made some progress, more remains on a number of customers where we had to honor pre-existing contracts. An example of that was a West Coast drayage operation that we were obligated to give almost a 90-day notice to two customers, which alone cost us approximately $1 million during the quarter. It is now gone. We had other situations like this, just not as bad, that simply have taken us time to work through. We believe good progress has been made and hope to be completely finished no later than September 1 of this year, which will have good impacts on our yield.

And, finally, we continue to refine our network cost, shown on the P&L as purchase transportation. While our team has made great progress, more work remains. We have made many others smaller, but important areas that our team is focused on to improve both the cost side and the revenue side of the equation as quickly as possible. We will continue with vigilance to make this happen.

And, now, Rodney Bell, our CFO.

Thanks, Bruce. Good morning. With all the noise in the quarter still want to tackle this a little bit differently, but as we traditionally do, I will start with revenue. On the same number of business days, Q2 2015 revenues were up $55.8 million, or 28.8% compared with Q2 a year ago. Obviously, most of that increase was the full-quarter benefit of the Towne acquisition. As Bruce mentioned, we estimate that we retain between 70% and 75% of that business. Without regard to Towne, we estimate that FAI revenues excluding CST had organic volume growth of approximately 5%. The primary reason for the slower sequential growth from Q1 was reduced distribution activities compared to Q2 a year ago.

Intermodal and related revenues related to CST were up 52% and $9.4 million. This was a result of two second-half of the year acquisitions as well as solid organic growth. TQI revenues were $1.9 million less than Q2 year ago. This was primarily due to a nonrecurring major pharmaceutical distribution last year and overall slower demand this year versus last year. Solutions revenues were up 3%, but actually increased 8% on an adjusted basis as we reclassified a small dedicated operations from that business segment into FAI.

Next, I will be covering next the expenses related to Forward Air, Inc., calling out the $6.9 million in Q2 one-time integration costs. Start with the purchase transportation. In total, PT was up $26.8 million or 39.1% and 60 basis points as a percentage of revenue as compared to Q2 a year ago. Included in that increase was $804,000 of integration costs. The Towne acquisition caused our network to become out of balance resulting in costly inefficiencies. This came in the form of costly brokerage miles, especially from the West Coast, reduced load factors, and a substantial increase in paid empty miles to owner-operators. At this time, this is more than offsetting the benefit gained from our program to reduce our reliance on more costly third-party miles. Given the magnitude of PT as a percentage of revenue, getting our network back into balance will be a key focus for our team for the balance of the year.

Moving to salaries, wages, and benefits, overall they were up $15.9 million and 180 basis points. Just over $600,000 of that increase was direct costs related to the Towne integration. Initially, we did a good job taking out duplicate functions and departmental salaries, as Bruce mentions. However, to protect service through the transition, we intentionally stayed overstaffed at the terminal level. With that behind us, our focus in the second half is to right-size at the terminal level, using our pre-Towne operating metrics as a benchmark, there are several million dollars in annual savings available through this process.

Operating leases were up $9.9 million, $4.9 million of that increase was one time in nature as we had better than anticipated success in closing duplicate facilities. We expect Q3 operating leases -- lease expense for FAI, inclusive of CST, to be approximately $11.5 million.

Depreciation and amortization was up $1.6 million. Most of that is related to the Towne deal -- the amortization on the Towne deal and to a lesser extent newly purchased revenue equipment. We anticipate Q3 D&A, inclusive of CST, to be approximately $7 million.

Insurance and claims increased $2.7 million, which included $473,000 in one-time integration cost. For Q3, we expect FAI insurance and claims to be approximately $4.2 million.

Other expense dollars increased approximately $6.8 million, with $1 million of that being deal and integration costs. With this line item being a catchall for operation inefficiencies, we are focused on it as well.

Next, moving to consolidating earnings per share for the quarter, adjusted for deal costs, we posted $0.51 for the quarter. That compares to $0.61, which was the midpoint of our Q2 guidance. I will spend a few minutes breaking down that $0.10 delta between what we actually did and what we expected at the first of the quarter.

Solutions missed our EPS expectations by approximately $0.03. This was due to the decision in Q2 to start up a new terminal, increase cargo claims, two large terminals that underperformed being addressed now, and higher than expected group insurance expense. Due to the non-deductibility of Towne deal costs, our effective tax rate increased resulting in a $0.01 drag. This was unanticipated. We expect that 38.7% tax rate and the $0.01 drag to continue for the balance of 2015.

Going into the year, we expected a negative impact of lower fuel surcharges to have a negative impact of nearly -- or approximately $0.025 cents per quarter. On a consolidated level, it was closer to $0.04. So that is approximately $0.015 per share worse than we modeled. And, again, we anticipate that to persist through the end of the year.

Twice a year, we are required to perform actuarial study on our vehicle liability and workers' compensation reserves. This year, it resulted in unexpected negative adjustment of $0.03 per share.

With all that, the remaining $0.02 -- approximately $0.02 per share is the shortfall related to our -- to essentially the Towne and the specific [cost] entities primarily in PT, salaries and wages, and other operating expense line items. In addition, we are looking very hard at the quality of revenue for opportunities there.

Finally, I will cover the Q3 and full year 2015 earnings outlook. We anticipate third-quarter revenue growth to be in the range of 23% to 27%. While there could be additional Towne-related integration costs in third quarter, we expect those to be minimal. Without regard to those costs, we expect income per diluted share to be between $0.58 and $0.62 compared to $0.54 a year ago.

In light of our current quarter miss and adjusted expectations regarding integration, we are adjusting our previously provided full-year guidance to $2.15 to $2.25.

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

(Operator Instructions) Jason Seidl, Cowen and Company.

A couple quick questions. I want to focus a little bit more on 2016. It seems like you are incurring some extra costs here to integrate Towne, maybe the market is a little bit slower than it was at the beginning of the year. But, walk us through how much of the expense -- extra expenses that you are incurring in 2015 that won't be reoccurring in 2016, and then I will have a question on pricing and some of the customers after that.

I am not sure we can give you an exact number. We have some ballpark figures. Let me tell you what we are attacking. We are going after the PT and basically refining that network we inherited -- some bad network lanes that we are in the process of cleaning up. So there is improvement there. And there are other areas Rodney mentioned.

But the big thing for us is to get through a rate review. And I will tell you, we inherited some less than good rates. And we inherited it in all types of forms. Things I have never seen in my 40 years of business. It will take us literally going one by one to each of the customers to revise those rates, to get them to where they need to be, or at some point we have to say we can't do business with you. And, hopefully, that is not the case. I think we build a solid case to retain them.

All that is to say, we have got to work very hard on the cost side and we have got to work very hard on the revenue side to clean it up, or the yield, probably better said. As that progresses, I don't want to wait until 2016. I don't think there is anybody in our Company that does. We want to have everything completed by the end of the third quarter so that we don't even have to think about this after that.

So in terms of ballpark in the total number of expenses that will not be reoccurring, could you give us a ballpark range?

Well, the hard costs are pretty easy, Jason. They are actually in the earnings release. We had $18.7 million through the second quarter in integration and deal costs. All of those are one-time in nature. Those were primarily the cost to buy out duplicate facilities, which that goes away. And we cease having to pay the rent on those facilities. And the other big piece of that is severances. Beyond the hard costs, the over staffing at the terminal level, as we --

That is what I am trying to get at. Yes.

That is a tough one. If you look, for instance, at the line item cargo handlers, and if we can get back to the metrics of the cost per pound that we were incurring prior to Towne, that is $7 million or $8 million that we can pick up if we can get back to that level of efficiency. So that is just an example, but we have not quantified line item by line item quantified what -- quite frankly, we just can't answer your question right now.

Okay. And, Bruce, getting back to some of your commentary on the rates, I think people can understand it is probably going to be a lot of blocking and tackling for you. But how long do you think it is going to take to get through this? Is this sort of early 2016, mid-2016 by the time you sort of get through all the guys that need a quick talking to?

Yes. Let me kind of share with you our approach. Number one, if it was airport-to-airport traffic or the typical Forward Air freight, that automatically became a Forward Air rate. But, then, the old Towne rate structure had additional rates. Many of them under contract. A big group of them, the airlines. Basically, all of those rates had to be renegotiated because they simply were not compensatory.

We are basically finished with that or very close to being finished. We have one straggler. So we have that behind us. Now, our next phase is to go after -- lack of a better word description -- class-rated shipments. Filing into this our international freight forwarders and, on limited basis, some commercial accounts. That will take us, hopefully, we will be done by September 1. And that is exactly as you said, blocking and tackling, one-on-one with really hard efforts by our sales team. But we can do it. So we are hopeful that we are out of that no later than October 1.

October 1. Okay. And what percent of the business does the class-rated freight make up for Towne?

I don't have the exact number in front of me. Somewhere around 20%, 25%.

Okay. 20%, 25%. Well, gentlemen, I appreciate the time. I'll turn it over to somebody else.

Scott Group, Wolfe Research.

Bruce, when you talk about non-core service offerings and then some of the business -- the Towne business that is operating at low profitability or not profitable, how much revenue are we talking about that could potentially go away if you can't figure out the pricing?

Oh, I think we can figure out the pricing. I think we have proof, based on some contract negotiations that we have already been through, that we are going to retain a large amount of that. We have certain advantages that others don't. And so while we certainly are not going to go to the customer and jam them, we are going to simply return them to compensatory rates. And I think most of our customer base, even the new ones from Towne, they are going to accept that because it is a fair value for a good service.

And what is the non-core service offering? Is that what you were just talking about with Jason? That is 20% of the revenue.

I am not sure I would term that non-core.

I am just reading from the press release from your comments from the press release from yesterday.

Yes. I evidently misspoke. Non-core means to us that it was not a domestic Forward Air business that we were used to doing in the past. But it is still very common in our world.

Bruce or Rodney, can you talk about just the underlying demand environment and if there is any way to kind of give us a view on same-store tonnage levels, if possible?

Sure, Scott. There is more -- there is certainly more art than there is science with the noise that Towne creates, but independent of the work I did, our senior VP of Sales came up with essentially the same number. We think that the underlying legacy volume in airport to airport are around 5% to 6%.

And are you seeing that strengthen, slow? How would you characterize that?

You know, the base of that is pretty consistent. What we have seen is big distributions when a customer comes to you and said, I have got -- this is just an off-the-wall example. I have got 2000 flat screen TVs and I need to move this weekend into ABC retailer. And we are not seeing those a big pops that we did last year of that kind of distribution business, but the underlying base business is pretty consistent.

Okay. And then, just last question and maybe getting to the crux of Jason's question from earlier. So as we look out to 2016, and we are trying to model the margins for the core Forward Air business, do you think we can get back to where we were last year? Can we get back to where we were a few years ago in terms of really good margins? Or does this take a little bit longer to kind of get back to where we want it?

We certainly think we can get back to where we were last year, if not a little better.

Great. All right, thank you, guys.

Jack Atkins, Stephens.

When I look at the revenue guidance in the third quarter relative to what you guys did in the second quarter, it certainly implies some deceleration in terms of growth. Could you maybe walk us through what is behind that, if anything specific?

Well, you look at -- Jack, you look at beyond the Forward Air segment, quite frankly, TQI has been a bit of a drag. We are not going to get that fixed overnight. That is going to require adding capacity. That is another story in itself. Solutions, their growth is tepid as well. Those two pieces put a drag on the overall. CST is doing great. They have been going gang busters. But, for the reason mentioned earlier, that lower distribution activity in the underlying legacy business is tough. And we are going to lose a little bit more of the Towne business going forward. I mean, the attrition is not over. I am not talking crazy numbers, but we will probably get down to that 65% that we modeled going into it before it is over. I hope not, but it probably will. But that is also factored in.

Okay. And then, in terms of the outside miles, which I know was a challenge last year for you guys, can you maybe give us an update there, because I think that is getting clouded in terms of the progress that you are making so far this year. It seems like the initiatives --

That is really a different circumstance this year. This year, it is primarily an issue of being out of balance. So for instance, we may have 20 loads -- extra loads out of LA and we don't have our equipment position there because of the flow of the freight. And so we have to go to outside sources to move that freight. The big thing, though, is this year we do have owner-operators where a year ago we did not. And so that has been a positive. And, Rodney, go.

Okay. And, Jack, without regard to Towne, we would be in really good -- we are in really good shape with Towne, but as it relates to PT and outside usage, we are down to -- this quarter it was 14.7% compared to 19.6%. That is good, but, to your point, it is being muted by everything else that is going on. And to Bruce's point, to being out of balance, which we are working hard to get that fixed.

Okay. That is a helpful update. And then, in terms of the solutions business, I think you said that was $0.03 of a miss relative to your guidance. Maybe walk us through what changed there, because it seemed like you guys had some good momentum going for the last four or five quarters. What is happening in that business, and can we get back to the runway we were on from a profitability level?

Yes. The big drag there in the quarter, Jack, was we opened Rochester, New York. We opened that at the demand of our customer base. And, while they got off to a good start and we are glad we have made that investment, any time you start one up, you're going to lose money for a few months. Hopefully, we can have it down to one month. Then, we had an unusual claim experience that occurred in the quarter that should be behind us. And then we had a couple of issues at a large terminal that we now have fixed. So we think we can gain that momentum back and get them rolling into the third and fourth quarters. They do have a pretty nice pipeline ready to come on that will occur both in August and September. So those are positives for them.

Okay. So you would expect, Bruce, that the profitability of that business to sort of bounce back in terms of what we should be seeing on a year-over-year basis in the third and fourth quarter.

That is correct.

Okay. And then, I guess last question, and everyone is trying to get to this. Maybe I will just ask it a little bit different way. But when you think about the accretion profile of Towne, given what you know today, four or five months in since the deal has closed, do you feel like the transaction will be in line with your expectations, better, or maybe worse than what you guys were expecting before you made the acquisition?

Yes. When you think about accretion, let me back you up and give you a bit of perspective. Every tuck-in acquisition we have done in the past was an asset purchase. So we were able to take that business and literally ignore everything else and simply throw the revenue into the Forward Air network and immediately it became accretive. This one, obviously, was a stock purchase, which meant we had to deal with all the problems. And we knew that going in and we knew we would have a rough quarter, quarter and a half to whatever. But it doesn't change our thoughts on accretiveness. We will get it to the point where it is right where we want it to be in terms of accretiveness.

Okay, Bruce, Rodney, thanks for the time.

Todd Fowler, KeyBanc Capital Markets.

Great. Thanks. Good morning. Thanks for the additional color today. Bruce, maybe just to start to make sure I kind of understand what is left to do with Towne. In the release, you are saying that you are 85% to 90% of the way there. You kind of talked about the areas of focus. Is the last 10% to 15% -- is that doing the repricing in the evaluation of some of the business? Or is there still more work to be done on the network side? It sounds like that you are ahead of plan on the terminal consolidation so I am just trying to get a sense of the last 10 to 15% that you have to do with Towne at this point.

We basically have, Todd, one more terminal to dispose of -- which is in the works. We have probably 5% of what we mentioned is further network refinement. And then, the balance of it -- by far, the most important at this stage of the integration -- is the yield improvement.

Okay.

Additionally Todd, we didn't get the benefit in the quarter because it came very late in the quarter and subsequent to quarter end, but has occurred, we have reduced manager's salaries on an annualized basis including benefits, you know, $3 million. And to the earlier point, we are going to be chipping away at the hourly wages where we are overstaffed at the terminal level. So that has taken place as we speak and we will see the benefit of that going into Q3 and certainly the full benefit of it in Q4.

So when I think about the big things that can get your network out of balance, particularly on the facility side, I mean, you are through the lion's share of that and so the last 10% to 15% is much more on the cost and revenue side with one facility that is still out there.

Correct.

Okay. That helps.

And there are plans in place for the one facility so it is not going to be a big deal.

Okay. Okay. And then, when is the expectation for baseline haul yields for the rest of the year? I think the initial commentary was that -- and I know that there is some mix issues; I know that you inherited some bad freight. But that line haul yields could be flat on a full-year basis. Is there still some potential for that or is that point to be pushed out a little bit more of the yield where it comes in the first part of 2016 at this point?

We think we can push the yield up, still, in this year. So if you pinned us down for an exact number, Rodney is saying 2%. We know, for instance, last week we turned neutral finding on yield after being down 3%. So a lot of that work has been done, but, again, as we have said, more work remains and we have a good team that will make that happen.

So the 2% would be where you think you can end on a full-year basis, or that is a fourth-quarter run rate? How does the 2% compare to -- it looks like you are basically flat in the first half of the year.

Yes. That will be a run rate.

Okay. That helps. Okay. And then, the last one that I had was, maybe just a little bit of sense of what you would expect from an operating ratio progression in the airport-to-airport business. And I am not asking you to give specific guidance, but thinking about the things that you have learned with the Towne business, is it some point in first part of 2016 or is it second part of 2016 when you think you can get the business back down to kind of the historical low 80 ORs something different than that?

Well, we are certainly not going to wait until the second half of 2016, I can assure you that. We are working hard -- again, not to be redundant, but we think we can start hitting the levels we want or be very close to it in the fourth quarter and then carry that momentum into 2016. This should not -- let me say this. I would be intensely disappointed if we couldn't start reaching those levels in the fourth quarter.

Okay.

And you wouldn't like me intensely disappointed.

I am sure there is people within the organization that would not care for that as well. All right, guys. Thanks for the time, as always.

Nate Brochmann, William Blair.

Just wanted to get a little bit of perspective going back to April when you guys reported the first quarter and looking at all the integration issues ahead of you. It sounded like we were off to a really good start, even at that point, just a couple of months into it in terms of customer retention and the driver retention. Did things accelerate in terms of just having the staff of those costs as you move forward in terms of retaining that revenue in those service levels? Or was that truly something you anticipated was going to reach those levels and maybe just crept up a little bit beyond expectations?

Yes, I think it is the latter. We accomplished a lot quickly and then you run into those issues and there were numerous issues, that either were under contract or had some other obligation that you simply could not move quickly on. So why you can move quickly on this and this, we could sign up owner-operators literally within a month, it just wasn't that big of a deal in terms of the process, but other processes have been very extensive, very time-consuming. And it is just something we had to work our way through. Again, we knew that was going to happen and we are good with where we are at and we also realize we have more work to do there.

And, on the customer retention side, obviously, those numbers are little bit better today than you originally forecasted. It sounds like maybe as you work through the final pieces of this, there might be a little bit more slippage, but still pretty decent levels. The customers that have left, are those mainly due to pricing and they didn't want to accept that, or was that another issue in terms of putting all their eggs in one basket and they wanted separate providers? Or can you give us a little framework for more of that slippage was?

Yes. It was almost all due to pricing. I am sure there are people who are looking to diversify their basket, as you put it. But we have really not run into that. And I think that is because we had some doubters out there that we had done limited business with in the past and when we took it over, we really popped them on service and gave them good product and I think that opened some eyes.

Okay. And then, now as you have been able to do that and we think moving forward and obviously the first phase is getting everything right-sized and all lined and getting through these final integration issues, but as you have been able to look at some of these accounts, do you see any additional opportunities maybe going into next year for some additional cross sell? And, particularly, as you have said, maybe as you popped them with service, maybe they have opened their eyes to be able to either give more business to you or you have identified other opportunities in some of the other areas to be able to cross sell through.

Yes. Without question. That doesn't apply across the board, but with a lot of the customers, especially new customers that we didn't have before, we have some really solid opportunities to sell the breadth of our service offerings.

Okay, great. I appreciate the time.

John Barnes, RBC Capital Markets.

Bruce, I don't think anybody here was shocked that Towne was not a great operation. The history of the company and comments that have been made about their pricing structure and philosophy going back over the years, no real surprise. These things are always complicated and take time. Outside of the things that poor price structures that you were unaware of and didn't see, is there anything worse than what you originally expected as you were going through due diligence? Is there anything that kind of surprised you at how poor it was set up, or was this all just kind of the course of normal integration?

There were a few what I would call minor surprises, John, but nothing that was completely out of the box. We knew, as you said, during diligence, and we knew even before that, that we would have a battle on our hands and that we would have to do a lot of cleanup, for lack of a better phrase. I think, overall, we have done a good job with that. The biggest frustration that we have had going through this is simply working through the wickets where we were limited by contracts or we were limited by other legal functions, where we just couldn't go as fast as we wanted to. But we identified those. We have set up a process to handle them. And we are hopeful that most of them will be behind us by the end of this quarter.

Okay. All right. And then, as you think about integrations, right now, it is all operations and redundancies in the yield. Is there anything that you found that it is going to be the next step? Is there an IT investment that needs to be made? Is there anything that you say, okay, we get the core piece of the integration done, but then we are going to have to come back and we are going to have to address some lesser shortfall in the operation or something? Is there another kind of, for lack of a better word -- I mean, is there another shoe to drop out there as you get past all this?

We call those bombs, John. And we don't see anything out there. Our IT has performed flawlessly. And I would say, even under some really difficult circumstances, as in the past, we consistently invest in IT so that we don't have to do these big projects. And, if you look at the other areas, we had almost every one of them identified and had a plan to address. And, as you said, though, and I think it is a very fair comment, you are always looking for, again, what I call bombs. And we just have not run into it. The only big negative we ran into was the drayage operation in California -- which we knew about, but didn't know the extent.

Yes. Okay. All right. Yes, no bombs, Bruce. No bombs. That would be a bad thing, but lastly, just as you think about -- your focus obviously has been so much on Towne. Can you talk a little bit about your own core airport-to-airport business and what you have seen trend line there and then, the other business -- businesses, TQI and FASI. I mean, maybe -- I know it is hard to keep an eye on everything when you have got something this major going on. Do you feel comfortable with where those results are given what you have got your hands right now?

Look, given the circumstances under which they operated during the quarter, yes, again, we have work to do. Our core airport-to-airport business, I thought our people did a super job. We didn't have any major customer loss. If we had an issue with service -- you know, you're always going to have things pop up -- I thought our people reacted to it strongly and took care of the situation so that we could continue on normally. We are seeing some nice growth so we are happy with that.

On the solutions side, we probably could have maintained our earnings-per-share had we not made the decision to open Rochester, but we consider that to be a good long-term investment. And I think that will pay dividends as we go forward -- and quickly. We are not going to have to wait for it forever.

TQI is battling a really tough comp from a year ago. If you recall, the Nexium rollout occurred in the second quarter and it was substantial. And they are also facing a few issues on outsourcing of loads, which we are working our way through. We think we have it adequately -- each of the issues identified. We think we have plans in place to make them better. And we think we will.

But, clearly, the star of the second quarter was CST. I mean, they are just rolling. And so as a result of that, you will see us really start to invest in expanding them. They are on about a -- you know, we bought them at a $65 million, $70 million revenue clip. They are up to about between $110 million and $120 million run rate now. And we have got some really good opportunities in the pipeline. And we are going to grow that business as fast as we can go.

Very good, guys. Appreciate your time, as always.

Ben Hartford, Robert W. Baird.

I just -- one quick question, probably, Rodney, for you. When you think about what is now an implied fourth quarter earnings guidance of, let's call it, $0.70, typically that is the seasonally strongest quarter, I understand that the progression that you are expecting to make in the back half of the year with regard to Towne. And it sounds like October 1, you will be hitting your stride more or less, but there still probably are some headwinds, particularly from pricing and negotiations during the fourth quarter. But that fourth quarter feels like it should be more representative of what the earnings run rate for the Company will be as we go into 2016. Rodney, is that fair? And then, what are some additional opportunities that can allow that, let's call it, a $0.70 guidance this quarter to grow -- to be greater than expected in the fourth quarter and then also to grow in 2016?

Then, you are looking at it exactly like we are, as a matter of fact, that the fourth quarter should be a proxy for the baseline full-year profitability for 2016. But on top of that, this past year we did our fourth consecutive annual GRI. So there could be some upside certainly from pricing. Bruce mentioned the opportunities within the CST, these tuck-in acquisitions. That will definitely result in some upside for 2016. And there is still room for improvement in solutions. They are not where they need to be in terms of operating ratio, and we could certainly improve their OR 150, 200 basis points next year. So there is ample opportunity for upside, but you are correct in your assumption on the benchmarking the baseline.

Okay. And then, Bruce, you had talked about really the net accretion from Towne being no different, normalizing for the treatment of the purchase. When we think about core and that business with the business that you expect to retain from Towne, 2016, 2017, 2018, thinking about the margin profile, I know that we probably shouldn't be thinking about the 21.4% peak margin that we saw in the mid-2000s, but still an upper-teens margin, are you comfortable with the ability for that core business to be able to get there? And, if so, in your mind, what is a reasonable timeline and what is the pathway to get to that margin level?

We like to be at an 85 by the end of the year. And then, once we hit that number we want to put push it going into 2016 to achieve a number below that. How good we can get, we are not comfortable telling you today, but obviously, we think we can drive that OR.

Okay, that's helpful. Thank you.

Kevin Sterling, BB&T Capital Markets.

Bruce, really at the end of the day, when I look at Q2, it sounds like you guys really did go out of your way to service the business. And, obviously, that impacted cost, but I think almost to prove a point to your customers that you guys offer the best service out there. Is that right? It sounds like that is going to pay dividends as we think about the back half of the year and 2016. Is that a fair assumption?

You are 100% right. That was exactly our approach.

Okay. And that strategy, do you think it is paying off? Obviously, the customer retention is better than what you thought. As you think about growing the book of business, as your sales teams are out there making calls, do you feel like that strategy is really paying off?

Yes, and the measurement obviously, Kevin, is the retention rate -- we are between 70% and 75%. I would tell you that what we did retain we probably didn't want. It wasn't so much a matter of us not servicing them properly. And there was business in there that simply wasn't a fit for the customer or for us. But we have been able to minimize that. We have been able to work through some difficult situations and, hopefully, to the benefit of both our customer and us. We are happy with where we are now, again, with recognition that we have work to do.

Rodney, can I ask you about July trend? I think you said you would look at your organic growth. You thought it was about 5% in the quarter. Can you tell us what you guys have seen in July in terms of maybe year-over-year growth for the combined business, but also organically, and how July has been shaping up so far?

Sure. On the volume side, Kevin, volumes are up overall, inclusive of Towne, in the mid-to-upper 20% -- call it, 25% to 30%. Bruce mentioned from a yield perspective, we got back to neutral and actually yields taking up taking slightly positive right now. So we are happy with that, but there is work to do with that part.

Yes. And so that mid-to-upper 20% a little bit higher than your Q3 guidance. I guess you guys are kind of baking in some conservativism because July has started so good, but in case there is some slowdown in August and September, is that right, too? Is that a fair way to look at it?

Yes. But, keep in mind that the range that I just cited is airport to airport. There is some segments of the business that are growing quite a bit slower than that that are going to pull that a bit down.

Yes. Okay. Thank you. And that's all I had. You guys, thank you for all your explanations of that cost and everything and best luck going forward.

David Ross, Stifel.

TLX seems like a bright spot in the quarter. Could you just talk a little bit there about what led to the revenue-per-mile increases significantly increasing the exceeding cost-per-mile increases and what the outlook is for TLX for the balance of the year?

We actually began that in the latter part of last year, David, with a real push that we have to get our revenue right. So obviously, with capacity somewhat lean, you have got to push your revenue -- your rates up, and they did that. They also -- and did a good job. They were on a roll prior to the acquisition, so when we did that acquisition, -- they inherited some additional business from the Towne acquisition -- that that business was priced overall pretty good. So we didn't have to do a lot of struggling to get the rate where we needed to be. And so, as a result, they have really done a very, very good job. I said CST earlier was the start of the quarter and I should have included TLX. They have just done a great job.

And then, back to CST a little bit, can you talk about the margin profile of CST versus the core airport business? Is that growing? Is that going to be a drag on margin, enhancing to margins, or margin neutral?

I think the quick comment is, we are happy when they are like in the 88% to 90% range because we basically have limited investment there. In that business, we think it would be difficult for them to get -- assuming we can get airport to airport back to an 85%. They would have to have a whole lot of things go right in order to get that low. But it is still great business.

For Q2, CST operated at an 87.6%, which is outstanding for them. The transactional nature of that business, it doesn't provide a whole lot of leverage so that are OR doesn't -- Bruce is right. I mean, if everything absolutely went perfectly, we could probably get down to an 85 or 86, but we are pleased with where they are today.

So is the return on capital in that business as good as the Forward Air business even if the margin isn't?

It is a bit better.

Okay. Excellent. Thank you very much.

David Campbell, Thompson Davis & Company.

Rodney, you mentioned quickly the tax rate, 38.7%, would continue in the third and fourth quarter, but that it was higher then I guess you thought it would be or higher than last year. What is the reason for that and was it going to continue at that rate in the next year?

That is a great question, David, because we didn't anticipate it. Our tax experts -- we found out after the fact that, given the nature of the Towne transaction -- and I won't get too far down to the weeds. The fact that we had exclusivity because of the permanent difference with the deductibility of some of the deal costs. And that drove our tax rate up about a percentage. That will persist throughout -- through the end of 2015 and then you will see it mitigate back down to the former levels in 2016.

Okay. Also, during your discussion, you said something about $0.015 per share and I didn't -- I don't remember. What was that about?

I think, David, that was where I was calling out $0.015 of more than anticipated negative impact from net fuel surcharges because of fuel being down, obviously.

Lower fuel surcharges, yes. That is included in your yields, of course.

Correct.

Right?

Yes.

Okay. And, Bruce, now that you have bought Towne Air, how would you describe the competitive situation on a long-term basis? Is there still opportunity for growth on a long-term basis that exceeds the overall industry growth? Or do you see forwarders taking the Towne -- took some of the Towne Air business, I guess -- that they will keep that business on a long-term basis?

The quick answer is that, David, it is still a very competitive business and we are in there fighting every day for our share of it. And that, I don't see changing. We believe that this market is a GDP plus 2%, 3% grower. We think that will continue. We think, if anything, there is an opportunity as the supply chains adapt to the new way of the world. There may be even more opportunity there, but we have not seen it yet. Our forwarder friends are doing great in their businesses, for the most part, so we are happy with where we are positioned. It is a competitive battle every day, but that is what we like.

But the Towne business you didn't retain, do you think it went to a less than truckload as operators or to other forwarders?

No. There are other expedited linehaul carriers. There is the BX company out of Toledo, Ohio. There is American Linehaul. There is -- you know, there are numerous others that are still in the market. So just because we bought Towne doesn't mean we don't have any competition. I can assure you, we have a lot of competition.

Right, right. Okay, thank you very much.

Matt Young, Morningstar.

For TQI, I think you mentioned that you are looking to add capacity. I am assuming that it is Company drivers versus third-party capacity.

Both.

I'm sorry?

Both. I'm sorry. I should have --

Oh, both. Okay. I guess, along those lines, then, could you talk about your success on the driver recruiting front. Obviously, it has been difficult for everybody in the business. Are you seeing any improvement? Is it getting worse?

Speaking about the macro market, it is still tough. I will tell you that I think our team has -- we completely rebuilt our recruiting and retention team starting last July. And as a result of that, that, we have really had a lot of success and, knock on wood, that will continue. And right now, basically, all our operating segments are at full [seat].

Okay. So then, on the revenue side, then, you did say capacity was somewhat of a problem there, probably not because it is down unless you had a lot of turnover, but is that the reason you didn't see more growth at TQI because you didn't have the capacity you needed in the right places?

That is correct. That is exactly right.

Okay. All right, that's all I had. Thanks.

Ari Rosa, Bank of America.

A lot of my questions have been answered already at this point, but let me just kind of try to pinpoint this a little bit further because it is unclear to me. So at what point did some of these issues around Towne become apparent to you guys? Was that following deal close? It sounds like it has been a little bit of a distraction for the quarter. Is that kind of fair to say -- just kind of the magnitude of the challenges?

I think we knew going into the transaction that we were going to have some battles. So we were not surprised by that. The only thing I would tell you that really wasn't a surprise, it was just a bit frustrating, was anything that was contractual that we simply couldn't move on -- at Forward Air, we get things done and we get that done quickly. Then, when you have a contractor or some other type of relationship that stops you from doing that, it is frustrating. We anticipated it. We knew we were not going to get it all done day one. I would go back to the drayage business. We made a decision there that rather than fight lawsuits for the next three years, we were going to service the business for the 90 day required. And then simply get out of it. So none of that was surprising. It is just, if you are like most of us at Forward Air, you can become very impatient very quickly with that. But we dealt with it. We got a lot of it behind us. We will get the rest of it behind us in Q3 and we will move on.

Got it. And then maybe you guys could say a little bit more about the process of contract renegotiations. What has that been like when you go to customers and have that discussion?

Usually, because the rates are too low, they are not jumping up and down to see us. But we work very hard to explain, gee, we are going to provide you top levels of service. We are going to provide you a true value and the rates you had just simply are not compensatory. And it is really not argument. It comes down to they either accept our price and the services and the value we bring or they have to go out and find somebody else. And we certainly understand that. But for the most part, we have been able to keep them in the fold and we are pleased with that.

But it sounds like a lot of customers kind of anticipated that conversation -- maybe were aware that they were getting rates that were below market. Is that fair to say?

That is very fair to say.

Okay. Great. And then, just the last question I had. Maybe you could give a little more clarity on the operating leases. It was a bit higher than what we expected. Maybe just what was going on there.

So that is mainly a function of much of the equipment we acquired from Towne was under lease, as opposed to a depreciation expense. So that is probably driving most of it.

Got it. Okay. That makes sense. And so that will be on an ongoing basis, that will continue to be elevated, I guess, or roughly in line with this quarter.

Yes, until we can get out from underneath the -- our goal is not to lease because it is more expensive. But, again, here is a contract issue that we have to deal with and we will honor it.

Just to make sure we are on the same page, on the operating lease line, it was -- of the $9.9 million it was up, $4.9 million of that was one-time deal costs and we expect that operating lease line item for Q3 for Forward Air, inclusive of CST, will be about $11.5 million.

Got it. Okay, that's helpful. Thank you.

Ladies gentlemen, that does conclude our question-and-answer session for today. Thank you for joining us today for Forward Air Corporation's second-quarter 2015 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. Thank you, and have a great day.