Forward Air Corp (Delaware) (FWRD) 2015 Q4 法說會逐字稿

Thank you for joining Forward Air Corporation's fourth-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've received a press release announcing fourth-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 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. 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 will turn the call over to Rodney Bell, CFO of Forward Air. Please go ahead.

Thank you, operator. Good morning and thank you, everyone, for joining us. We will jump right in with revenue for the fourth quarter.

On one additional business day, consolidated revenues were up $42.3 million, or 19.8%, compared to Q4 a year ago, mostly as a result of our March 9 acquisition of Towne Air Freight. Forward Air, Inc., without regard to CST, revenues increased $40.1 million or 28.3%.

Airport-to-airport revenues, inclusive of complete, increased 21.2%. This resulted from average weekly tonnage growth of 21.7%, offset by a 2% year-over-year decline in total yield. Quarterly progression of Q4 tonnage growth was 23%, 21%, and 26%, respectively, for October through December.

The yield decline consisted of a 0.2 decline in our linehaul yield, 3.4% negative impact of lower fuel surcharges, and a 1.6% benefit from Forward Air Complete, which grew 40% as compared to Q4 a year ago.

Logistics, which is primarily TL ex-full truckload revenues, grew an impressive 50.7%. CST, intermodal, and related revenues were up $2.4 million and 11.4%. Quarter-over-quarter deceleration of CST revenues was due to the grandfathering of two 2014 acquisitions. Last week we did close a small tuck-in deal and our pipeline for potential acquisitions for CST is full.

TQI revenues were $3 million and 24.8% less than Q4 a year ago. We expect Q1 will be another challenging quarter for the TQI team; however, we do expect that new initiatives will begin to gain traction and we should see progress as the year proceeds.

Finally, Solutions revenues were $2.7 million and 6.7% higher than Q4 a year ago. Benefiting from both Q1 new business wins as well as a general rate increase, we expect Solutions revenue growth to reach double digits for Q1 as well as 2016.

Jumping to Q4 expenses, purchase transportation was up $15.2 million, or 16.5%, but down 120 basis points as a percentage of revenue. Most impressive was the nearly 5% decrease in airport-to-airport cost per mile as our use of more costly third-party miles went from 26% in Q4 last year to only 12% this quarter.

Salaries, wages, and benefits were up $15.2 million and 30%. Including this increase was approximately $1 million of cost associated with workers' compensation claims experience, a $700,000 increase in payroll taxes related to employee stock purchase activity, and $700,000 increase in incentive pay related to our technology-related tax deduction.

In addition to these costs, we had higher-than-expected dock costs associated with nearly 3% to climb in our average shipping size. This essentially results in us incurring the same labor cost on a lower revenue base. This will be mitigated in part by our February 1 change in our dim weight factor.

Operating leases were up $6.2 million and included approximately $432,000 related to the buyout of a duplicate Towne facility. Depreciation and amortization was up $1.3 million, most of which was related to Towne amortization and additional depreciation.

Insurance and claims increased $0.1 million and were 30 basis points as a percentage of revenue. Finally, other operating expenses increased $2.2 million, or 12%, but decreased 60 basis points as a percentage of revenue. This included $400,000 of additional costs, again associated with the technology-related tax deduction.

Operating income increased $3.4 million and 13.3% to $29 million for the quarter. After factoring out the approximately $1.1 million of costs related to our technology tax deductions and approximately $600,000 of Towne integration costs, our operating ratio would've been an 88% compared to an 88% Q4 a year ago.

The following comments are related to our consolidated income per diluted share in the table included at the end of our earnings release. It reconciles Q4 EPS as reported to the midpoint of our guidance.

Adjusted for approximately $0.01 of integration-related cost, adjusted EPS was $0.77. Included in the $0.77 was $0.17 per share related to amending our prior-year tax returns for a technology-related tax deduction. This was offset in part by $0.02 of operating expenses related to that tax deduction.

The remaining variance to our guidance midpoint was attributed to $0.02 of lower-than-expected net fuel surcharges and a $0.01 lower-than-expected EPS from contribution from our TQI segment. Both CST, as well as Solutions, met their modeled EPS contributions.

Finally, let me jump to our Q1 guidance. We expect revenues to increase 12% to 14%. We expect income per diluted share to between $0.41 and $0.45 compared to $0.40 Q1 a year ago. Our guidance includes an estimated $0.04 and $0.05 -- I'm sorry, includes an estimated $0.03 to $0.04 per share estimated reduction in our net fuel surcharges.

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

(Operator Instructions) Scott Group, Wolfe Research.

Thanks. Morning, guys. So I am wondering if you can help -- is there any way to think about organic tonnage ex-Towne and maybe kind of walk us through the monthly progression there and what you've seen in January and so far in February?

Scott, that's really tough. It was initially tough when we bought Towne because it was really the same customer base, the same lanes, the same cities to a large degree and it's gotten even fuzzier over time. With a lot of assumptions, right now we think the base organic growth, without regard to the change in our dim factor, is low single digits. Call it, 2% to 3%.

Are you seeing any directional changes? Is that slowing? Is it accelerating?

You know, it's pretty much the same coming out of the quarter into the new year. There has been a little bit of noise from weather, but by and large, in January and into February tonnage in the low 20s.

Okay. The dimensional pricing change, is this something you guys have done before and is there any way to think about what percent of the business it impacts and what ultimate impact you guys are hoping for?

It has never been changed in our history, Scott. We always had a 250 dim factor. If you look at international airlines, they are at 166 and others at 190.

It was never a huge concern to us until the shipment traits and characteristics really began to change over the last, let's say two years, where normal freight -- what we would call normal freight three years ago would be in the 750 pounds per shipment and today it has dropped all the way down to the low 600s. The cause of that is moving very low-density freight, much more than we have in the past, and that is driven by probably technology and other issues like that.

So the freight is different today than it was in years past and so we had to address that. As you know, we moved it from 250 to 200. It will have an impact from the standpoint of those customers who handle that type of freight. It will not impact across the board.

So to give you an exact number, we don't know that number yet. We need another month or two of actually having the rule implemented and then we will be able to tell you exactly what happened.

But is there -- maybe is there a way to think about what's the effective rate increase from this or kind of, if it all hits, what the margin benefit is?

Sure, Scott. The intent was to essentially take the place of our normal general rate increase. As you'll recall, that is typically targeting somewhere between 3% and 3.5% across that airport-to-airport line item.

Okay. And just last question. If I look, the core Forward Air business had a roughly 87% operating ratio last year. You guys used to do low 80%s. I think you've had high 70%s operating ratios.

Is that still the goal and what does it take to get there? And maybe what kind of margin improvement do you think you can see at Forward Air this year?

Our goal isn't to get into the 70%s this year, because that's not going to happen. And the one time that we did get in the 70%s was an absolutely perfect storm, so for us to -- but we do have opportunities to improve. One of the critical steps was the one we took last week on the dim factor.

We also have opportunities within our labor, where we still have tried to get the old Towne influence out and where we are much more efficient in that area that we have been. We have seen great efficiencies already in our load averages, which is critical to the airport-to-airport business.

And we would be happy to work it down to an 86%, 85% OR and then start working it to get it even better. But today our goal is to get it to the 86%, 85% area.

And that is a near-term goal for 2016, 85% to 86% OR?

As best -- yes. I'm not sitting here telling you we're going to do that. I am telling you we are striving to do that.

Got you, okay. All right, thank you, guys.

Jack Atkins, Stephens.

Good morning, guys. Thanks for the time. Going back to the GRI comment for a moment; if I heard you correctly, it sounds like this dim weight change is in place of a standard GRI. Can you maybe talk about why you guys decided not to go forward with a GRI this year and when was the dim weight changes set?

Jack, as you'll recall back this fall, we -- it was a rivaled approach to putting in place a couple of surcharges, West Coast-driven and Florida-driven, so that's relatively new. We got to be cognizant of just our customer having to -- which is the forwarder primarily, having to be able to pass along the rate increases that we put in place to their customer. So we really didn't feel like that we could do both.

Let me add to that, Jack, this is the most defensible pricing actually we've ever taken, primarily because the business mix has changed. Had the business mix stayed the same, we wouldn't be talking about this. But as we recognize and kept trying to say, gee, that's really not happening; well, in fact, it was happening. And so as a core tenet to our ongoing business, we had to fix that part of it and I think our team did a great job of doing that.

Okay. And then when we think about fuel surcharges, we've seen some of the LTLs adjust their fuel surcharge tables in 2015. Is that something that you guys have looked at doing and just decided not to do, or is that something that could be in the cards?

It's something that could be in the cards. We're certainly not going to do it right on top of that we just did. We have discussed fuel surcharges just beyond belief, so I think at some point, if oil does not recover in any way, shape, or form, we will probably take an action there.

Then, Rodney, I guess thinking back to 2015, what was the total impact year over year EPS from the lower fuel surcharges and what would you expect that full-year impact to be in 2013 (sic)?

You know, Jack, it was -- we're broadcasting remotely from Florida so I don't have my notes, but from memory it was about $0.12, $0.14 in 2015, I believe. And we're looking somewhere between $0.10 and $0.12 again in 2016 with fuel at its current prices.

Okay. Then what you are assuming in the first-quarter guidance, Rodney, in terms of tonnage growth year over year and then in terms of yield?

Jack, as far as tonnage growth, keeping in mind if we grandfather Towne on March 9, we're looking at between 12% and 14% without regard to the change in dim factor, which will drive tonnage up by the way that works. And essentially we got back to, as far as our core linehaul yield, pretty much flat with the prior year in Q4 2015. Sequentially, we think that will be a little bit better, but not a lot better.

Okay. So the dim weight changes will impact tonnage, not yield?

The way that works it's an increase in billable tonnage; it's not an increase in yield.

Okay. Then last question and I will turn it over is on TQI. It seems like we are every quarter talking about some issues there. I guess you all refer to some initiatives that you are putting in place. What are you guys doing to get profitability back on track at TQI and what is sort of the timeline to make that happen?

The first thing we did was have a complete organizational change. We put some -- as I like to call it, some horses in there. The new person that's running it is an industry veteran, top-notch, and is going to deliver some really good results for us. Then we further supported that down the organizational structure.

And I can tell you we are hard on TQI right now, our efforts, because the great thing about TQI is they have wonderful opportunities that we need to bring to the table. So we're looking at the next three to six months getting it back to where it was and then from that point on really taking off with it. A lot of work to do, but we have the right players in there to do the work.

Thank you again for the time.

Todd Fowler, KeyBanc Capital Markets.

Great, thanks. Good morning. Bruce, can you just give us an update with where you are at with respect to Towne? At this point are the integration costs going to be behind us? And then, is there any work to still do with the legacy pricing on the Towne business?

We are basically done, Todd, so we're happy about that. Don't have to deal with it going forward. There's a few -- I don't know the exact number, but it's not meaningful -- of ongoing contractual rates, if you will, but basically we are done.

So at this point when we think about both volume and yield trends it should just be reflective of obviously adjusting for the timing of when the acquisition came in. But we shouldn't see any big shifts of freight moving in or out because of pricing actions at Towne?

That correct. The big thing that Towne -- that the Towne freight does and has done is it's a lower length of haul, so we're into more and more regional traffic, which is good. Nothing wrong with it, but that will be the big change you see.

Got it, okay. And then it sounds like that the outside capacity costs in the quarter were back down to where they've been historically. Is there any more opportunity when you think about the purchase transportation within the network or is that where you needed to be at this point? And is there anything you have to do with the owner-operator pay going into 2016?

If you compare Q1 this year versus a year ago, we are up 100 teams, so that has just been a monumental step to improve our linehaul. Our ability to buy on the outside market is like everybody else's: you can get capacity cheaper than you could a year ago. We are anticipating that to change, but for the time being, we work every single day on lowering that cost.

Okay. And then just the last one I wanted to ask about. With the change in the shipment size -- and the other LTLs have talked about this to an extent, but it sounds like in your network that that's more of a reflection of a shift in the freight that you're handling versus being economically driven. And maybe there's a combination of both.

But maybe it would be helpful if you can talk a little bit, Bruce, about specifically what you are seeing. Is that mostly e-commerce type customers? I think you made the comment about technology, so is it a way that your customers are packaging the shipments? Maybe just a little bit of high-level context as to what you are seeing with the shipment size that I think would be helpful.

I would tell you to look at your own office and everything in that office --.

It's a mess, if that helps.

Yes, it does. It helps me greatly, Todd. Thank you.

If you look at laptops, they weigh half what they used to weigh. You look at TVs; they weigh even less than that. But, in many cases, take up the same amount of space so that drives a number of things.

Number one, obviously, revenue. We're not getting the revenue that we would've gotten in the past. Number two, it takes as much cost in terms of labor cost to move that freight, even though it weighs less. So we're getting the same amount of labor and a lower amount of revenue; in most cases that doesn't work really well. And then it affects our linehaul, which, as you know, is our biggest cost component.

So all of those things work together; and what really driven decision to do this is none of that is going to change. We're not going to come back with TVs that are big boxes that weigh 1,000 pounds. Those days are over. So we really had to make a change that will be a forever change.

Okay. So it's a shrinking of the freight versus a shift in the customer base or anything like that?

Correct.

Got it, okay. Thanks so much for the time this morning.

Jason Seidl, Cowen and Company.

Thank you very much, operator. Getting back to talking about the LTLs, what we've seen from the LTLs, obviously, has been a little bit of weakness in some of their tonnage in the fourth quarter. Did you guys see them get a little bit more competitive in your lanes? I know sometimes they can drift over into competition with you.

No, I think what we see the most, Jason, is the disappearance of large shipments, because, with capacity available, our customer will take a 7,000-pound shipment and put it on a truckload carrier. We really don't see a lot of bleed off to LTLs. Not to say there isn't any, but it's just not significant.

Okay, that color helps. Also, when you're looking at some of your end-markets -- I've been reading a lot of the stuff that our retail team has been putting out there and a lot of their companies are telling them sort of about a glut in inventories that they have, especially on the apparel side. What are you hearing from your customers and what should we expect going forward?

We obviously read the same reports and we simply did not see it. And the quarter started for Solutions -- I'm referring to Solutions and their customer base -- started off pretty well. We were really concerned that the quarter would start off with basically zero freight, but it started off pretty well.

So we're pleased with that. Although we read, again, the same things you talk about and keeping a very watchful eye on it.

And so what is embedded in your guidance in terms of the business for TQI for the first quarter?

TQI is going to struggle again, Jason. Revenues; we're starting to see sales wins, but that's coming on slow. We're essentially modeling TQI to be breakeven contributors from an EPS perspective.

That's a good color again. Gentlemen, thank you for your time, as always.

David Campbell, Thompson Davis.

Bruce and Rodney, how about your Solutions division? Obviously, did well in the fourth quarter. Do you think it's going to lose money again like it has been in the first six months of the year and then turn profitable the rest of the year?

Let me tell you that that division now reports to me and we are working as hard as a human being can work to make sure that we are making every effort to get through Q1 and Q2 profitably. We would take a breakeven in Q1, which we think we're on the road to, and then in Q2 up that into a small profit -- not a huge profit. And then be ready for the balance of the year.

And most of that is from new contracts?

Part of it is and part of it is efficiencies.

Right, right, right. What would you say --? Last question is about the synergies of that business and your core airport-to-airport business. Has there been any synergy benefit?

The only synergy we get out of the Solutions business as it relates to our other businesses is we do, in a few locations, share buildings, but that's it. Different customers, different services.

Right. Okay, thank you.

Ben Hartford, Baird.

Good morning. This is actually Zax Rosenberg on for Ben. Just hoping to follow-up on the core linehaul tonnage comments. Just wondering what a reasonable rate for that could be after Towne's contributions are lapped looking to second quarter through fourth quarter this year. Are we looking at a positive or a negative growth do you think?

We're looking at it to be positive for a couple reasons. We think, again, the core organic or legacy, without regard to Towne, is probably bumping around in the low single digits. But we think the impact of the change in our dim factor, which is going to increase tonnage, that will bring it up into the solid mid single digits for the post-Towne balance of the year.

Related to that, what benefit have you guys seen from the [BX] Solutions closure in fourth quarter, if any?

We saw a bit the weeks following that. It wasn't big because, quite frankly, based on our intelligence, because they didn't have a whole lot of business to begin with. But we saw volumes go up 1, 1.5 points.

Okay, great. And if I can sneak just one last one in here. Salary, wage, and benefit growth was 30% and you broke out a few of the items. So just wondering: to what degree was it greater than internal expectations, given efforts to improve service through the integration of Towne? And can we expect that to be flat year over year in 2016 as realization of synergy and savings are now there with the Towne integration completed?

Most of that integration, those efficiencies were accomplished in the second half so you're going to see some improvement in Q -- well, the first half really of the year. And then you mentioned, and we called out, some what we consider not necessarily one-time costs, but some very unusual costs that were in that line item. So those should mitigate and you should see some improvement from a percentage of revenue across that salaries and wages line item.

Great. Well, thank you very much for taking the time.

There are no further questions. Thank you for joining us today for Forward Air Corporation's fourth-quarter 2015 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.

Thank you for your participation. You may now disconnect.