Forward Air Corp (Delaware) (FWRD) 2016 Q1 法說會逐字稿

Thank you for joining Forward Air Corporation's first-quarter 2016 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 a press release announcing first-quarter 2016 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 companies 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 of foregoing words, such as believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements.

You are hereby cautioned that the statements made be affected by important factors among others set forth in our filings with the Securities and Exchange Commission and in the press release issued yesterday. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

And now I will turn the conference over to Rodney Bell, CFO and Senior Vice President of Forward Air. Please go ahead.

Thanks, operator. Good morning, and thank you all for joining us. This is the first quarter with the recasting of our reporting segments, so allow me to briefly speak to that. Going forward, we will have the following four segments: LTL expedited, which includes our legacy airport-to-airport service; our Forward Air Complete pickup and delivery offering; and, lastly, other accessorial services primarily provided at the terminal level.

Next is our truckload expedited segment, which combines our TLX expedited full truckload service with our TQI full truckload offering, which today primarily services the pharmaceutical industry. Full distribution is our Forward Air solutions segment, which was previously broken out separately, so nothing has changed there.

And lastly, is our new segment breakout of central states that for financial reporting we refer to as our intermodal segment. Given our growth plans, we thought it important to begin showing CST as its own reporting segment. Q2 and Q4 in the recast for 2015 -- in the recast format has been made available yesterday via an 8-K filing.

Now moving on to the first-quarter results: LTL expedited revenues increased $12.1 million or 9.9%. This growth continued to be primarily the result of the acquisition of Towne, which closed March 9 of last year.

Also positively impacting tonnage was February 1 change in our dimensional factor. This change resulted in an increase in our billable tonnage.

Network tonnage was up 8.4%, while all-in yield was essentially flat, coming in at a negative 0.3% as compared to Q1 a year ago. The breakout of that yield was the change in the yield consisted of 2.2% from improved linehaul pricing, a negative 2.2% from lower year-over-year net fuel surcharge, and minus 0.3% resulting from Forward Air Complete.

Our Complete attachment percentage was down 4.7% on a year-over-year basis as a result of fewer large distributions. However, we have started to see that pick up in Q2.

Our operating ratio improved 50 basis points to 87.3, which drove a 14.8% increase in our operating income. Included in those results was approximately $700,000 nonrecurring costs under our other operating expense line item.

Moving to truckload expedited, revenues were $38.6 million and $4.1 million, an 11.9% increase compared to Q1 a year ago. Operating income was $1.6 million compared to $3.2 million a year ago. This resulted primarily due to TLX having higher initial costs associated with new business coming on board, while TQI continued to struggle to replace lost business.

Our pool distribution segment revenues were $33.2 million, up $6 million and 22.1%. Operating income was essentially flat compared with the prior-year quarter. The Intermodal segment revenues increased $1.6 million and 7% to $24.6 million.

Our operating ratio improved 110 basis points to 90.2, while operating income increased 20% to $2.4 million. At the consolidated level revenues increased $23.6 million and 11.5% to $229.5 million as compared to Q1 a year ago.

Earnings per share was $0.43 compared to an adjusted $0.40 last year. And as you recall, that $0.43 was [also] the midpoint of our guidance this quarter.

Moving on to guidance for the second quarter, we expect revenue to be in a range of -- revenue growth, rather, to be in a range of 1% to 5%. In Q2 a year ago we were still in the process of evaluating the majority of the Towne revenue. Over the course of the quarter and into Q3 last year, we parted ways with a business that we were unable to get to our minimum yield requirements. So that is what is going on with the prior-year comparison.

We expect income per diluted share to be in a range of $0.57 to $0.61 as compared to $0.51 a year ago. Assumed in that range is the 6% -- $0.06, rather, negative impact from lower year-over-year fuel -- net fuel surcharges. That concludes our comments. Now back to the operator for your questions.

(Operator Instructions) Jason Seidl, Cowen.

Wanted to talk a little bit about the broader macro picture, if you will. Obviously, a lot of the pure play trucking companies are taking down expectations. Even from some of the rails are talking about weaker-than-anticipated volumes for Q2, although I think their cost-cutting is helping. What is your take on the macro and where we are at at this stage?

The best answer, Jason, is we don't know.

Well, that is my answer. Come on. You can't steal that one! (laughter)

When we talk to our customers, it is all over the board. So we have some customers who are doing great and who think the economy is wonderful. And we have others who -- you know, things are not as rosy.

I think the biggest soft spot we see today is at our intermodal business. That has definitely slowed down. And especially when you compare it to a year ago with the West Coast interruptions -- port interruptions. So that is a lot of words to say it's softer. It's certainly not alarming, but it is softer.

And on the intermodal weakness, is -- part of that is just comparisons? Or do you think some of this is that diesel is so cheap, truck prices are falling, and it is getting tougher to get some of that transactional business that may have been there in the past?

I am not sure if freight has been diverted from intermodal. Without question, the comp's a little bit more difficult. But, also, without question, it is just simply slower.

Okay. That's fair. And kind of piggybacking on that, when you guys bought Towne, I think everyone got real excited that, all right, now the aggressive pricer is taken out of the marketplace. You guys are going to be going there and start to take pricing up, finally, being the 900-pound gorilla, if you were, for lack of a better word, in the space. Is just a slow market really curtailing the opportunity to do that, and once it turns around, we should start seeing that going forward?

Well, I think our number one goal is to make sure our customer stays in business, so we don't want to price him out of the market. Secondly, when we did our dim changeback, effective in February, that in essence was a rate increase. But it was a rate increase on the proper freight.

So if you had good freight before, you were not penalized. But if you had fluffy freight, as we call it, you're going to take an increase. So I don't think you're going to see us play like the 900-pound gorilla. We are simply going to continue to improve the efficiencies that we gained from the Towne acquisition and continue to drive that number down.

We actually had in March the best month we have ever had. So we are really pleased with where they are at and where they are going.

Okay. And how does April look from March?

So this is how April is. Look, here is the last three tonnage, if this will help you.

Sure.

So on Wednesday, we were plus 10. On Thursday, we were minus 10 in terms of tonnage. And today we are flat. So if you can draw something from that, great.

(laughter) Got it. So it was a totally clear picture for you there.

Exactly.

Understood. Well, listen, gentlemen, I really appreciate the time, as always.

David Ross, Stifel.

Rodney, can you talk a little bit about the negative impact from the lower fuel surcharges? $0.06 seems like a fairly being hit for something that is, in theory, a pass-through.

Well, it is really not, David, and it really never has been. We have always made (technical difficulty) on fuel. And the way that mechanism works -- essentially, we are paying our drivers -- not essentially; we are paying our drivers on a per-mile basis. So that is relatively a fixed cost, if you will.

And then we are charging our customers on a percentage of the airbill. So it is an opportunity, if you're being efficient loading your trailers, to leverage that fixed cost and make money on fuel. Now, that $0.06 that we have in the guidance, it is conservative. There could be some wiggle room there, depending on -- you know, fuel has kind of firmed up the last couple of weeks, but I have given up predicting what oil is going to do and what diesel fuel is going to do, because it bites me every time. So that is the reason for that $0.06.

And in terms of sensitivity around that, if we end the quarter in May/June, say, up 10% from current fuel price levels, would that negative headwind go away?

It certainly helps it. I don't know that it totally goes away. At that 10%, that is.

Yes. And if we could talk about pool just for a second, it looks like you had more business in the quarter, which is a good thing, but less profit, which is a bad thing. Is there onboarding costs associated with that new business that is kind of masking some of that margin improvement? Do you expect it later in the year?

There was really a few things going on with pool this quarter. One is exactly what you said -- the onboarding of the new business that came on. We had a competitor go out of business late in the year, and they didn't bring all that business on until the first of the year, so there was some onboarding costs. We were a little slower downsizing coming out of peak then we wanted to be. So there was some additional cost there.

And unfortunately, we had some equipment damage that took place in Q4 that we didn't know about until Q1 that we had to recognize. We had modeled solutions to make $0.01, and essentially they were flat from the quarter.

And equipment damage -- is that trailers, tractors, or sortation equipment at the terminals?

It was two leased tractors that were totaled. And unfortunately, nobody told anybody about it.

(laughter) Got to love it. Thank you very much.

Ben Hartford, Baird.

Bruce, around Towne, lapping the one-year mark or so, how pleased are you with the progress that you guys have made of late? And you talked about March being a strong operational month with regard to Towne.

When you think about what you guys have in your control with regard to Towne, is there the opportunity to continue to drive, maybe, upside to expectations internally/externally from the better balance, better overall execution within that expedited LTL business as we move through the year-end, dependent on the macro?

Well, we certainly hope so. Here is what we looked to get out of Towne what we bought them. One was we wanted to retain 65% to 70% of the revenue. We knew unless we wanted to go to low yielding traffic, we wouldn't be able to keep the other 30%, and we were okay with that.

The second thing we wanted to get was linehaul efficiencies, you know, where we are running one trailer out of one city rather than two that were ran previously. And all of those things -- the yield improvements, the linehaul improvements and that -- took time to do, longer than we thought.

But what we saw in the first quarter was we were exactly where we needed to be. So we are encouraged about what is going to happen there for the balance of the year. The expedited LTL group is on a roll.

Okay. In that vein, when we think about Amazon and some of the news over the past several quarters with regard to them specifically, and just B2C generally, how much of a risk do you see to a large e-commerce player coming in and absorbing more of their own linehaul capacity relative to your model and your customers?

We handle, obviously, e-commerce activity all the time. And the giant -- if we didn't handle as much as we do today, and especially during the holidays, I don't think any of us would lose sleep over that. It is a very difficult business to handle.

Okay. Good. Thanks for the time, guys.

Kevin Sterling, BB&T.

Bruce, as I look at your yields, you are getting some really nice pricing in a sloppy freight environment. And you listen to the truckers, and you know, they are just crying the blues. So I assume the bulk of that is repricing the Towne book of business. Is dim weight pricing contributing yet? Or is that on the come?

Well, dim weight -- when we changed dims, Kevin, that doesn't change the yield. It changes the weight. So that has no impact on yield. And, again, we went through a year-long process -- it seemed like a forever process -- to get this traffic properly priced, if you will. And some of it, we lost, obviously, but a lot of it we retained. And we're right where we need to be.

Good, good, good. Some of that business you lost, I know you didn't mind it walking, because I'm sure it was losing money in some of your lanes. Have you seen some of it come back, possibly, maybe because of poor service elsewhere?

We have. It is kind of interesting; that typically is what happens when we lose business over prices. It sooner or later will come back, and, in some cases, that's what has happened.

Yes. Are you getting pushback on your dim initiative, or do shippers understand that? Because the parcel guys are doing it; the LTL guys are doing it. It is becoming pretty standard. But are you getting pushback?

Yes. I think you are exactly right. Everybody has jumped on that bandwagon. Our team did a terrific job. I had two concerns. One was we would get immediate pushback; and then the second one was we would get -- you know, 40 days later, when bills or invoices came in, they would all be short paid. And we didn't have any of that. It was really well executed by our team.

Great. And last question here: it looks like you guys have a decent M&A pipeline. Are you seeing valuations come in some with some of the challenges that truckers are seeing and all the regulations that are coming down the pike?

Yes, we have. They are definitely down.

Well, good. Well, thanks for your time, and congrats on a solid quarter in a challenging environment.

Thanks.

David Campbell, Thompson Davis & Company.

Bruce, I just wanted to ask you -- in answer to another question about Amazon, you said that you wouldn't lose any sleep over the traffic, if you lost any. Is that because it is all low yield traffic that you can't make money on it?

It is not necessarily low yield. It is just very difficult. And, obviously, it depends on the product. But we handle a lot of TVs. They are very difficult to handle. They are very easily damaged. It is just a tough product to move.

Right. Right. I can guess it would be. What about the outlook for truck expedited volume in the second quarter? Do you expect it to be up 2%, like the whole Company, or --?

We do.

About the same as the Company. Okay.

Yes.

So that is really not bad. I mean, it could be a lot worse.

Yes. We look at it from the positive side, David.

And your margins are going to be better. There was a nonrecurring cost element in the first quarter, as you mentioned, Rodney?

That is correct.

What was that for? Do you know?

It was some professional fees as well as some cost for rebranding across the product lines. Again, it is nonrecurring, but it was about $0.015.

And is that in the expedited business?

That is correct.

Okay. Thank you.

Todd Fowler, KeyBanc Capital.

Great. Thanks. Good morning. I am not sure if you gave this earlier; I jumped on a little bit late. But did you have the tonnage trends during the quarter? And I heard some comments about April just on a couple of days. Do you have where April has been trending and maybe what you are expecting for 2Q?

Todd, yes. We haven't given that, actually. And this would be -- okay. January was 15%. February was up 27%. And March was down 8%. And doing slightly better than that -- right around that 8% mark so far into April.

I'm sorry. Up 8% in April?

No, it's negative 8%.

On the tonnage side.

Yes.

Okay.

And as we mentioned in the release, that's -- you know, when we bought Towne, we brought over pretty much all the business until we had an opportunity to evaluate it. And then there was a culling of business that wasn't meeting our yield expectations.

Okay. And then, so Rodney, what do you have factored into the guidance for tonnage for the second quarter?

Minus 10%.

Okay. That helps. Okay. And then, Bruce, just maybe on the change in pricing with the dim, so how should we see that in the numbers, then, as we move through the year? Is it reasonable to think that yields are going to be up in that 2% to 3% range going forward, and then we get the adjustment kind of on the tonnage side? Or is there anything else that really should start to come through on the yield as you move through the year?

At this point, we don't anticipate any additional yield changes, if you will, factors that will increase it. The only big things that could increase it would be fuel. And if fuel starts to run back up, we would be overjoyed.

Okay -- which we have seen a little bit. And I don't want to ask something that I know the answer to, but I'd just appreciate your comments on this. At this point, is the network pretty cleaned up from bringing on the Towne freight from a network standpoint? I mean, is it running the way you want it to be running? And how do we think about the margin progression, if you are through cleaning up the business and you have got the network where it should be? How should margins progress as you move through the rest of 2016 and maybe into 2017, if you want to comment on that?

I think you're going to continue seeing it improve. We really had validation based on our operation in March. The big cost we watch, obviously, is purchase transportation. We probably set a record with that during March on how efficient they were. We think those trends will continue through the balance of the year and, hopefully, get a little bit better.

And what is the mix of outside capacity versus owner-operators now?

You know, our recruiting team has done such a good job, we are down to between 5% and 7% of outside carriage.

Whoa, okay.

And that basically is due to -- out of balance, and not the lack of drivers.

Okay. And then just the last one: with the change in the segment presentation and thinking about growth going forward, where would you kind of suggest that you would see maybe the most growth, either organically or inorganically, over the next couple of years out of the new segments that you have from a presentation standpoint?

Well, I think, as Rodney mentioned during his comments, we segregated the intermodal business due to that reason. And that is the one we're going to really push to grow.

And is that -- are there acquisition opportunities there, or is that organic?

Yes, there are. There are surprisingly a number of them. So we are on that road as we speak.

Okay. Very helpful.

Scott Group, Wolfe Research. (Operator Instructions) Jack Atkins, Stephens.

Rodney, just going back to second-quarter guidance, what does the guidance assume in terms of core linehaul yield changes year-over-year?

Year-over-year, Jack, on the low end, 4%. On the high end, 6%.

Okay. And that is an acceleration from what you saw in the first quarter?

It is a bit.

And what is driving that? Is that just more traction with some of the yield initiatives that you put in place towards the end of last year?

It is some of that, and then the fact that the current year's -- that lower yielding -- the lower yielding count of the mix.

Okay. Yes. That makes sense. That makes sense. And then in terms of the dim factor changes, could you maybe comment on how much of your expedited LTL business from a tonnage perspective that dim factor really applied to? And what sort of -- and I am sure it is hard to quantify, but what sort of impact did that have in the quarter in terms of incremental tonnage to the system?

Sure, Jack. On any given day, it is impacting about 17%, 18% of our network freight. In terms of tonnage, it has improved tonnage, call it, 4%.

Okay. And were there some larger customers that perhaps maybe it didn't apply to immediately that, over time, you expect to maybe get on board with a dim weight change? And what does that do to that?

There were very few exceptions, Jack, but a couple. And by mid-quarter they will -- everybody will be on board on the program.

Okay. Okay, great. I know you guys -- it looks like you guys bought back a fair amount of stock in the quarter -- about $10 million worth. Can you talk about capital allocation going forward? Because you guys did a great job generating cash flow. Are you thinking about being more regular purchases of your own stock, or is that just sort of an opportunistic thing?

No, it is really more regular, Jack. We have got a 10b5-1 plan in place. The last couple of quarters, we bought back $10 million worth of stock. That is always subject to the input from the Board. We will talk about that at our Board meeting in May. But I wouldn't anticipate that changing, but that could change.

But before we get to share repurchases, M&A is the number one priority -- and, more specifically to Bruce's point, the opportunities that we have using CST as a platform. Good pipeline there. And that is the number one use of cash. But to your point, we are generating a lot of cash. And there is no reason that we can't do both.

Absolutely. And then last question, but what was the quarter-ending share count, if you have that, Rodney? Diluted share count.

30.6 million.

Okay. Thanks.

Scott Group, Wolfe Research.

This is actually Vanck Zhu on for Scott. Wondering if we can start by drilling down a little bit more into the macro environment. So any end markets of particular strength or weakness right now?

That's -- I am not evading your question; it is just a really hard question to answer. We don't see any particular vertical just off the cliff either way. We just see it -- that it has slowed down a little bit. Some of this could be the Easter effect, which was earlier, obviously, this year than a year ago.

So again, as we said earlier, we don't think it is an alarming situation. But it is just not as vibrant as it has been.

Okay. And in terms of month, I guess, tonnage, we saw a decrease in March because of the acquisition. Do you have any views as to the trends in second quarter, third quarter, fourth quarter?

Do you have that, Rodney?

Yes.

I guess just more forward-looking -- just expectations for second quarter, third quarter, fourth quarter. I know some other business that was formerly in Towne went away because of yield, focus on yield.

Yes. Right now we have got it modeled to be a negative 10% tonnage decline in Q2. That should abate some in Q3, but there was some continued offboarding of lower yielding business. I would rather wait until we get a little bit further down the line to really speculate on Q3, but it should be less than Q2.

Okay. And with the volume declines, you can still expect to see margin improvement?

Yes. There is a couple of things going on. Like we have mentioned, the business that we did lose year-over-year was low yielding business -- in some cases, business that we were losing money on. And the other thing is the rate adjustments that we did in late Q3, we're still getting the benefit of that. And then the impact of the dim change. So, yes, there should be margin expansion even on flat and even on declining volumes.

Okay. And just follow-up on the dim pricing: how is that sticking? And what benefit did you see in 1Q from that?

Sure. It's -- as Bruce mentioned earlier, it is -- it was received very well. We are dimming about 17%, 18% of our freight. Total network freight. And the positive impact on a year-over-year basis is about a 4% increase in tonnage. So it has been very successful.

Okay. And could you speak about what your expectations are for margins -- annual margins for each of your segments? Your new business segments?

Sure, Vanck. We are targeting -- for the LTL expedited, we are targeting an 86 OR. We think we can do a little bit better than that, but that is what we are targeting thus far for central states. OR of, call it, 88 or 88.5, in that range. For the expedited truckload group, they should operate at a 90. And then, solutions for the year should operate at a 95.

Okay. Great. And one last question. Just wondering if you could speak about ELDs. What percentage of your owner-operators currently have ELDs? And what could come in to get to 100%? And would this also have impact on capacity?

We are at 100% today. We implemented ELDs four years ago now. Because if you are not a cheating trucking company, ELDs will actually help make you more efficient. But if you are a cheater, you are going to get caught. So we are in great shape there.

Okay. Great. Thanks for the time, guys.

Art Hatfield, Raymond James.

Just one question for me, and I apologize. I got on a few minutes late and you may have addressed this. And if not, you may or may not be able to answer it.

But my quick question is this: you had mentioned, Rodney, that you're modeling about 10% down tonnage in Q2. Any thoughts on what that would look like ex the culling of the down business, and kind of what -- I don't know, for lack of better words, what organic tonnage is looking like in the quarter?

Art, I had that question yesterday evening, and I will answer it the same way. Our guess, albeit an educated guess, is flat to slightly up from an organic perspective. But there are so many moving parts, and with Towne in the mix, you are dealing with the same lanes, a lot of the same customers. So it is very difficult to answer that question. But our sense is slightly up.

Okay. No, I appreciate that. I figured as much. But I just wanted to see if there were any kind of big deviations from what was going on just broadly from an economic perspective. Thanks for the time.

Thank you. And we have no further questions in queue at this time.

Great. Thanks.

Okay. That does conclude Forward Air's first-quarter 2016 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 the call. You may now disconnect. Have a good day.