Forward Air Corp (Delaware) (FWRD) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for joining Forward Air Corporation's second-quarter 2016 earnings release conference call. Before we begin, I'd like to point out that both the press release and this call are accessible on the Investor Relations section of Forward Air's website at www.forwardair.com.

With us this morning are Chairman, President, and CEO, Bruce Campbell; Senior Vice President and CFO, Mike Morris; and advisor, Rodney Bell. By now you should have received the press release announcing second-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 Company's expected future financial performance.

For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. Without limiting the foregoing, words such as believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements.

You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in our filings with the Securities and Exchange Commission and in the press release issued yesterday; and, consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements.

The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events, or otherwise.

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

Thank you, operator, and thanks to each of you for joining our call today. In the past I have not made opening remarks, but I feel it is important for me to do so today for two reasons. First, the performance by our air expedite group during the quarter was simply outstanding. We have finally been able to see the positive results of the Towne purchase after a year of hard work. Truly great team effort. And secondly, this is my opportunity to publicly and personally thank Rodney Bell for his 20-plus years of service to the Company. Truly a great effort, benefiting all of us.

And finally, this is my first opportunity to publicly welcome Mike Morris to our team. We are excited he has joined us.

And with that, I am now going to turn the call over to Mike.

Thank you, Bruce, and good morning, everyone. I'm very pleased to be here today. Before I begin I would also like to thank Rodney Bell for his nearly 25 years of service, and for the value he created helping to make Forward Air the great company that it is today. I look forward to working with Rodney over the next few months, and I and the entire organization wish him the best in his retirement.

I will begin by highlighting how the TQI impairment will increase our book tax rate for 2016. The goodwill portion of this TQI charge has no impact on our 2016 estimated tax expense because we will never benefit from this charge on our tax returns. However, it does reduce our 2016 estimated pre-tax book income.

So when we calculate our GAAP tax rate, the numerator -- our estimated tax expense -- is unchanged. But the denominator -- our estimated pre-tax book income -- is reduced. Therefore, our book tax rate has to rise, as it has, to approximately 50%.

For GAAP purposes, we expect to book to this rate for the balance of the year. That said, we will adjust for this TQI tax rate effect in our non-GAAP presentation, which currently reflects an approximate 37% tax rate. We expect to use this rate for our non-GAAP presentation throughout 2016.

Now I will provide some additional perspective on 2016 for your modeling purposes. Regarding intangible asset amortization, the TQI impairment will reduce our quarterly amortization from $2.7 million per quarter to $2.3 million per quarter going forward.

Regarding capital expenditures, we expect full-year net CapEx to be approximately $45 million.

Finally, regarding shares, our full-year diluted share count should be about 30.5 million shares, and that is prior to the effect of any future share repurchases.

With that, I will turn it over to John to open the line for Q&A. John?

(Operator Instructions). Scott Group, Wolfe Research.

It's actually Vanck Zhu on for Scott Group. Just a few questions for me. First, wondering what your LTL margin expectations are for 2H, second half of this year?

We modeled an 83 OR for the balance of the year. That makes a number of assumptions. So business levels stay relatively the same on a year-over-year basis. We don't get impacted by fuel surcharges, and on and on and on. So as we sit here today, that's the best we can tell you, looking forward.

Okay, great. And it looks like purchased transportation took a good step down just this quarter. Was there any -- what's the driver behind the lower PT rates relative to past quarters?

The best thing that happened to us was we were fully seated in terms of having owner/operators on board. And that allows us not to outsource the loads, which cost us quite a bit more than if we pull it with our owner/operators. So our outside miles for the quarter ran in the 5% range, which is really, really good. Most of that would be caused by us being out of balance and we simply couldn't cover the load with our owner/operator. So if we can continue that for the balance of the year, that really helps our team in terms of lowering PT.

Okay, great. And just a question on the current environment. Are you seeing any sort of pickup in June and July across your businesses?

Well, June was better. And that's blessed by July being a little bit soft. So, for any of us, we were talking earlier, the prediction business right now is very difficult. For us to predict what will happen for the balance of the year is, at best, a guess. I know we have planning processes in place of that allow us to adjust to whatever happens; but beyond that, you know more than we do.

Okay. And one more question. Just wondering, I know you guys did a pricing action last September. Wondering if another one is in the works sometime in September or maybe sometime this year?

We will evaluate that, as we do annually, towards the end of the year as we go through our planning processes for 2017.

Okay. Great. Understood. Okay, thanks for your time, guys.

Jack Atkins, Stephens.

This is actually Andrew on for Jack. Bruce, going back to the volumes there, can you walk us through how that trended through the quarter on a year-over-year basis?

This is Mike Morris. I can take that, Bruce. So, April's year-over-year tonnage was down 11%. May's year-over-year was down 5%. June's year-over-year was down 4%.

And then so far in July, if you have it?

We're basically flat to up 1% or 2%. And I would point out to you that when we went through the second quarter, that was really our first quarter that we lapped the Towne acquisition. So a year ago, there was still a lot of what we called bad business in the network. So you can see from our operating results that by ridding us of some of that business, not all of it, we were able to dramatically improve our operating ratio. So this is one of the few times you'll see in a transportation company where a little bit less volume was truly beneficial to us.

Make sense. Within the 3Q guide, what are you guys expecting in there from a core linehaul yield and volume standpoint?

In terms of our guidance for the third quarter, we see linehaul yields up in the low single digits. Keep in mind that if you think about tonnage and then pricing actions following suit, we're lapping the tonnage now, but the pricing actions will be lapping in the third quarter. I think it was September when some of the pricing actions came in. So, you're going to see some balancing out on a year-over-year perspective that will deaden the growth rates of core linehaul yields.

Make sense. And then tonnage?

Tonnage is probably up in the low single digits. Again, you kind of pass the tonnage comp as a pure comp, and now you got the pricing comp to catch up on.

Okay. And the last one for me is, in the Pool Distribution business, if I look at it over the last two years, revenue is up 25% or so. But EBIT has actually declined by about $1 million. What's going on in this business? And why haven't we seen the operating leverage in the model?

Well, I think you will see it. It's just in order to take on some of that business you have to -- it's a big decision you make when you take on new business because -- can we handle it within our building, our existing buildings? Or do we have to go out and find a bigger building? And both cases this time we had to go out, incur additional costs, incur additional fixed costs. And we're hoping that in the second half of this year, that trend will reverse. So it's equally frustrating to us. And we're hopeful that, again, that we'll see a better result in the second half.

Sounds good. Just one more, I realized. On the buyback, is that a signal that you guys plan to become more aggressive there? Or is that just replacing one was already in -- authorized?

It was replacing one that was already authorized.

Okay. Thanks for the time.

Todd Fowler, KeyBanc Capital Markets.

Rodney, congratulations again. Mike, welcome.

What about me, Todd?

(laughter) Bruce, it's always good to hear that you're still here, so thank you.

Thank you.

You threw me off with that one (laughter). It's not hard to do. I guess what I wanted to start off with is with the linehaul yields sequentially coming down a little bit in the second quarter, that's different than what you normally see or what we would normally expect to see. Does that have something to do with the change in the dimensional factors? Does that have something to do with the change in the mix? I guess I'm just trying to understand why yields came down sequentially. And then I understand the guidance going forward, but how do we think about what's going on with the linehaul yields?

Two quick answers. One is a little bit of change in mix, and the other is a little bit shortening of the length of haul.

Okay (multiple speakers). Right. Is there anything, Bruce, then to read into either the mix or the change in the length of haul, as far as what's driving that? Is something different with it?

No.

Okay.

If you follow us, as you do, we go up and down on that. Assuming we've made no structural changes, that number will go up and down. And that's just the nature of the beast.

Okay, got it. And then when I look at the salaries on the per pound basis here this quarter, it looks like you guys just did a very good job there. Very strong incremental margins. Was there anything specific going on, on the salary side, that was able to give you that good leverage? Or was it just a good quarter where everything aligned, and you're getting the experience that you need with the dockworkers, and the freight is where you want it to be, and that sort of thing?

Yes, it's the latter. And really top-notch execution by our team; they brought that right to the bottom line. They just did a terrific job.

Bruce, is there any reason why that would change into the second half of the year? Are there wage increases that you have to put in, or anything like that? Or is that -- the comment that was in the release about if you see incremental volume that you get the leverage off of that.

Yes, we're convinced we can get the leverage. We are convinced we can maintain that cost structure. We have already taken wage increases, so that's behind us. That's reflecting Q2 numbers.

Okay, good. And then can you help us understand a little bit what happened in the intermodal segment here this quarter? I know there were some comments in the release about the revenue, and it was down year-over-year, and down a little bit sequentially, but maybe if you can just give us some color. What's going on there? I don't think it had a huge impact on the margins, but there was a little bit of fall-off in the top line. And then what your expectations would be for the rest of the year.

Yes, I'll give you a bit of context. If you'll recall, a year ago, we had the port strike, and then right after that the resulting surge in intermodal business for a period of time. So we were up against a fairly tough comp.

And on the other side of it, it's simply slow. We've had a number of people say, what's the cause of this? Well, the import levels are just not what they were a year ago. We have the same customer base. Nothing has really changed there. It's just they simply don't have as much business. We're hopeful as we go through the balance of the year that we're going to see that start to tick up. But our team -- our CST team did a terrific job of maintaining their margins. They were just top-notch.

Okay. So there's no business that's been lost or anything like that? It's just a reflection of the year-over-year comparisons, and then what the environment is today?

Yes, to us, it's more of a macro issue. We're still out, hard at it, selling, trying to gain more customers. They did gain more customers. So we're hopeful as we go into second half that we can grow that, but we are mindful that the macro conditions are not the best.

Okay. And then two last ones for me, one just on the guidance. When I think about the sequential improvement into the third quarter, so you've got $0.57 here in 2Q, stepping to $0.61 to $0.65. Can you just, at a high level, help us think about -- is that just the normal seasonality?

To me, it feels like historically, or more recent history, the third quarter has looked a little bit like the second quarter; maybe not as strong in some of the businesses. But what are the parts of the business now that step up sequentially, or that we should think about, that help you add $0.04 or $0.05 sequentially in the third quarter versus the second quarter?

This is Mike. I think it's just -- yes, there is some seasonality in there, as you point out. But I think it's all -- it's also seeing another quarter of the full effects of the Towne integration, and realizing the network synergies that we saw in the second quarter.

Okay. That's helpful. So you don't think that all of that came through in 2Q?

Well, I think it's starting to come through, yes.

Okay, got it.

You need to remember, obviously, Todd, that solutions tend -- the second half of the year is their half of the year.

Yes, that makes sense, Bruce. I got that. That's right, okay. And then just the last one I just wanted to ask, and I know that you get asked this periodically. But with your business model and with the shifting e-commerce, and thinking about if it's things like Amazon Prime Day, how much more -- or how much different do you feel the volumes as a result of some of the shifts in e-commerce at this point compared to a couple of years ago? And what do you expect for the second half, or maybe the intermediate-term future as a result of some of those shifts?

We have worked over the past three, four years to position ourselves to handle that business. It is a change in how we move freight, but we have a good group. They know how to adjust. Probably three, four, five years ago, 90% of the freight that moved across the Forward Air dock was on a pallet, and we moved it with a fork lift. Today that number is probably down to 50%, and we're hugging 50% of the freight. So we've had to adjust. We've had to adapt. But that's part of life, and that's what you have to do to continue to be successful.

Okay. All right, guys. Makes sense. Thanks again for the time this morning.

David Ross, Stifel.

Bruce, very lovely to have you on the call today. Congratulations on a terrific quarter.

Likewise. (laughter)

First, can you talk a little bit about TLX and the shift to owner/operators? It looks like a big growth there in the owner/operators. Was that one of the reasons that you weren't able to flex as much down on the cost per mile, when there was rate pressure?

Correct. And as you notice, a number of our customers on the truckload side, where a year ago would allow us to broker, today they are demanding that we run the freight with our people. So that's why you see the uptick in the owner/operators there. And then the cost pressures that come with it, because all of a sudden you are concerned with empty miles, and that type of thing. So, we feel good that we're going to be able to stem that cost increase as we get more and more fluid in moving the truckload products across the US.

Because shouldn't they pay a premium if they are demanding that you use owner/operators instead of third-party?

Well, in some cases they do. And in other cases they say, the market is not really good, so if you want this business, this is the price you are going to get it for.

But you still have to use owner/operators?

Yes.

Has there been any change to the truck brokerage environment as we have moved into July? Has the spot market gotten any better? Has it been more difficult, less difficult, to find capacity?

We ended June -- if I go all the way back there, where it got really, not tight, but it was much better. And then as we progressed through July, it's not back as far as it was in terms of looseness. But there's definitely capacity available. And there's definitely competition going on for what rate level you are going to be able to charge.

And of what are you hearing from your customers in the way of inventory levels at the moment?

That's all over the board. I think in general, you could say that inventory levels have probably pulled back a little bit, but they still remain pretty healthy.

Okay. And then on the Expedited LTL side, has there been any difference between your international customers or your domestic customers?

Probably the most affected of our customer base are the internationals. You see the numbers for the airlines, and then obviously that impacts international freight forwarders. So they've been hurt a little bit harder. It also depends on what part of the world it's coming from. But in general, the answer is their business is off more than a domestic forwarder.

And then last question, just back to intermodal and the growth there. Could you remind us what the geographic footprint is of the intermodal division? Are you at all the major ports, or do you have concentrations in certain ports? And is there plans to grow more broadly from a geographic standpoint?

Today we are concentrated primarily in the Midwest, so Chicago is our big facility. Also facilities in Milwaukee, Minneapolis, Indianapolis; across that Midwest grain belt. Our next step will take us to enter the Southeast. We have a couple of startup operations now, but we will supplement that hopefully in the future with a pretty nice acquisition.

And with that startup, would we expect any near-term margin compression as you get the ball up and running? Or should that be able to plug into Forward Air's existing intermodal infrastructure without any margin degradation?

I don't think we will see margin degradation. They do a really good job of controlling that cost. In some cases, they were able to borrow an existing Forward Air terminal, so that helps them get up and running. So, we should be good there.

Excellent. Well, thank you. I hope you all have a great weekend.

John Barnes, RBC Capital Markets.

Let's see, a couple things here. On the outside miles at that 5% level, obviously you're dealing with a little bit softer freight environment. What is the sustainable number on a go-forward basis, when we're in maybe a little bit more normalized freight environment? I know that's up for debate as well, but just what is the sustainable level?

It depends on two things, John. One is how balanced are we. So if LA pumps out 75 loads a night, that's going to drive up our outside carrier usage. But if we stay relatively imbalanced, and things will get tighter as we go through the balance of the year, we would be happy with a number between -- on the low side, 6; and on the high side, 9.

And then can you talk a little bit about maybe what percentage of your freight now is bypassing your hubs and moving directly between your other facilities?

Our hub today, our national hub in Columbus, is handling about 34% of our freight. That number stays pretty solid. And then the balance is either going through a regional hub or going direct.

The numbers you gave on the quarterly -- the month-to-month progression on the tonnage -- so down 11, down 5, down 4, and now flat to slightly up. Can you just discuss a little bit how much of that decline in April, May, and June was due to Company decisions that you've made about some of that freight you talked about, versus what percentage was because you were just dealing with a little bit softer environment?

Yes, this is what I would call an 80% guess -- because we don't know factually, exactly -- but I would say 80% of that down was freight we rid the system of.

So that was due to a Company action, either due to combat poor pricing on it, or it just didn't fit the network?

Correct. And the other side of that was -- it's just horribly priced. In a number of cases, we repriced it, and that's where we lost the business. Interestingly enough, some of it has come back. But it just simply could not go into our network at the price it was at the time of acquisition.

Okay. And do you feel like, at this point, you have addressed the entire book of business in terms of that type of freight, that poorly priced freight? Or is there any left that has maybe not come up for renewal yet?

No, they've done a terrific job, and we're done.

Done, okay. All right. Very good. And then the rollout of the dimensional pricing process and methodology -- can you just describe maybe where you are in that process, and how much of the freight now moving through your system is actually being priced through that methodology?

The implementation of the dim process was implemented just about as well as we could have possibly hoped for. The actual freight impacted changes week to week, as you might imagine. So, we've seen as low as 10% and as high as 18% of the shipments that are impacted. And that changes, as you might imagine, almost on a daily basis.

And can you remind us, what are you thinking is the ultimate level you can get to of your freight that will be priced under this methodology?

I would think the ultimate would be somewhere around 20%.

And then my last question is, you went through the period where you were integrating Towne. You got that done. I know that took a lot of attention. Now that that seems to be running pretty well, number one, should we expect you to be turning a little bit more of your attention to the nine Expedited LTL type of operations?

And as you look at those other operations, do you have a thought process on when -- when do they get better or you have to make a different decision? Whether it be -- I go back to the question about Pool, where you've got revenue that's up, but EBITDA that's down. Where do you think you have to make a decision as to -- is there a different strategy that has to be employed?

Well, a lot of that I truly can't answer. I would tell you, we have plans in place. We have goals in place. We have certain expectations that we expect our people to hit. And we will make measurements as we go forward.

Very good. But it's safe to say that -- have you directed more of your attention to those operations, now that the core business is back up and running like you want it to be?

Yes, that's a very fair statement.

Okay, very good. Thanks for your time. Always appreciate it.

Kevin Sterling, BB&T Capital Markets.

Mike, welcome to you; and, Rodney, congratulations. I've really enjoyed working with you over the years.

Thank you.

What about me?

Bruce, just always love working with you; and like Todd said, we're glad you're still on the call (laughter). Most of my questions have been answered. I just really have one question. Bruce, you guys are replacing the buyback. But how about the M&A pipeline? How should we think about that? Are you seeing deals out there? Maybe you're looking at anything new. Maybe you could talk a little bit about what you see in the M&A world.

Well, our whole strategy -- we've been fairly transparent on that -- is to grow CST and help them fill out their geographical footprint. They're such a good model and there are so many opportunities. Most of them are small, but they help us to fill out and move into the Southeast and other areas that we're hopeful of addressing here in the near term. So, that's really our whole focus today: let's get CST up to where they need to be.

We think the easiest way to do that, in this environment, is via acquisition. The multiples are very good now, and we're excited about the opportunities there.

Got you. No, that's great. And going back to the dim question, following John, have you seen -- as you have been dimming your freight, are you seeing some customers that have been pushing the envelope maybe not push as much anymore, because they know you are focused on -- with rolling out dimensioners? How should we think about that?

Well, you would have thought that; but, in fact, nothing has changed. Now, part of that is driven by the fact that our customer does not always see the freight. So, they are relying on the actual shipper. If you look back -- we actually thought what you said would happen, but it hasn't. So we're dimming as much as we normally have.

Okay. No, I guess that makes sense, because like you said, they don't necessarily always see the freight. Okay. Well, gentlemen, thanks so much for your time, and best of luck to you. Thank you.

Ben Hartford, Robert W. Baird.

Bruce, as we start to put Towne in the rearview and look ahead to 2017 and beyond, how do you see -- what is the growth profile of the Expedited LTL business? Is it a market in line with industrial production type grower that still generates a lot of cash? Or can this be a mid-single-digit type volume growth business for whatever reason?

Yes, we think it's a mid-single-digit from a volume standpoint, Ben.

Right.

And then with good pricing actions, hopefully we can push that up a little bit more.

And where do you think that mid-single-digit volume growth comes from, if we assume that overall freight growth is 1% to 2%?

I think you are looking at low side, 2%; high side, if everything goes right, 5%. And then for us to get really big growth, something will have to happen in the macro environment. So maybe one of the smaller competitors goes out of business. Think of all the different things that could happen that might impact that. But in the normal course of business, I think that's where we'll be.

Okay. This 83 OR in the back half of the year, is that the new run rate, post-Towne? Or will there still be some tailwinds through the back half of the year, so you can have another step-up on what the representative run rate will be in 2017 and beyond?

When you get into ORs in the low 80s, I start getting nervous from the standpoint of how much more can you improve it. Then when people ask you how much more can you improve it, I get really nervous. So, I will go back to what I said earlier. To make this better, at this level, a lot of positive things have to happen. They happened in the second quarter. We got a little bit of relief on fuel.

We had, overall, pretty good volumes. And we had the volume that we wanted, and got rid of the volume we did not want. We had our pricing in place, and it did a good job. So all of those things have to occur to really make an 83 and 82. Again, if things line up, we can do it. If they don't, we're happy with an 83.

Sure. Yes, not to take away from the work you guys have done. It's been good work. Final one, just back to that inventory question. You had mentioned that they are healthy. We can all point to the same inventory to sales ratios being higher over the past few years.

But curious, in terms of your perspective and your forwarding -- your customer's perspective on retail inventories as they stand today -- as B2C continues to develop, there's a lot of uncertainty as to whether this is a new normal as it relates to inventory levels or not, or if there's risk to inventory levels. Do you have a view on inventory levels up here in the context of where they have been, and where they might go as B2C presumably continues to develop?

This is a Campbell opinion, so it's worthless. But I think the inventory levels we see today are the new normal. We've had a number of months to get them down, and it simply hasn't occurred. And when you talk retail, you can't group it because there are retail outlets, stores, whatever, that are doing well. And there are others that are just dying on the vine. So it's really hard for me to lump those all together.

Sure. That's good. Congrats again, Rodney and Michael.

Thank you.

David Campbell, Thompson Davis & Company.

Congratulations, Mike, on your new job. Thank you very much for your -- taking the questions. Bruce and Mike, I know you said Towne has helped, but could you be a bit more precise on how Towne has helped in the second quarter? And it's not there anymore, is it? It's totally integrated, so you don't have a so-called Towne business to visibility benefit from.

If I followed your question, when we say -- first of all, we got the warts from the Towne acquisition behind us. That's, number one, most important. Number two, we retained the business from Towne that we wanted to. So that was a big step forward. And number three, it is now priced properly. So all of those things together worked themselves out in Q2; took us a year to get there; and they will carry forward as we go into the future.

But Towne doesn't exist anymore. That's correct, right?

That is correct.

And total -- fully integrated, and you can see that business through your -- through what wasn't there a year ago is there now. And are there any other significant opportunities in the so-called air freight business, because that's basically what Towne was? Anything else you can see? Or would you be more likely to buy forwarders, or what would be (multiple speakers)?

We won't buy forwarders, I can assure you that. You never know when opportunities will come up within our operating parameters. We do have competitors. But today, as we sit here, we have nothing on the books.

Right, right, right. Well, thanks again for having such a good quarter. It really makes a big difference.

Thank you.

And with no further questions, ladies and gentlemen, that will conclude Forward Air's second-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 this call. That does conclude your conference. You may now disconnect.