Forward Air Corp (Delaware) (FWRD) 2017 Q2 法說會逐字稿

Thank you for joining Forward Air Corporation's Second Quarter 2017 Earnings Release Conference Call. Before we begin, I'd like to point out that both the press release and webcast presentation for the call are accessible on the Investor Relations section of Forward Air's website at forwardaircorp.com. With us this morning are Chairman, President and CEO, Bruce Campbell; and Senior Vice President and CFO, Mike Morris. By now, you should have received a press release announcing our second quarter 2017 results, which were furnished to the SEC on Form 8-K and on the wire yesterday after market close.

Please be aware that during this conference call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the company's outlook for the third quarter and fiscal year of 2017. These statements are based on current information and our current expectations. As such, they are subject to risks and other factors that may cause actual operations and results to differ materially from the results discussed in the forward-looking statements. For additional information concerning these risks and factors, please refer to our filings with the Securities and Exchange Commission and the press release and webcast presentation relating to this earnings call. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Today's presentation will include non-GAAP financial measures, including adjusted income from operation, adjusted income before taxes, adjusted income taxes, adjusted net income and adjusted diluted earnings per share. These non-GAAP financial measures exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our second quarter 2017 earnings press release. The company appreciates your attendance on today's call, and your review of the second quarter 2017 press release, including Bruce and Mike's comments and guidance information provided therein.

To make the most of today's time you have all given Forward Air this morning, we will move directly to the question-and-answer session.

(Operator Instructions) Just a brief reminder today's conference is also being recorded.

Looks like first we will go to the line of Jack Atkins with Stephens.

This is actually Andrew on for Jack. I guess, as we look at quarter linehaul yield is down I think about 3% year-over-year in the quarter. And I think this is the third quarter in a row now we've seen down year-over-year yields. But can you help us think through to what degree this is due to weight per shipment or link-to-haul mix versus core pricing?

I think it's a combination of all those factors you note. Because yield sometimes decreases, it's not necessarily a pricing issue. As you pointed out, it can be linked to haul, can be shipment size, et cetera. So we watch it very closely as you might have imagined. You'll probably see us do some incremental changes as we go forward in the year. And we'll get the yield back to where it needs to be.

Okay. Good to hear. Then Bruce, I know that you've been asked before about GRI this year. But just given what we've seen from the broader LTL market in the recent months plus the potential for inflationary pressures from driver wages. Has your thinking on the GRI changed at all?

Andrew, we're going through that process as we sit here today. We'll probably be in a better shape about a month from now to tell you exactly what we're going to do. Per the factors that you just listed, I think you'll probably see some what we call structural changes in our pricing model.

Okay. Good to hear. And, Mike, could you provide an update on your LTL, 3PL initiative you guys have going on?

Yes, it's going well. We're seeing nice growth in this initiative ahead of our internal plans. We're also in the process of making the necessary adjustments in our network to where we can have better dispatch capabilities at the terminals and bring in more of an owner operator content in the pick-up and delivery. Let me expand on this and loop back to your prior question, if I could, for a second, Andrew. When you're in these 3PL, TMS systems, you are bidding on freight where you're going to have a door-to-door offering. You're going to pick it up, you're going to linehaul it, you're going to deliver it. And so you're going to see a continued growth in the pick-up and delivery aspect of our business as we continue to grow in this space. But when we price it, we price it per pound. And that's a little different than the legacy setting around complete where you price 3 distinct legs of the transaction and you invoice them separately, the pick-up, the linehaul and the delivery. So we have to internally allocate that revenue between those legs and then there is math behind it, but it is an allocation. And so as we continue to grow in this space, it's going to start to make more and more sense to look at our yields on a system basis ex-fuel, where linehaul and PD -- P&D are smashed together. And so per your prior comment, if you look at our system yields this past quarter, they were essentially flat, they were down 30 basis points. You're going to see more of that effect as we grow our door-to-door offerings to grow in these markets that we're looking to expand in. And at some point, we may change what we disclose from a yield perspective, more along the lines of a common carrier not that we would become a common carrier. But what you would expect to see from the other common carriers, where you're just getting yield number. Does that make sense?

Yes, no, that's helpful. That is helpful.

And so the other thing that's going on, back to your prior question, is we are growing very nicely this initiative. It's bringing a different mix-to-freight in that has a more of a varying characteristic than the legacy tonnage, if you will, if I can group it like that. We're seeing a wide diversity of length of haul and weight per shipment that is having the standard impacts on stated yield that you hear from the other LTLs. So you're going to see more of that, there is a -- more noise going on and underneath the yield curtain. But when we strip things down to look at it on a revenue per ton per mile basis, we continue to see freight that we like at rates that we think are profitable.

That is helpful. And then, Mike, on the $0.05 -- the benefit from the talent indemnification, could you provide some color or help us think about how that breaks out? And kind of where that fell in the P&L?

Sure. So the -- we had 2 things, Towne and when I say Towne, I'm referring to the Towne indemnification proceeds, I'll just call it Towne. And Atlantic, the effect of the Atlantic acquisition. Those matters were not finalized at the time of our last quarter call when we gave our guidance. And so we excluded those matters from our guidance. Towne was $1.6 million of proceeds that flowed through our operating income. The EPS effect of that was about $0.04. $0.03 of an operating income effect and $0.01 was related -- was an impact it had on the tax rate. Of that $1.6 million, the biggest piece of it, which was $900,000 was in LTL and that landed in their other OpEx line. And it was in indemnification or professional fees that we'd incurred related to some claims that we inherited in the Towne acquisition. And so it's going back against professional fees, which is in other OpEx and the LTL, P&L. The other big piece of it was Corp. $600,000, this would land -- we don't have a standalone Corp. P&L, so you would this in the consolidated P&L. It went against operating leases, we were indemnified for certain operating leases that we inherited, where the terms ended up being different than what we had expected when we did the transaction. And so that's a good guide against the operating lease line.

So that's how Towne breaks down, it was $0.04. And then we did not include Atlantic, but Atlantic is performing better than we expected. And Atlantic contributed about $600,000 of operating income in the second quarter for the short half a quarter period that we owned Atlantic, and so that was about $0.01. So that's the breakout of the $0.05. If you back the $0.05 out of the $0.64, we landed at $0.59, which was the high-end of our guidance range.

Got you. That is helpful. Bruce, if I look at Solutions, the OR there has been running about -- call it about 500 basis points better year-over-year to the first half of this year.

Correct.

Should we expect a similar level of OR improvement in the second half?

I hope so. We worked hard to get it to where it is. Our team there has really stabilized, they're doing a great job, they're getting additional wins of business, seems like almost daily we picked up another -- almost $5 million of new business, this week. That will help us going into the third and fourth quarters. So they are going along really well right now.

That's good to hear. And then last one for me. Mike, could you give us the monthly volume trends and expected LTL in the 2Q? And then what the guidance assumes in terms of volume and yield for the 3Q?

Sure. In the second quarter, our year-over-year tonnage per day: April was up 2.4%, May was up 2.0% and June was up 5.3%. So nice acceleration coming into the end of the quarter. With respect to our outlook, we're expecting high single digits year-on-year average daily tonnage growth for LTL. We think that's going to come from our growth initiatives. It feels like the macro climate is getting a little better. But I do want to remind you that we have a soft comparable in the third quarter of 2016, that you may recall last August we hit a bit of an air pocket in our tonnage. And so we're lapping a soft comp. Add those things together, we think we'll have average daily tonnage up in the high single-digits range.

We'll go to Jason Seidl with Cowen.

Two quick ones for me here. One, hearing a transport company out there talk about preparing for peak season. Some of their customers are telling them that peak season is actually going to be starting early this year. Didn't know what you heard from some of your customers, particularly in the Pool area?

That probably is a very fair assessment. When these things happen -- especially in Pool, what we're going through is the back-to-school portion right now. So we're not convinced that we'll see a move up, if you will, of the peak season, but it wouldn't shock us. And we're prepared if that happens.

And how has back-to-school been for Pool?

Good. We're pleased.

Okay. And I guess, the other thing, piggybacking on the new LTL services. And you guys are going to, I guess, change how you report on the yield going forward. Could you sort of walk us through what type of an impact that's going to have on yield on a year-over-year basis? All things being equal, just looking at the mix of business change?

I wouldn't definitively say we're going to change what we disclosed. I just wanted to signal that we're looking at it, just to be clear.

Okay. Well, can you walk us through sort of what kind of change to expect in terms of just on the mix of business portion of that?

I think you're going to see denser freight that...

So quickly from a real simplistic way to look at it. If you pick up a 5,000-pound shipment, you're going to get a lower rate per hundred weight than you do for a 600-pound shipment. So part of that yield going down is good and there is nothing wrong with that, it's sufficient for us in our operating system, et cetera. But we do want to make sure our yield in our normal business, our core business, is hopefully going to improve as we go forward in the year. Right now, it's basically flat. So if you look at, let's say, up 6 months -- and this is truly a guess because we haven't been through it -- and you look at the total overall yield of the corporation. If we're flat year-over-year, we'll be very happy.

Next, we have Scott Groove of Wolfe Research.

This is Ryan Greenwald in for Scott Groove. So just kind of wanted some clarification on the third quarter outlook. So, you guys kind of anticipate earnings to be down sequentially. So is that -- if we exclude the Towne and the acquisition one time, it wasn't in guidance, I guess, so why are we anticipating it to drop sequentially? Can you kind of talk a little further on the drivers?

Yes. This is Mike, Ryan. We do expect a continuation of our growth trends and revenue. We think our strategic initiatives are going to continue to give us good revenue growth. In this particular quarter, we are expecting some cost headwinds that we're going to have to manage around. We have increased merit pay, we've got higher incentive compensation. Insurance premiums on a year-over-year basis are going to be higher, and we have some expectation for some adverse reserves development that we're going to have to manage around as well. So we've got some cost headwinds in this quarter that we're concerned about. The bigger picture, we believe we can continue to grow the company.

Got you. Great. And then...

Does that help?

Yes. And so moving over to the driver recruitment problems. Can you kind of talk a little bit further about that? And your expectations for pay increases? And how quickly we can offset that with pricing?

Sure. We went through -- recruiting to me and the way the company views it, we go through cycles, it's hard to avoid a down cycle. And we just went through a bad period as we were going into really the latter part of the quarter where we had to go outside and get more and more outside carriers to help supplement our fleet. We have since turned that around, have added almost 10 teams a week for the last 3 or 4 weeks. So we're pleased with the growth that we've had there. But we had more work to do. And we do anticipate an increase in owner operator pay per mile. We'll be ready to talk about that in about 30 days. But that's without a question is going to happen. If we increase our pay, obvious to our owner-operators, 2 things that we really work on to help negate that. One is to add more and more teams, so we aren't paying $0.50 more a mile when we go to outside carriers, which we think we can do. And then secondly, we're going to have to look real hard, as we discussed earlier, at our pricing because that's a hard cost to negate as we move forward. But overall right now, we like where we are. We've got more work to do, have to be prepared for peak season. And I think, our team will get us there.

That's it. So net-net cost should come down?

Absolutely. What you saw in the second quarter with the increase in PT, even though it's still a decent number, it didn't match last year's. Last year's PT in the second quarter was probably the best in the history of our company. When you start supplementing that cost as we talked about earlier, with outside carriers, it hurts you. So again, our drive is to get rid of that cost as we go forward in the year and to be better prepared as we hit peak season.

Makes sense. And then lastly on the volume growth outlook, does that include an expectation of a GRI? And...

No, it does not.

Look like next we have the line of David Ross with Stifel.

First, you've talked about the nice new wins you're getting in the Poolside of things. Can you talk about any startup costs? Because in the past when you'd grow in that segment, there's been some startup cost that haven't allowed the margins to expand. And do you think you're past that? Or should that be less so in the second half of this year?

Are you really asking me a question about Solutions?

I'm starting with a question from Solutions. That's how I lead.

It depends on the type of business we onboard. So if it's more of a dedicated-type operation then we do have startup costs. Most of the business we're bringing onboard, the new business wins are what we call integrated. And those do not have much, if any, additional cost. So we just blended in with our existing -- our business.

And then good news on the Atlantic side because, I guess, my prior understanding was that wasn't going to become accretive until 4Q. So if you look at $600,000 in the second quarter, it was a seasonality of that business? Could we assume a $1.2 million EBIT run rate for 3Q and 4Q?

I think 3Q, maybe $0.01, $0.015. 4Q, $0.015. There's still some integration costs that are being incurred as we integrate them. And -- so I think for full year in the range of $0.03, and which is about what we said in the second quarter call, we said $0.02 to $0.03 in our second -- prior quarter call. Let's see if $0.03 feels a little more likely. And then, from an EBITDA perspective, we said $2.5 million on the last quarter call. That's probably $3 million. And Atlantic is performing very well.

That's good. And if we look at TLX, the margins were roughly cut in half last year. Is there any reason that they can't return back closer to double digits as we saw back in '15?

No, they'll get back there. It's truly a matter of drivers. They did have a couple of business startups that require them to place equipment that cost them quite a bit of money. But really it gets down to, you got to have owner-operators. If you're doing all outside sourcing on this business, it hurts your margins. So they have a goal in place. We think they're going to improve it and get to -- back to the double digits as we go forward.

Okay. So if we look at owner-operators doing about half the miles right now, is there a target? And do want owner-operators doing 70% of the miles to get back there, 80% of the miles, how do you think about it?

A lot depends on the business and the sources of the business. But typically, we like to be at 65/35. But right now we're -- as you pointed out, we're simply not there. But we think we can get there. So a lot of work being done.

And next we have the line of Todd Fowler of KeyBanc Capital Markets.

Looking at the tonnage growth here in the quarter and the expectations for the back half of the year. I understand there's some comparisons going on. But can you talk a little bit -- with the internal initiatives and some of the growth strategies that you have? What sort of business are you targeting? Is that your traditional freight forwarder? Are you specifically going after some of the e-commerce -- kind of the bulky stuff that we're now seeing moved through the e-commerce channel? Can you talk a little bit about what you're targeting to bring into the network at this point?

The quick answer is, yes, to all that. The -- our team continues to work with our forwarding customers. We see a more favorable atmosphere out there. The forwarders are doing well, better than in the past 2 or 3 years. So we're happy with that and want to make sure we're in position to grab that additional business that they gain. We also have initiatives into the 3PL business. That's taken us a while to get systems in place, to get owner-operator delivery in place throughout the nation. We are closer to having our entire network built out on that. When that occurs, you'll see the more business come out of the 3PL initiative. So far they have really done a good job. And we're just about, I should say, ready to gear it up big time.

And what exactly does that mean, Bruce, as far as -- is that a bigger push with that customer base? Or I don't know if I fully understand that comment.

Gee, Todd...

And I'm guessing, there is probably some intentional vagueness in there as well.

Yes. 3PL business is -- you push your price, they either like your price or they don't. What it does require us to do is develop. And we have done this different back office functions, if you will. Our systems are different for that business. They're not difficult. Everybody does it. But you have to have them. So it took us a little while. Normal implementation of that, we now have that in place. The other thing that has to go on is because we're doing more and more pick-up and delivery, is we have to have -- we prefer to have, let me say, our own owner-operator pick-up and delivery network. We are probably half way through the process of adding owner-operators in Dallas, as an example, where they can go out and either pick-up or delivery. It's much more cost efficient for us to do it, as opposed to outsourcing it. But it takes time, you can't recruit that overnight, you can't train your local people overnight. We are installing at about 75% of the way through on a local pick-up and delivery software program, that is really outstanding. We just simply don't have it all the way there yet. We will by the end of the third quarter. And that's why we really feel, as we go forward, that this business is going to drive a lot of additional volume to the pool and air network.

It's crystal-clear now. So just another question along those lines. As you think about how the freight in your network has changed the profile of it over the last several years. I know that you guys are being very thoughtful about your pricing actions and how you're getting compensated, and I know that some of other peoples are handling the changes in freight profile, have struggled a little bit with that mix. But what I'm getting at is structurally -- and your operating ratio is still fantastic, but structurally, do you think you can still show improvement within the operating ratio, maybe a couple of hundred basis points down to the low-80s within the LTL business? Or is there something that has structurally changed within just the freight profile that may prohibit you from getting there?

Yes, we can get there. When you get into ORs that low, everything has to be perfect. So you can't have any bumps, you can't do any silly things. But if everything's perfect, we can certainly -- or close to, we can certainly get there. We understand how to price freight better than we ever have. So we know where we have a problem, where we don't have a problem on pricing. Our people have -- as you said, freight has changed dramatically. And our people have learned how to -- we call it hug-freight, you got to handle it as opposed to forklifting it. Those are processes that you go through with any type of new business. I think our team has done a really good job of adjusting and learning how to handle it the most efficient way we possibly can, which will then deliver good results to the bottom line.

I guess, we've come to expect perfection, so maybe that's been part of it. So Mike, just a couple of last quick ones. So there was some comments earlier about the higher merit pay. Do you have a number amount? Was that in your original guidance for the second quarter? And then what would our -- what should our expectations be for merit pay for the rest of the year?

In -- yes, we do anticipate this in our guidance, but we still get these questions of "Hey, on an absolute year-over-year basis, why are we seeing more profitability?" In the third quarter, if you take merit and incentive comp, you're probably at $2.5 million.

Year-over-year?

Yes. I mean, we're -- our planning process means that we have a greater probability of paying a bonus, improvements we've made. We have to lap that and then that will just become part of the backdrop. But don't forget about insurance premiums. That's an issue in this -- in our sector. We've got some increased premiums. And as I mentioned, there are some reserves that we're concerned about in the third quarter, which I won't quantify, that we have to manage.

Okay. And then, just lastly, do you know -- from an overall cost structure standpoints, this is maybe a little bit more of an intermediate-term question. I think we all, to a certain extent, understand the cost pressures on owner-operators in capacity to salaries piece. But is there anything else structurally within the network, either facility costs or IT investments that you think you need to make that's substantial and, I guess, I'm trying to think about cost inflation that you'd see over the next couple of years? Or is it a situation where the infrastructure is in place and there's going to be things like insurance and things like driver pay that you should get that leverage on, if you're able to get the volume and the yields that you're anticipating?

Yes. The latter part of your statement is exactly right. We're comfortable that -- comfortable is probably a bad word. But we're working hard to make sure that our other costs stay in line. There's a little we can do about insurance premium. You have to obviously have a safe fleet but it's going to -- when 2 underwriters leave the market you're going to pay an increase. And then the owner-operators pay is, as you well know, is subject to supply and demand. And we're going to have pressure on that.

No further questions here in queue. That does conclude Forward Air's Second Quarter 2017 Earnings Conference Call. Please remember the webcast will be available on the Investor Relations section of Forward Air's website at forwardaircorp.com, shortly after this call. We do thank you very much for your participation. You may now disconnect.