Thank you for joining Forward Air Corporation's 3rd Quarter 2019 Earnings Release Conference Call. Before we begin, I'd like to point out that both the press release and the webcast presentation for this call are accessible on the Investor Relations section of Forward Air's website at www.forwardaircorp.com. With us this morning are CEO, Tom Schmidt and CFO, Mike Morris. By now, you should have received the press release announcing our Q3 2019 results, which was furnished to the SEC on Form 8 ks and on the wire yesterday after the 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 Q4 fiscal year of 2019, the expected impact of growth in strategic initiatives, the expected impact of organizational restructuring, the expected impact of the FSA and OST acquisitions and those forward looking statements identified in the presentation.
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. And now, I'll turn the call over to Tom Schmidt, CEO of Forward Air.
Thank you, John, and good morning to all of you on the call. If you remember, in July, during our last earnings call, we just came fresh of our Investor Day in New York. And in New York, we committed to our, what I call, double double, a double digit annual revenue growth rate and double digit margins in the medium term. With a strategy behind it that's basically around when it's bigger than a box, think forward and driven by organic growth in LTL and targeted M and A in Intermodal and Final Mile. With truckload and pool being strong stretches, truckload being a complementary service to our LTL service and pool going deeper into retail and also additional verticals.
Structurally, we supported this whole thing with a very, very clean approach commercially and operationally, one consistent set of rules, one rigorous set of guidelines and KPIs. And most importantly, with the right team and the right leaders at the table. So, in September, I had another milestone. We had Forward Air, perhaps less so, but I personally definitely saw. I had 1 year here with Forward Air.
I'm still close to a rookie here. And with a strategy, a structure and a team in place and a year behind me, it's probably a time where whatever honeymoon there was, it's over. It's showtime. It's time to execute, and we are executing. In my mind, precision execution for our customers and internally is happening.
If you look at the Q3 in the release that John just referred to, 9% year over year revenue growth, 10% excluding the reserve, operating income growth and we're just getting going with our position execution machine. So let me show you a few proof points how we got to these types of numbers and how this machine keeps warming up and keeps going. In our core LTL business, we are stretching our muscle beyond airports, and it works. So now we have 40% of our network revenue in door to door. The average length of haul is almost 1,000 miles and the weight per shipment is around £775 and going up.
Our Grow Forward initiative works also. We are actually getting back more fully engaged with our core customer base, our domestic forwarders. They're putting more tools and the best service in the industry into their toolkit and are working very, very closely with them. So, getting back into growth mode with that core customer base that's so important to us. In addition, we're also growing other segments.
The one that stands out perhaps 1st and foremost is 3PLs, where we are up 75% year over year, with weight per shipment up by 60%. Secondly, Intermodal, our 9th tuck in acquisition in the last 5 years, OST, in Baltimore, which we just closed 3 months ago, performance. I was there in Baltimore with the team at OST just last Friday. The passion, the competence is the exact same we see in our Forward Air family across the board. So, this is a great addition to our family.
That formula we got going with the platform CST and then the tuck in acquisitions keeps working. Final Mile. I mentioned last time FSA shortly after closing earlier this year, we actually added $10,000,000 in run rate of new business, and the pipeline for Final Mile keeps growing. It actually does help when the most challenging companies on earth, which are the customer base in the Intermodal and sorry, in Final Mile and FSA for us, And they tell us on their own scorecards that we are the best in the business supporting them. If you look at Intermodal and Final Mile between the 2 of them, I did commit to more acquisitions in those spaces as long as the targets maintain the same high standards that we have in our financial results.
And so far this year, we have 1 acquisition in Intermodal. We have 1 acquisition in Final Mile. All I can say, the year is not over yet. Truckload, we are deeply exploring synergies between Truckload and LTL. In essence, looking at 1 fleet serving 2 business lines where we recruit jointly, we actually also are looking at more and more lanes where we use truckload outbound LTL back, which leads to less outside carriers, better on time service, fewer deadhead moves, which our drivers love because it gives them better utilization, which also is a big part of us having a record number of 400 plus teams in our fleet for the first time in the history of Forward Air.
And so we will keep evaluating these potential synergies in the Q4 and through peak, but I'm excited about how it's working so far. Pool, we massively and if you look at the 3rd quarter numbers in the release, it shows that we are massively onboarding new business, and we're doing it very effectively for our customers. 1 of our competitors struggled, and our customers and their customers have choices at that point. And many of them choose to go to the best in the industry, which is our poor business within Forward Air. So, that's what led to the massive new onboarding of business.
We also are continuing going into additional verticals. Hospitality and parts are emerging as industries. So, let me just step back beyond the strategy structure and the team and beyond a quick proof point set in each of the 4 business lines. Behind it, we're getting better and better surgically in decision support, making sure we get the right business online. And if you'll just look at and Mike may be talking to that later, the incremental margins in our LTL business in the Q3, that's a great proof point of us being very surgical about selecting the right type of business.
Last and then certainly not least, we also, as a Forward Air team, are making our presence across the U. S. And Canada count. We joined recently, I mentioned that last time on the call, Truckers Against Trafficking, making sure that we keep our eyes open and we act when we see something that's not right. We also just recently joined a team that's called Hope for the Warriors, in essence, tag teaming in support for our military veterans.
We have hundreds of veterans on our own Forward Air team. And then beyond that, every single one of us is deeply grateful for what these military veterans have done in support of us, protecting and serving us. So, it's a great cause for us to get behind. We're going to get as a team behind it with our own sweat equity, making our presence count across all of the terminals across the country, initially with clothing drives and probably beyond that, but just making sure that our hearts and minds are in support of those who actually serve and protect us. So, our position execution machine is just getting going.
It's warming up quite nicely. We'll take it to another level in Q4 and then beyond 2019. We're far from done. So having said that, a few more specifics over to our CFO, Mike Morris.
Thanks, Tom. During our Investor Day last June, we provided commentary around the role of Final Mile in our medium term growth strategy for LTL. Specifically, we described Final Mile evolving over time into more of an integrated model that builds pickup and delivery and terminal density within our LTL network. We also discussed the near term impact this could have on LTL's margins as our final mile growth will likely involve acquisitions, which could dilute the underlying margins from our LTL operations. During the Q3, we saw this effect.
As disclosed in our release, purchased transportation was 45 0.5% of LTL revenue last quarter. FSA, our recent Final Mile acquisition, is still being integrated and diluted this margin by 160 basis points. Excluding this FSA impact, purchased transportation would have been 43.9 percent of LTL revenue, reflecting the significant leverage we generated on our owner operator fleet. As Tom mentioned, over the past few months, we've been exploring a deeper synergy between our LTL and truckload operations, which could help drive organic growth, build line haul density and lower purchase transportation costs within our LTL network. We're still evaluating this potential opportunity, but if we determine that it makes sense to run as one combined fleet, we may also determine that we should consolidate truckload into our LTL segment, if that best reflects how we operate the business.
Like Final Mile, consolidating truckload could dilute margins from our LTL operations until it becomes more fully integrated. But also like Final Mile, truckload could drive medium term benefits by enabling organic growth, enhancing density and lowering unit costs. We will continue to evaluate this potential synergy as part of our ongoing strategic review for truckload and we'll keep you apprised of our progress. With that, John, let's open the line for Q and A.
Certainly. And first go to the line of Scott Group with Wolfe Research. Please go ahead. Scott Group, your line is open if you're on mute possibly.
Hey, thanks. Good morning, guys. How's it going?
Good morning, Scott.
Can you guys just start with maybe just some of the monthly tonnage trends on LTL and then just a view of the pieces of 4th quarter revenue guidance?
Okay. So I'll take you the tonnage per day for the Q3, was down 5.1% over the quarter. In July, it was down 8.4%. In August, it was down 2.1% and in September, it was down 5.1%. But Scott, I will point out that this particular quarter, both Q3 2019 and Q3 2018, were pretty heavily impacted by some GAAP adjustments that were required to make to our reported tonnage.
It gets down to the day of the close of the quarter in the comparable period in the current period. And with some Saturday and Sunday calendar timing, it led to some larger than usual shift to deliver adjustments. Tonnage was still down, but just to give you another mark for the quarter on our daily system reports, which don't have these GAAP adjustments made, our 3rd quarter tonnage was down 3.4% as compared to the 5.1% we have in our release, just to give you a little more color there.
Okay. That's helpful. And any early view on October?
Yes. Hang on one sec. Through October, our tonnage per day is down 1.9%.
Let me just add a little bit of color to that. If you look left and right, what the numbers that we just mentioned, the best in the industry, especially also keeping pricing discipline. We saw some of what we just told you about in terms of numbers over this quarter. Our initiatives, winning business back that makes sense for us and going after underpenetrated segments, are starting to actually make the numbers work the way we intend for them to work. So, those deltas that we just talked about, I expect them to get smaller, not larger versus previous year as we go into Q4 and beyond.
So, the trend is definitely going in the right direction where we use our surgical intelligence to win a larger slice of the pie, and we are going after the most tasty slice of the pie.
Okay. The accident cost that you talked about in the release, is that in one of the segments? Or is that just show up in the sort of corporate line?
Yes.
Well, yes, and I just I was going to pause for a sec. So we took a modification to a reserve for a pre existing claim and we filed an 8 ks on that claim on the 21st June before we entered our IR day. If you need more color and I'll answer your question, but we did provide a lot of commentary on the last earnings call about where it hits. And I'm referencing that so that I can be really clear. The business unit had $1,000,000 self insured retention, which it has already exhausted.
And so the effect of that $1,000,000 SIR was felt in the LTL business when the reserve was put up at the end of the Q2. The overage is in other because that's where we have our internal insurance company providing coverage to the business units. And so therefore, with the extra 2.5 percent that is in corporate other because that's the body that has to take this incremental reserve. We have brought our reserve as a company up to the full extent of the self insured retention that we have with our outside insurance carriers.
Okay. So the initial impact in the 2nd quarter in LTL, the second impact in the 3rd quarter in corporate?
Initial impact in the second quarter, dollars 1,000,000 to LTL, dollars 4 to corporate.
Okay.
Then in the Q3, the next $2,500,000 is sitting at corporate.
Okay. Everything you guys are talking about with truckload and LTL sort of together and opportunities, I guess, where are we going to see that? Is that going to show up in truckload results or in LTL results? And then when do you think we're going to start to see that? And what's the opportunity?
Yes. So the answer is actually you will see it in both, and it's hard to predict where you see it most. So let me just tell you there's a positive effect from doing business kind of more together that hits both. For instance, when you recruit and you interview people and you basically appeal to both LTL focused drivers and truckload focused drivers in one conversation just makes those conversations actually fewer and more efficient and effective from an outcome perspective. So, you have processes that actually lend themselves to synergies, including recruiting people.
But when it comes to the actual business success, that's where it becomes a bit harder. So, take it let me give you an example. We added 10 more lanes going from mostly the Midwest and the Northeast to California. And we were able to do that because suddenly between truckload out and LTL back, lanes made sense when we looked at both businesses together that didn't make sense individually before because before, it would have been a truckload out and perhaps an empty dead haul back or it would have been an LTL move from California to the Northeast, but then no backhaul as a consequence after that move was completed. Now we have the in and out.
Now the pricing, that we have, obviously, will surgically adjust so that we attract both sets of moves. But in some cases, the pricing might be tremendously helpful to the LTL profitability and not so much to the truckload profitability. But the overall move is tremendously positive for us. It wouldn't have happened without us looking at both sets of moves together. Somewhat long way of saying, obviously, we are pricing for profitability that's appropriate.
At the same time, we are looking at some of those moves combined. And in some cases, LTL may benefit a bit more. In some cases, truckload. That's also why Mike said, we are deeply exploring the potential impact of those synergies going forward. So we're doing it more and more.
And obviously, we're going to come to a conclusion at some point what that means for the segments. But what we saw so far is tremendously commercially appealing and frankly also from a process perspective appealing. The reason that we have a record number of team drivers, which is the single best resource to have in this business, definitely is not coincidental and is somewhat linked to our ability to recruit those driver forces together.
So, Scott, just kind of walking down the P and L, I mean, you have increased revenue opportunities by taking loads you might not otherwise take. So you should see an improvement in revenue over time. You have improved line haul density at a lower cost per mile if you can avoid using brokers and get your trailers more fully packed. So you'd see PT. And then we believe that if we can keep making this work, we'll actually use less trailers.
And so you might see an improvement flow through the depreciation and amortization line. We're still exploring it. Tim Parker and his team have done a wonderful job this past quarter in really showing the leverage potential of the model. And as part of looking holistically, strategically across the portfolio, we're hopeful that we can come to the conclusion that this is something that can enhance the leverage potential of the model.
Right. And I guess so I guess the question I guess is when, right? Because if we take a look at the Q4 guidance, right, we've got good revenue growth, but sort of flattish pretax income, I think so, implies some margin contraction. When do you think we start to see consolidated margin improvement?
Well, we're going to have as we talked about in our call, we are going to have some improvement in the underlying platform margins a little bit dragged by acquisitive growth. We won't lap FSA until next April. We've got OST to lap inside of intermodal. And it takes a couple of quarters to grind those margins up. We haven't made any decisions on truckload.
That was something that would also take a couple of quarters to implement if we conclude that we need to do it. But we very much believe that we're on the trajectory towards the things that we discussed. And it was unfortunate we took a vehicular reserve last quarter. But if you strip that out, our results were actually a lot better than the earnings release would have suggested. And we were very close to double digit revenue growth and double digit margin.
Make sense. All right. Thank you for the time guys. Appreciate it.
Thanks Scott.
Thank you Scott.
Our next question is from Ben Hartford with Baird. Please go ahead.
Hey, good morning guys.
Good morning, Ben.
Good morning, Ben.
Maybe just coming back to Mike, I think the granularity you provided in expedited LTLs PT was helpful. I know you've had some initiatives there to rebuild that owner operator fleet. Is there any way to splice out that leverage that you have had that you have experienced ex FSA on a year over year basis? How much of that is just due to the natural operating leverage that develops as spot pricing does soften versus some of those internal initiatives to rebuild that owner operator fleet? And to that latter point, what do you have in store for 2020 to help continue some of those initiatives?
Well, I think that the operational excellence had a lot to do, Ben, with the leverage. I mean, I think if you look year over year and you strip out FSA with the comments they made, I mean, I think we're looking at 300 something basis points of improvement in that operating leverage. And our owner operator fleet is the best I've ever seen it. And from the people who've been around here for a long time, it's starting to sound like it might be the best we've ever had. Recruiting has definitely stepped up its game.
Kyle and Ryan have done a wonderful job with their teams there. As I mentioned, Tim Parker and the Lighthall Group reporting up to Chris Ruble have really taken advantage of that fleet and have put a tremendous amount of leverage potential in the model. We're going to just keep hammering away at it as we get into the Q4 and as we get into the beginning of next year. Our teams are at near record highs and are approaching where we really like to see them as a percent of the overall fleet. So we'll just keep working it.
But I think a lot of it was execution, Ben, versus the evolution of spot price.
And then Tom, maybe for you, specifically on the expedited LTL side, it seems like the model is kind of walking that fine line of some still macro headwinds and pressures to core customers against the initiatives, the broader TAM expansion market initiatives that you've been talking about. When do you think that this unit can that the segment can consistently get to positive tonnage growth? And maybe as an addendum to that, I mean, you're a year into the 10 year, if you could provide a little bit of perspective on what you're able to what you were able to accomplish over the past 12 months, what you want to accomplish next year specifically for the expedited LTL segment and some of these growth initiatives that you have underway?
Yes. Ben, there's 3 things going on at the same time. The first thing is what you mentioned, Ben, which is the macro. So, there's probably some level of headwind. And again, whether you talk anticipation of a minor recession or, at some point, possibly the presence of a minor recession.
So, that's going to be worth a few percentage points, the wrong direction versus the last few years, a few percentage points in the right direction. So, that's one piece. The second piece that's much more important is what we can control. That's obviously us winning back some business and going after additional business. And we're doing that using this intelligence of being much more conscious and aware of the profitability of specific customers and of specific lanes and segments.
That's knowledge we actually are putting into work. And I talked about this Go Forward initiative of being extremely surgical, intelligent. We just reviewed it with our Board of Directors on Monday Tuesday, and I think there was a lot of just confident enthusiasm in the room about us being able to really go after business that makes tons of sense, pun intended, for us. But so in terms of timing, my sense, Ben, is that we'll be pleasantly shocked by how us putting these pieces in place between identifying the customer set, certainly core customer base, domestic forwarders and the additional segments I talked about, 3PLs, international forwarders, airlines, knowing who they are, engaging heavily with them, making sure they understand the value propositions better, That takes a few months. And so, to your point, Ben, the last year, we put a lot of emphasis on getting closer to these customers and prospective customers, getting the surgical intelligence of the tools in place.
And now, the last few months, we started actually deploying them within this Grow Forward program very, very, very surgically and very, very aggressively. I oftentimes use the word or the term, I'm constructively impatient, but sometimes you do have to kind of give it the time to start moving. Now we are seeing it starting to move. So, I expect more of that in the Q4. Also back to Scott's question, like we're not talking about multiple years here.
We're talking getting better quarter by quarter, seeing the traction, seeing the results that you and I are both looking at very closely. And I expect 2020 to be a very, very strong leverage year that benefits from some of the efficiencies operationally that Mike just talked about with the tremendous work that's been happening under the recruiting and the operations teams. And then I expect the commercial teams with the 1 Forward Air perspective and consistent execution do their part equally spectacularly well. So, I'm bullish about Q4. I'm really bullish about 2020.
So, this is a yes, this is a marathon, not a sprint. At the same time, I think you're going to love the race and the pace of the race in the first kind of a few 100 yards and a few first few miles also. I'm bullish about the Q4 and then bullish about 2020.
Great. Mike, just to hone in on revenue per 100 away within expedited LTL with industry rate pressure perhaps as we look into 2020's bid season with some of the mix headwinds that some of the new business might bring offset by some opportunities perhaps with the legacy business. How do you think about revenue per 100weight directionally during 2020? Can it remain positive given some of the industry pressures and some of the likely mix headwinds?
I think it can remain positive. There's just still a size differential between the magnitude of the legacy business, if you will, and the magnitude of the unaddressed markets that we're entering. So if we have to compromise some yield to get heavier weight freight in our new markets, that would be a pull on yield, but it's still a small relative number compared to the legacy where Tom has indicated in several of our prior calls our pricing philosophy. So I think that kind of tug that you've seen in the past quarter, I think it will be the same kind of tug as we get into 2020 where if you have some macros slowing the legacy, it's still mathematically bigger. And then if you have to give any yield on some of the growth stuff, it's not big enough yet to where it moves the needle on yield.
That'd be my handicapping of how 2020 evolves.
I'm sorry for any further questions.
I'm all set. Thank you.
Thanks, Ben. Thank you, Ben.
We'll go to Todd Fowler with KeyBanc. Please go ahead.
Hey, guys. This is Zach on for Todd. Thanks for taking my question. Just kind of wanted to shift to pool. I noticed you guys added a couple of terminals during the Q3.
And Tom, I know you mentioned in your prepared remarks just referencing some onboarding of new business and some struggling competitors. Just wondering if you guys could give me some color on that and how we should think about that going into 2020?
Zach, first of all, good to have you on the call. On pool, the one thing that we consistently have been saying is this value proposition of hitting very tight time windows and what I call precision execution for something that's bigger than a small box applies to pool the same way as it applies to the rest of our business. So, this business fits our narrative extremely well and our DNA extremely well. What we obviously also said is we also need to make this business perform from a profitability perspective in the range of where we aspire to be as Forward Air, and that goes back to the Double Double commitment medium term from New York. So we've been stretching.
And obviously, it's very clear that profitable revenue and growth is what drives the pool business profitability. So, the revenue line has been going up. We've been tremendously Mike, you talked about pricing discipline. We've been tremendously clear with our customer base there that we are providing the best service in the business to them. We're investing into our pool business and into the drivers and into the operations, And we need to be compensated fully for that, and the rates are reflecting that.
So, what you should be seeing, Zach, is continued growth of the pool business, continued pricing discipline. And both of that and the operational execution that Roger Gellis and his team have been just marvelous with, we'll also get more and more of that to the bottom line. So, I have a very, very strong financial outcome expectations in all our businesses. And again, we are stretching them to the next possible, and so that they stand up to the forward air kind of expectation, which is to be excellent in all we do and the results reflecting that. So, I would expect that business to go further north.
Great. That's helpful. And then I guess just shifting to I know it's probably still a little early on, but 2020 CapEx expectations, I guess, directionally, how are you guys thinking about that? I know, Mike, you mentioned there's been some technology spend during the year, but I guess just what are your thoughts on 2020?
Yes, Zach, we're still doing our plan, but I think we have a decent picture, give or take, a couple of $1,000,000 where it's going. In terms of CapEx, if I could just take a step back, we have become a lot more efficient in our utilization of our assets, particularly our trailers. And the operations teams have done a really nice job at learning to do the same and more volume on a lower trailer base. We had some incremental investments over the past couple of quarters sorry, past couple of years in trailers to work through some old vintages in the fleet. Those investments are over.
We have a really great trailing fleet and we're using it very well. That's been the driver in the reduction in our CapEx, which has been an important part of us putting up record free cash flow. But don't think that we're not investing in things. We're actually investing in everything that like we can handle. It's just we don't need to make the investments in trailers as much as we do.
It's $30,000,000 $35,000,000 in today's dollars is the type of number that I think you'll see on a net basis that you'll see next year. Somewhat similar, but what we're doing is shifting a lot of the investment into technology and information technology. Whereas in the past, technology might have been 15% of our CapEx, it's now probably 25% of our CapEx. A lot of what we need to do to accomplish the strategic objectives we've laid out is to just keep the pedal to the metal on tech spending, enhancing our customer facing and user facing experience is and giving us better decision support and a better understanding of our own data to drive better action. So you're going to see probably a similar net CapEx type number, give or take $5,000,000 next year.
But what you will see is a shift to a lot more IT CapEx.
Got it. Great. Thanks for the time, guys.
And with that, we have no further questions in queue.
Thank you.
Thanks, Chad.
You're welcome. And ladies and gentlemen, that concludes Forward Air's Q3 2019 earnings conference call. Please remember that this webcast will be available on the Investor Relations section of Forward Air's website atwww.forwardaircorp.com shortly after this call. You may now disconnect.