Ladies and gentlemen, thank you for standing by. Thank you for joining Forward Air Corporation's third quarter 2018 earnings release conference call. Before we begin, I'd like to point out that both the press release and 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 Schmitt and CFO Mike Morris. By now, you should have received the press release announcing our third quarter 2018 results, which was furnished to the SEC on Form 8-K 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 fourth quarter and fiscal year of 2018, 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.
Now I'd like to turn the call over to CEO Tom Schmitt of Forward Air. Please go ahead.
Thank you, Leah. Good morning to all of you on the call. My name is Tom Schmitt. I recently became the CEO of Forward Air. I can tell you I'm pumped to be here. Since I joined in early September, I've been immersing myself in the culture, the operations of Forward Air, meeting our teams, going across the country, visiting our facilities, and learning what makes this great company tick. I've been around this industry for 25 years. I can tell you, I'm incredibly impressed by the capabilities, the commitment of our people, and our underlying growth potential. Our core competencies in premium service offerings and our operational excellence position us well for both secular growth in expedited and other value-added segments, as well as in new businesses.
Forward Air has a lot of runway to grow across the increasingly optimized supply chains of both retail e-commerce and the industrial complex. What are we up to in the next few months? In the upcoming months, our leadership team will be focused on becoming an even larger asset-light freight and logistics company. We have a terrific business model and a very solid core strategy, and we will be somewhat aspirational in our thinking about ways we can accelerate our growth. We will ask and answer the how high is up question, and there's tons of untapped upside. We will review our portfolio to ensure we have the right offerings for the future. We will consider organic and inorganic investments to achieve our objectives with a careful focus on returns. Results matter, and we will not confuse efforts with results.
Along the way, we'll also have some fun as a team of 5,000-plus teammates. As a continuation of our strategy to grow intermodal, we are pleased to announce the signing of a definitive agreement to acquire the assets of Southwest Freight Distributors for $16.25 million. That's a good example of our inorganic growth strategy in places where it matters. Southwest is a Dallas, Texas-based premium drayage provider. We expect the transaction will close in a few days, and we anticipate that Southwest will contribute about $20 million of revenue and $3 million of EBITDA on an annualized basis. I truly look forward to bringing you strategic updates such as this one in future calls as we execute on our growth strategies. Before we go to Q&A, two important points.
The first one, first and foremost, a big thank you to Bruce Campbell, who got this great place to where it is today and enables us as a team to really make a remarkable reality happen going forward. The second point before we go to Q&A, let's get some meat around the bone and get some more specifics from our CFO, Mike Morris. Mike?
Thanks, Tom. Our quarterly results were adversely impacted by vehicular claims-related expenses, which we recorded in other operations. Specifically, we saw these costs rise $1.4 million more than we had expected, which was worth roughly $0.03-$0.04 per share. Let me take a moment to explain the nature of these charges. GAAP rules require that we recognize expenses today for future costs that we may experience related to our current vehicular claims. These expenses are predictions of future losses on these claims as the claims develop over time. We therefore refer to them as loss development charges, and they are a non-cash expense for the period. As we've discussed in prior calls, we are now self-insuring to a much larger extent. We anticipate these loss development charges in our forecast. However, last quarter, the actuarial estimates of these expenses came in $1.4 million higher than we had expected.
We've subsequently improved our forecasting process to better project these charges. Our greater challenge, however, is to keep claims from occurring in the first place with safe operations. Since last year, we've made significant strides in our safety initiatives. Our safety culture is very strong. Even in this tight driver market, we will disqualify an owner-operator who does not meet every one of our safety standards. On a year-to-date basis, our DOT accidents with recorded injuries are down 71%, and barring any severe incidents, we don't expect further vehicular claims surprises like the one we experienced this quarter. Regarding capital allocation, we repurchased roughly $17 million of stock during the third quarter and have reduced our year-over-year share count by 2.8%. We did not incur any additional debt during the third quarter, and our leverage remains at roughly a quarter turn of EBITDA.
We're pleased to announce a 20% increase in our quarterly dividend from $0.15 to $0.18 per share. Our dividend is an important component of our capital allocation philosophy, and we believe it should rise over time commensurate with increases in our earnings. Between share repurchases and dividends, we've returned over a quarter billion dollars to shareholders over the past five years. With that, Leah, let's open up the line for Q&A.
Thank you. Ladies and gentlemen, the floor is now open for questions and comments. If you have a question or comment, please press star then one on your telephone keypad. You will hear a tone indicating you have been placed in queue, and you may remove yourself from this queue at any time by pressing the pound key. Our first question is from the line of Jack Atkins with Stephens. Please go ahead.
Hey, good morning. Thanks for taking my questions. Tom, congratulations on your new role at Forward Air.
Thank you, Jack.
Tom, I'd like to start off asking you a broad question, and you touched on this to some degree in your prepared comments. But if you could, I'd be curious to hear you just speak about your vision for the company as you look out over the next three to five years. Do you see the growth coming in the existing core business lines around intermodal and Expedited LTL, or do you see Forward Air expanding into other parts of the asset-light logistics network? Could you see Forward Air expanding internationally? I'm just curious to know what your focus will be as you look to put your stamp on this company over the next several years.
First of all, Jack, thank you for the question and for the interest. I think the quick answer would be yes, more specifically, yes, we will be obviously focused on the two businesses that have had remarkable close to double-digit, or in some cases, actually consistent double-digit margins, Expedited LTL and the intermodal business. We've got machines going there, which my experience, my background of driving profitable growth really just makes me excited about how fast, how high is up for those places, and we only own a limited share of the market in those two spaces. There's much more untapped outside in those spaces. The answer is yes, we will be doing more in those two businesses. The second yes, Jack, is also, I'm very, very confident that this is also where the value focus comes in.
We can bring more value to the other offerings and business segments that we are in. Good example is the pool distribution business. We've been focusing a lot on maximizing and optimizing this business for our retail customers. We continue and will continue doing that. At the same time, whether it's spare parts, whether it's medical, whether it's telecom, there should be other segments where we can bring the same value to the table. I believe we're far from done there either. As you can tell, Jack, I'm a proud U.S. citizen, but I wasn't born and raised here, so I also know how to look across borders. We bring here the world to America, moving America forward with Forward Air, at the same time, I think we can and should stretch a bit more north and south.
As you may know, we actually do have stations in Canada. We do have a partner in Mexico. Obviously NAFTA and the future of those three countries will play a big role. Again, it's a bit early for me to say. I still believe we will be looking left and right, at the same time, I do want to also make sure we're going to keep the main thing the main thing. What you've been relying on in the past, you will see going forward also, which is going to be a highly rigorous focus on results. We've seen them in some of our businesses. We're going to keep driving that. I've grown up in a culture of precision, we're going to bring that precision to those businesses. At the same time, yes, we will be looking to more from the core businesses.
We're going to be looking for add-on and value creation in the other two businesses beyond Expedited intermodal. Yes, we're going to also stretch and see where there's more upside, bringing more of Forward Air excellence to more people even beyond our borders.
Okay. Tom, thank you for that thoughtful response. I guess shifting gears and looking back more towards the third quarter, Mike, maybe this one's for you. Is there a way to think about the purchase transportation costs in the quarter, particularly with an Expedited LTL? What % of your miles were outside miles versus owner-operator miles? I guess you guys have been sort of grappling with how to get those costs under control for a while now. At what point do you think we're going to be able to start making some progress there?
Thanks, Jack. First, the numbers answer to your question. The broker power was 28.3% of miles in the third quarter of 2018, compared to 13.9 in the third quarter of 2017. It's still a tight market. That's the first challenge we've been facing. It's not just rate in this market. There's a lot of other softer factors around attracting and retaining drivers. Jack, when you peel back on recruiting and look inside, we've actually been making good traction on solos. Where we've fallen short is teams. To be an Expedited service provider, we need teams to be around 40% of our fleet so that we can service the long-haul lanes within the service requirement standards that we have with our customers. A generally tight environment, coupled with an even tighter environment for recruiting teams is the first place where we ran into some challenges this past quarter.
I will note, Tom, I prepared remarks that as part of our safety initiatives, we are not going to let anyone into this fleet that we don't think will operate to our safety standards, even if that means we have to have some higher PT for a period of time. We're chopping away at it, Jack. We're making some progress. We're up a little bit from the end of the quarter. We're also trying to reinvent how we recruit, offering different features, different amenities, different incentives, and we will just keep at it.
Jack, this is Tom. Let me just add a couple of points to Mike, to your points. The first one is, when we look at growing this place, we know obviously there's a one-two punch between kind of commercial prowess in terms of sales, marketing, revenue management on one side, and the second leg that needs to go equally strong is obviously what we kind of dubbed people forward, which is being extremely first class and focused on attracting and retaining talent, and that obviously includes the driver pool. We have had, as Mike said, we've had actually a good trend over the last several weeks. Now, a few weeks don't make a trend yet. At the same time, we're going to be extremely creative. I've grown up also with FedEx, 12 years in a people-intensive culture.
We're going to be extremely creative about how can we get really first class in finding ways to make it appealing to people to make Forward Air a top-notch, people-focused company, their professional home. More to come, obviously. We're not going to confuse efforts with results here either. Be very certain that people forward for us is kind of a core thing to make sure we can service that growth that we're going to be acquiring.
Okay. That helps. I guess just following up on that, obviously, the need to recruit more drivers, that obviously means that you're having to pay your owner-operator capacity more. You're certainly having to pay more when you go into the outside or broker market. I know you put 2 GRIs through in the last 13 months, you were sort of behind from a pricing perspective going into this year, or going into that period. Do you feel like there's more to do on the pricing front, Mike and Tom, as you look out into the next couple of quarters, just given how tight the driver market still is?
Jack, we knew this one would be coming. We also have an answer that's an answer beyond this call. In my mind, and we've had the same conversations here as a team. Every year, there is something called Christmas, or if you are of a different denomination, then there's another event that's like that. Every year there's Easter, and every year there's a pricing review. We're going to actually get into that good habit of having annual pricing reviews. As and if and when there's extraordinary circumstances, there may be supplementary reviews. By the way, a pricing review doesn't always mean a significant increase. Again, very predictably for our customers, for our partners, for ourselves.
For our drivers.
Our drivers for planning purposes. Drivers, exactly. For planning purposes, there will be a certain date. On that date, there will be a pricing review every single year. Yes, I think we need to get the same discipline, predictability for planning, execution, and frankly, for making livelihood purposes available to our drivers, to our partners, to our customers. You should be expecting annual rate reviews the same way as many of our other competitors have done it for a long time, and frankly, the same as is customary in many other industries.
Okay. Got you. Makes sense. Mike, one more question on the Expedited LTL business. There was a fairly sharp slowdown in growth range from a tonnage perspective. Is that just because you guys were tapped out from a capacity perspective? The overall macro sounds like it's still fairly strong. How should we be thinking about tonnage growth at Expedited LTL moving forward here?
Yeah. Tonnage growth was a little slower in the third quarter. I think there was, on a relative basis, a little bit of a macro slowdown from a comp standpoint as we lapped the tightening that began last year. We did have some capacity allocation issues, which would also impact tonnage as we look to preserve capacity for some of our more important customers. On a go-forward basis, we still are looking forward to a solid peak. We think that peak will be higher than last year's peak. I can't say by how much, but we are anticipating a good fourth quarter. We think it'll have the usual shaping of an e-commerce start and a rush into December.
I think one question mark that I would look to the research community to answer is, will we see any pull forward into December if there are tariffs looming in the new year? That's some commentary about our outlook for tonnage on LTL, Jack.
Okay. One last one, I'll hand it over. Within Expedited truckload, obviously, it's nice to see some stabilization from a profitability perspective there, but we're still well below prior levels of profitability. What's the strategy there over the next couple of quarters to get that business back to where it should be from an OR perspective?
Yeah, Jack, I'd say there's two prongs to that strategy. You have to acknowledge the progress the team has made over the past several quarters, coming out of a difficult reaction to the tightening that began this time last year. The over-the-road driver is a difficult one to recruit, we continue to focus on recruiting and building back our owner-operator fleet. In parallel, the truckload group has done a fantastic job of somewhat reinventing itself around the broker model and working with customers to have the ability to broker transactions. They've added nearly 1,000 brokered carriers to their database, we've had a lot of success restoring profitability and growing our spread between revenue per mile and cost per mile while still using brokers. I think those strategies are going to continue in parallel.
We'll see when the tightening cycle around drivers starts to loosen to the point where we could pick up more owner-operators. At the same time, we'll continue to leverage our capabilities around brokers. How those two paths play out, Jack, will determine the OR you land at. You're not going to get as much leverage off of a brokered load as you will one run by an owner-operator. We do believe, however, we can continue to grow top-line revenue and profit. Margin will depend on how much leverage you can get on your owner-operator fleet.
Okay, great. Mike, Tom, thanks again for the time.
Thank you, Jack.
Next we go to the line of Scott Group with Wolfe Research. Please go ahead.
Hey, guys. It's Ryan Greenwald on for Scott. Thanks for taking our questions. Tom, congratulations on the new role.
Thank you, Ryan.
Are you guys able to share monthly tonnage trends and what you're kind of seeing so far in October?
Sure. At Expedited LTL, tonnage per day for the quarter was up 1%. In June, I'm sorry, July, it was up 0.7%. In August, it was up 2.9%, and in September, it was down 0.2%. Thus far in October, tonnage per day is down 2.8%.
Do you have any thoughts on the deceleration?
We've anticipated the deceleration in our outlook. We still, however, to my earlier comments, are anticipating a strong fourth-quarter peak season.
Got you. As the spot market softens, you touched on this a little bit in your commentary, but should we start to expect meaningful LTL margin improvement, or are there enough other factors in there between the tight driver market that you might not see meaningful improvement in the near term?
It really depends. We're cautious in our outlook. We are expecting margin improvement in LTL. I think how the fourth quarter plays out and from a tonnage perspective, will probably be more of a driver of margin improvement relative to recruiting. We are making traction on the recruiting, though, and we do anticipate continued year-over-year margin improvement at Expedited LTL.
There's a second part, Ryan, to add to Mike's answer. The second part really is, we are continuing to actually complement and to some extent, actually complete the services that we are offering in Expedited LTL, going from what used to be an airport-to-airport model to a more complete origin to destination model. As we actually are being more complete with the value that we create with the offerings that we have, with the value add, the accessorials that come with it, this goes back to my earlier point, we also obviously will be extremely precise with our customers when we create value for them, when we add services, when we articulate that value, when we quantify that value, and frankly, when we also capture our fair share of that value.
When it comes to rigorous surcharge, accessorial management for services we actually provide to our customers that they value, we'll be all over that.
Right. Is that higher margin business than your legacy?
About two points, right? One is, it's more sources for margin because there's more services. The second part is, once you actually provide those services, you also need to be doing the commercially smart thing, which is actually charging for them.
Makes sense. Lastly from me, before I pass it off, are you guys able to give us a sense for the margin targets for each segment looking out to next year?
We're not going to give guidance into next year for margins per segment.
Understood. Thank you.
Thanks, Ryan.
Next, we go to the line of Seldon Clarke with Deutsche Bank. Please go ahead.
Hey, thanks for the question. I just want to get a little clarity on the deceleration in LTL tonnage. I think on the last call, you talked about being more selective, and some of this is your initiative taking away volume, and then some of it is a capacity constraint. Could you just help maybe quantify how much volume was constrained by capacity? And then maybe just give us a sense of what some of those initiatives are, and what exactly do you mean by being more selective? Are you kind of leaning into the more industrial heavy goods and walk away from some retail business? Just some color there would be helpful.
Seldon, thanks for joining the call. I want to make sure I get the timeframe of your question understood. When you talk about deceleration, I assume you're speaking towards the end of the third quarter.
I guess really just from the second quarter. I think you're up over 8%.
Yeah. Okay.
Yeah. Really just from April or May.
Part of it is just a comps standpoint. We did see in the legacy backdrop, a bit of a slowdown, notably on the airlines. Airline tonnage was down in the third quarter. Pushing against that have been growth initiatives. Our door-to-door offerings are growing. Within that, our 3PL offerings are growing from a tonnage perspective. It was a bit of a push when you put it all together. On the capacity side, there is a capacity angle to this. There's certain business you're not going to win unless you're pricing it off an owner or operator fleet. If that fleet is a scarce commodity, then you have to decide where you allocate it, and you lose some business opportunities like distributions or things like that. I would say, Seldon, it's a mix of all that stuff coming together in the third quarter.
At the same time, I'm very, very confident that us going after additional segments very rigorously and with precision, and to some extent completeness, international forwarders flying goods in there that are oftentimes high value, very time critical, leave us a lot of runway for growth. The initiatives, Mike, you mentioned some of them, 3PL, international forwarders, there's a lot of untapped upside for us. For the best company in many aspects of what we do, having a market share that we have, that's, in most cases, single digits, frankly, it makes me pretty excited about what's possible.
Okay, that's helpful. I guess just continuing on that longer term. You don't have to give, I'm not asking for particular numbers on guidance or anything. What's the right way to think about your Expedited LTL business from a top-line perspective longer term? Like, is this, in terms of growth, are we thinking about GDP plus e-commerce, freight forwarder volumes? What's just the right way to think about the longer-term run rate for revenue?
Yeah. Revenue, which is going to be different than profit. From a revenue perspective, it's a GDP plus to an e-commerce type of growth rate would be my expectation, ex fuel. You have to have a view on the macros and how fuel is going to behave. Because the fuel surcharge plays a role in the change in revenue. We do feel longer term, we continue to have a secular tailwind around e-commerce type offerings. I mean that in a broad sense, not necessarily going to your front door, but that whole expedited nature of the supply chain. We think we have a role there. You got to remember fuel and wherever you think diesel is going to go.
Yeah.
Let me, Seldon, let me just.
Go ahead
have two data points. This is perhaps a bit more forward-looking over a longer period of time. If you look at our Forward Air today, 2018, and where we most likely will end up, and I'm referring to revenue the same way you do, Seldon. If you look at the company five years ago, Forward Air more than doubled. If you take the remarks I made over the last few minutes about untapped upside, single-digit market share, operational excellence in what we do. Just at a headline level, I've got every reason to believe that what we saw from five years ago to today, and what we are going to be seeing between today and five years from now, will be somewhat very similar.
We're far from done, I also would have to believe that if you are the best at what you do, that you should be able to outpace the growth of the industry. Some of the comments that Mike made here in terms of industry behaving a certain way, we behaving in a certain way, that certainly should set us apart from that. The second point I want to make is that there's organic growth, there's inorganic growth. I talked earlier about the acquisition in the intermodal segment with Southwest. Even on that front with the inorganic growth, I believe we are far from done.
Okay. That's very helpful. Just a quick housekeeping question. Are there any one-off items like similar to the vehicular charges or maybe the acquisition of Southwest that are impacting the fourth quarter guide?
No. Not that I would call out.
So we should-
Our outlook, it isn't already baked into our guidance. What caught us off guard was the unexpected nature of that charge.
Okay. That should come back to that $1.5 million or wherever it is.
Well, we'll see. Yeah, I'm not calling anything out for you.
Okay. There's nothing in your guidance related to it.
Whatever's in our guidance is what we believe is going to happen.
Okay. I appreciate the time.
Next we go to the line of Todd Fowler with KeyBanc. Please go ahead.
Great. Good morning. Tom, welcome. Mike, good morning.
Good to be here. Thank you, Todd.
Good. Tom, maybe just to follow up on where Jack started the Q&A. What would the thought process be on sharing some of your strategic initiatives with the investment community? What should we expect as far as how you map out where you want the company to be? What are you going to lay out for us for some things that we should be following, and what should we expect from a timing standpoint?
Great question, obviously, and this is one of those things where it's better to be somewhat solid, rigorous, precise, than to be fast. At the same time, I'm very constructively impatient. The team is constructively impatient, I think, together with me, in tandem with me. What does that mean? We have, I think, good observations. We just had our board and committee meetings earlier this week about, again, some of what I talked about, the upside in specific spaces. Obviously, what we will be doing, Todd, is over the next few weeks and months, when I say a few weeks and months, I'm talking about not 12 months, and I'm also not talking a week or two from now.
Over the next few weeks and months, we need to be taking those observations, some of the initiatives that Mike and I just talked about at a headline level, and articulate them and quantify them. Obviously, you and the investor community will be part of that communication process. I think we've made good progress making strong observations on what's the excellence that we can build on, how can we make more out of this goodness? Now over the next few months, we're going to turn this into specific initiatives with meat around the bone and numbers next to it.
Okay. Sit tight for now, but stay tuned maybe?
Yeah, I think it's a fair point. In all fairness, that's a good way of putting it. This place didn't start with me joining six weeks ago, but in terms of us as a team creating joint initiatives with numbers behind it, obviously we have to be somewhat, again, as I said before, precise, rigorous, rather than being a week or so quicker. There's going to be precision and rigor, but yeah, you should expect to see something over the next few months.
Okay. Then just a couple of ones on the numbers, this has kind of been asked and answered a couple of different ways, with the expedited LTL results here this quarter, yields did take a nice step up, I know that that's a function of some of the pricing initiatives. Then tonnage decelerates, I know that's comparisons, at a high level, we think about if you're pushing price, do you lose a little bit of volume? Do you have a sense if there was any share shift because of some of the pricing, or do you think that that's the tonnage change is more just a function of the comps and what's happening in the macro environment?
I think the bigger picture was the latter part. Obviously, when you adjust price, it has impacts on tonnage. Sometimes those are impacts that you desired to occur based upon the way you designed your price increase. I would not look at price as the driver on that. I think it's more of the bigger picture commentary that you provided in your question, Todd.
You don't feel like, Mike, that you overshot on price and that you lost some share because of that?
I think to someone's earlier, I think it was Jack's comment, I think we're a little behind.
Okay.
No.
Okay, fair enough. Mike, in the fourth quarter guidance, just to be clear, you are anticipating tonnage to be positive in four Q?
Yes. We are anticipating tonnage to be positive in four Q, we also anticipate a shaping of the peak similar to what we've seen historically.
Got it. Okay. You commented that there's some puts and takes. I mean, that the airline tonnage was down, that the door to door is growing, you said that the 3PL initiative is also growing. Is the 3PL initiative, at this point, is it enough to move the needle? Is it contributing a percentage point of tonnage growth or is it still too early to really quantify or put some numbers around what you're seeing from that?
I don't have the math as to how much it moved the needle, it is growing nicely. We have a ways to go. We're still coming off a small base. We're still building our brand. We are tracking with our goals internally.
Okay. Got it. Just maybe the last one that I have. The intermodal margins have been very strong for the last two quarters, actually getting to a level where the legacy, the LTL business has been, and that's kind of perceived as one of the industry leaders from a margin perspective. Is the margin level in intermodal sustainable as you continue to grow? Is there leverage in that business if you layer on more of these small tuck-in acquisitions that you see more margin improvement? Understanding that if you don't want to put out guidance for 2019, I'm just trying to think about what is the margin profile of that intermodal business, because it's a little bit different from what we see from some of the pure IMCs in the space.
Yeah. As we've talked about in the past, think about the intermodal business as a series of layers, at the bottom is the platform, the CST platform, and that's tended to operate at a 10% to 12% margin. The layers are all the subsequent acquisitions that are getting stacked on to the platform. If it's a small acquisition, it'll get absorbed into the platform very quickly, and whatever the margin of that target was, it would get brought up to the margin of the platform. If it's a big acquisition, it's mathematically going to be dilutive, and it'll take a while to fully integrate, and that's what we experienced with Atlantic. The Atlantic margin has been improved dramatically since we did the acquisition, it took a year because it was a rather large one.
If you were to stop, Todd, and just let things run forward, you'd see it walk itself up on a full intermodal segment P&L up to a 10% to 12% steady state margin. You have to overlay your M&A thesis to see what type of dilution would happen and where you are in the process they call it as top grading, of bringing that target margin up to the platform margin. If you're looking for something longer term, it's a 10% to 12%, we're going to bounce around quarter to quarter based upon M&A and where the overall macro environment is.
The machine that you're describing, Mike, has been working actually almost scientifically well. To your point, if you have a bigger item on the menu, it just takes a bit longer to digest, the machine works, and it's been working very precisely to actually get the acquisitions to perform at the platform level, and that's more in the 10% to 12% range.
Okay, that helps. It helps in the context of if there's a period where you've got a big acquisition, that there would take some time to get it back to that platform margin and some of the smaller ones would perform in line probably sooner-
than the bigger ones. Okay, good. Okay, guys, thanks so much for the time, and look forward to catching up soon.
Thank you.
Next, we move to the line of Kevin Sterling with Seaport Global Securities. Please go ahead.
Thanks. Good morning, Tom and Mike.
Good morning, Kevin.
Morning, Kevin.
Tom, congrats. Let me share my congrats with you. You're joining a great organization.
Thank you. That's you and me thinking the same thing. Yes.
Well, good. Hey, Mike, maybe this question is for you. You kind of talked about the vehicle claims. Were just more severe this quarter, or did you have more accidents? Maybe you could share just a little bit more color. I know you're largely self-insuring, but was it a little bit more. It sounds like it was obviously a little bit more severe this quarter.
Well, we didn't actually have any severe claims. Where we had a gap in our forecasting process was anticipating the amount of this non-cash actuarial adjustment, called a loss development. If you have an existing claim, you've paid out a certain amount on that claim, and then the actuaries would come in and predict how much you'd ultimately pay out, and you have to book that. We had anticipated what that incremental expense would be. We just fell short because we had a gap in our process. We didn't actually have any claims. It's older claims from last year that kind of start working their way through the dataset that the actuaries use to make their future predictions. We've actually, and this is me knocking on wood, we've actually done a fantastic job this year in reinventing ourselves from a safety perspective and beginning that long-term safety journey.
Let me just, I'm going to tag team here because this is a great example of the rigor and precision that I talked about. On the safety front, obviously, we had some tragic events in 2017, and to Mike's point, we took it, and Matt Casey on our team and his team just did a fabulous job with that. We took a set of initiatives and really turned them into a safety culture where we want to be the best in our industry. Frankly, also looking at other industries at a safety, at a top-notch, non-compromise, no options level. 2018, this year, has been a great example of that becoming actually a remarkable reality. We've had a tremendous year. What's catching up with us is exactly what Mike's talking about.
We're now having to account for some of the challenges that we had in prior years, specifically in late 2017. This year has been remarkable so far, and that's a testament to turning a set of initiatives into a true pervasive safety culture, and that's what Matt Casey and his team have been doing.
Okay. Great. Thank you for that clarification, caller. As I look at the operating margin in pool distribution, it looks like it dipped this quarter at about 1.6% after running north of 3% the first two quarters of the year. With your comments around you're expecting a strong peak season, should we see it pick back up in Q4 as the retail peak season kicks in? How should we think about that in Q4?
Well, we're certainly going to anticipate a better margin in Q4 at pool, as they have their biggest quarter of the year. We had some headwinds with respect to purchase transportation and labor costs. There's been some very public wage increases out there that we've had to contend with. Yeah, Kevin, we would anticipate margin improvement coming into the fourth quarter.
Okay. Got you. Obviously, I mean, like to see the intermodal acquisition, you guys are just continuing to consolidate that drayage industry. Tom, maybe as we think about this, you guys, I believe you're now a top 10 drayage provider, which is quite impressive how fast you've grown in the past couple of years. Is your goal from here to be a top five drayage provider? Then maybe along those lines, how does the pipeline look as we head into 2019 for future M&A?
Yeah. Kevin, good news is that the questions you're asking and the conversations we are having are consistent. Goes back a little bit to untapped upsides, to being constructively impatient. Everything we're doing with Matt Jewell and his intermodal team is looking for exactly what you're describing. We've got a great thing going. We've got a machine going. We just talked about this five minutes ago, how we actually walk the acquisitions up to a level of precision and profitability that the platform had and continues to have. Obviously, when you got a good thing going, you do think through how can you accelerate this, that's exactly what we're doing right now. There's two dimensions to accelerate. One is getting more deals worked in the pipeline at the same time, the second dimension is obviously the size per deal.
We are with the CST team, Ron and Matt and that entire team. We're all over making sure that we are looking at both dimensions, getting more deals into the pipeline, and looking at the size of deal at the same time, knowing full well what Mike mentioned a few minutes ago. As and if and when we have bigger acquisitions like Atlantic, we do have, obviously, the digestion timing consequences that we talked about. Be assured, I mean, when we have got a good thing going, we are very constructively impatient to get more of that going faster.
Great. Well, thanks. Good to hear. Make sure you keep Matt Jewell busy now, okay?
We will.
All right, good. One last question here. Mike, you touched on this. Obviously with the broker miles continuing to be high and the difficulty in recruiting team drivers, just the challenges there. Tom, you touched on some of the things you're doing outside of driver pay. I got to imagine as we think of into 2019, it's going to be a tough road to hoe to really recruit team drivers. As we think about 2019, is it fair to say, given your safety culture, that purchase transportation is still going to remain relatively high and in 2019, just given the difficulty we're seeing in recruiting team drivers?
Kevin, we're going to have to see how that plays out. I don't want to drift into the territory of guiding to levels of purchase transportation for next year.
Okay. I got you. I was just trying to just kind of think about conceptually. I don't want to pin you down on anything. I hear you.
Kevin, on the conceptual point, I do want to reiterate, though, and again, this sounds like a somewhat aspirational statement, but we are very nerdy about turning that aspirational statement into specific initiatives, plans, goals, numbers, building on the most recent trends of actually turning around the driver count, it's been growing the last few weeks. That's obviously going to have to be a month and year-plus trend, not just a few weeks. Again, to me, the very simple statement needs to be, if you're one of the best, if not the best professional home for these drivers, we should find ways, and we will find ways to make more of them choose our professional home to be their professional home.
Okay. Got you. That's all I had. Appreciate your time this morning. Take care.
Thanks, Kevin.
Thank you.
Next we go to line of Ben Hartford with Baird. Please go ahead.
Hey, good morning, guys. Welcome, Tom. Maybe, Tom, I'll start specific to 2019. Are there two or three key focal points on your behalf as you look at 2019 and out of the composition of the business, growth in specific areas, anything with specificity as you look at 2019 that is high on your priority list as you start at Forward Air?
Yeah. Great question. Obviously, same thing, Ben, that we've been talking internally about and focusing our energy on. Going to be somewhat, I guess, conceptual, but as specific as I can be. We have four lines of business that we report. We actually are continuing looking for accelerated growth in all of those. Obviously, in the best way it makes sense. We got the expedited and LTL and the intermodal business, which we just spent quite a bit of time on, which frankly, at a headline level, they've been working tremendously well, and we want to get more of that organically and inorganically.
Some of that is a, what we call a commercial forward, kind of a very intense sales and marketing, and revenue management effort, going also after segments, international forward, as we mentioned before, 3PL initiatives we mentioned before, that we certainly have quite a bit of untapped upside and where we are under-penetrated. You should see a lot of focus on continued organic and inorganic growth in those two businesses, expedited LTL and intermodal. For the other two businesses, it really is about scale. It's about looking also for value add. We mentioned pool before. We've done a remarkable job, I think, of providing first-class service to retail customers. We're looking to also bring this to other industry segments. I mentioned as examples, spare parts, medical, telecom. There may be other industrial segments that we should be going after.
In TL, obviously, there are synergies between TL and LTL. They are different segments. They will remain different segments, but still we're looking for synergies. Also to some extent, we need to check out to what extent that we can actually get more scale to translate better into a bottom line. If you look at what does this mean if you want to accelerate that growth across all four business segments, we obviously need two things driving that. One is a truly first class commercial, and when I say commercial, that sales, marketing, revenue management prong. I've had the good fortune of spending the vast amount of my professional energy over the last two decades in building growth machines for different great companies.
The second piece is obviously what we call people forward and making it more logical, more apparent, more appealing to the best talent to come here because obviously we can only grow this place to what's possible if we have first-class people wanting to come here, develop here, grow, and stretch their franchises here. If you look at it's almost like a house. The whole thing gets bigger, but it has two big prongs, the commercial prong and the people prong. Not in that sequence probably, but people obviously always first. Underlying that, you have rigor and precision with customer-level profitability, with obviously making sure there's a purpose why this place exists in the first place. Lastly, and most importantly, and this is going back to what we talked about before, this has got to be a safe place.
That's the single most important thing. Everything starts and stops with a safety culture that's pervasive. I've been in transportation for a long time. Like in every industry, but in ours, perhaps even pronounced the way safety always comes first. Our people need to come to work the same place in the same way they go home, which is in one piece, in good shape. That's underlying everything. This gives you a bit of a concept, accelerated growth, being extremely value driven, and then obviously making sure that commercially and people-wise, we've got the horsepower to satisfy that accelerated growth.
Okay, that's really great. Thanks. Mike, just coming back on the PT question within expedited LTL. Obviously, it's been a tight environment for some time, but as you see it, is there any reason why the model shouldn't behave as it typically does through cycles? That if and when supply and demand in the industry reaches more of an equilibrium and capacity does loosen, that expedited LTL would benefit in terms of the reduction of outside miles and some normalization on that PT line? I know you've avoided specificity, but just conceptually, is there any reason why we should think that the model behaves any different than it has in the past when capacity does loosen?
No, I don't see any reason to think that way.
Okay. On the guidance, the fourth quarter guidance, does it include any contribution from Southwest?
The contribution from Southwest this year is tremendously small given the timing of the acquisition. There will be a little bit. It's not in the guidance. It's going to be very small.
Okay.
Given the expected timing of the closing.
Right
We might have 200,000 bucks of EBIT.
Okay. To be clear, there is nothing in the guide as it relates to that?
No.
Okay.
We didn't know if we'd sign it.
Sure. That's fair. Okay. That's all for me. I appreciate the time, guys.
Thanks, Ben.
Thank you, Ben.
Our final question is from the line of Bruce Chan with Stifel. Please go ahead.
Good morning, gents, and Tom, welcome. It is nice to meet you. You are certainly joining the company at a very, I should say, interesting and dynamic time in the company's history.
Maybe just a question, starting out with you, Mike, here on the intermodal side. Just want to follow up on some of the margin questions. I know you have got this sort of layer cake dynamic as far as the margins are concerned with that 10%-12% base. It seems like we have done materially better than that here in 3Q. I just want to unpack that margin performance a little bit. Is that kind of what we should expect to see from a fully unencumbered, I guess, intermodal margin where everything is kind of buttoned up and running at that base margin level as it should be? Or is there something specific or peculiar to this environment that is really helping to juice that drayage margin?
There are a few specific things in the third quarter that aided the margin. The first that I'll note, and you can see this in our cash flow statement, is we had a release of an earn-out related to the Atlantic acquisition. We relieved ourselves of that liability, and that means it goes through the P&L. That was about 100 basis points, roughly, of margin. If you back that out, you're at, let's say, 13 and a half. The other thing I'll note about the quarter is, you may remember this from prior calls, in the intermodal premium drayage space, when volumes are high and customers are busy, they're more likely to use CST for some accessorial services like chassis rentals or storing their boxes on our yard.
Those accessorials were strong in the third quarter, and we have a higher margin profile than the base product of a premium dray move. Unpacking it, there was a piece that came from Atlantic and the earn-out. There was a piece that came from incremental volumes and accessorial revenues. I still think, to our earlier comments, when you peel those back, we're still at a solid platform margin, and I would expect that platform margin to behave as we mentioned earlier on the call.
Okay, great. That's super helpful. I guess just continuing for a moment here on intermodal. I guess on certainly the positive side, we're seeing a nice revenue run rate. Growth in that business has been very impressive, and we're closing in on that $250 million revenue run rate that you kind of laid out almost a year ago, I guess now, pretty closely. I guess on the other side, I've also heard some rumblings from other companies and other carriers out there about M&A growth in that kind of drayage or intermodal space. I guess just thinking about that in terms of your pipeline, have you seen any more competitiveness in that kind of small company market? Is there maybe less kind of favorable properties out there in terms of that top grading of the pipeline?
Well, it's a big market, for starters. We're keeping our pipeline of opportunities full. Each deal is unique. It has to be a good fit for the seller. It has to be a good fit for us to buy. Within that criteria, we continue to maintain a strong pipeline of potential revenue, and we'll keep working through it. There's always been competition for assets of various sizes in this space. I don't think anything's changed there.
Let me, Bruce, just add one piece. We have a lot of, I guess, credibility and goodwill here. Bryan Grane, one of the family members of the company that got us into the intermodal business, CST, is very much still on board with Forward Air today, co-driving this business together with Ron and with Matt. When these companies that are in the space and are in our pipeline, when they obviously talk about potentially graduating from the business and passing it on to someone outside the family, it counts a lot when you actually have someone sit at the table on our side who says, "I've done this.
We from CST are now part of Forward Air, and it's turned out to be tremendous for us." When you're one of these small, medium-sized family founders of a drayage business, having this type of a conversation with a former founder, also still sitting at the table and being a very happy member of a very well-functioning Forward Air team, I think it gives us a leg up. I feel very, very positive about many of these companies. There's many, to Mike's point, out there coming to the conclusion that this is going to be a great professional home beyond what they founded and built to take it to the next level.
Okay, great. That's really helpful color. Just one final question here on the pool business, because I just can't help myself. I know that's a tough business. It's tough to penetrate new verticals, and I know there's a fairly long sales cycle with some of the new businesses that you've been targeting. Is there any indication that your sales force has been making progress there? Any updates as far as efforts to kind of diversify that business away from the traditional retail? Anything that you can offer there?
We've had focus, Bruce, on obviously those additional verticals, and that's not instead of retail, that's in addition to retail.
Okay.
We've had, I think, a very successful close just recently, and more in the pipeline. Again, Roger and his team, they are tremendously focused on making this an "and" proposition. Meaning being first class for our traditional retail customers, taking some of that profitability and efficiency and customer value up so that we will see better margins than we saw, for instance, in the last quarter in the pool business in retail. I'm very confident we will be seeing better margins there. Now we cracked the first door open for a non-retail customer, I think that crack will lead to more entries coming in here from non-retail in addition to what we got in retail. We have a first close there. We're activating it, I think, still in this fourth quarter. That pipeline is very, very closely watched and managed.
Okay, great. Is this sort of first crack or first foray outside of retail something that we will begin to see in the volume and margin progression through the first three quarters of next year? Is it still very much a seedling at this point that still kind of needs to be nurtured?
It's a small first step that we're still standing up.
Got it.
It is progress.
Okay, great. All right. Well, thank you very much. I appreciate the time, gentlemen.
Thanks, Bruce. Thank you, Bruce.
Ladies and gentlemen, that concludes Forward Air's third quarter 2018 earnings conference call. Please remember, the webcast will be available on the investor relations section of Forward Air's website at www.forwardaircorp.com shortly after this call. Thank you for your participation, and you may now disconnect.