Ladies and gentlemen, thank you for joining the Forward Air Corporation's 2nd 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 Chairman, President and CEO, Bruce Campbell and Senior Vice President and CFO, Mike Morris. By now, you should have received the press release announcing our Q2 2018 results, which are furnished to the SEC on Form 8 ks 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 their Q3 fiscal year 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. And now, I'll turn the call over to Mike Morris, Senior Vice President and CFO of Forward Air.
Thank you, Ryan, and good morning to everyone on the call. Before we get to Q and A, we would like to update you on a few strategic and other items. On the strategic front, our LTL group continues to make investments in drivers and expanded capacity to better serve our current customers while we look to grow in the expedited segment of the 3PL market, which we believe is a $2,000,000,000 addressable opportunity. While it remains early stages, we now have our tariffs loaded in roughly 190 transportation management systems and are continuing our focus on growing our brand, our revenues and our weight per shipment with our 3PL customers. Our truckload business has completed its implementation of the McLeod operating system and will now begin to leverage load visibility and real time decision making tools to grow our dry van and refrigerated offerings.
Our Intermodal group is continuing to execute on its M and A pipeline, and we are pleased to announce the signing of a definitive agreement to acquire the assets of multimodal transport for $3,700,000 Multimodal is a Minneapolis based premium drayage provider. We expect the transaction will close in a few days, and we anticipate that multimodal will contribute $6,500,000 of revenue and a little over $1,000,000 of EBITDA on an annualized basis. We are now a top 10 drayage provider with an annualized revenue run rate of just under $200,000,000 We have a strategic roadmap of organic and inorganic investments, which we believe can grow this business to a $300,000,000 run rate in the next 2 years. Finally, while our pool distribution group continues to strengthen its position in retail, where it does all of its business, We are also exploring other verticals where this final mile distribution model makes sense, such as health care, hospitality and parts distribution. In total, we believe that our strategic initiatives will broaden and strengthen our premium service footprint and enable us to become a larger, wider reaching asset light freight and logistics company.
Regarding capital allocation, we repurchased roughly $8,000,000 of stock during the Q2 of 2018 and have reduced our year over year quarterly share count by 2.8%. We did not incur any additional debt during the Q2 and our leverage remains at roughly a quarter turn of EBITDA. Over time, we will continue to buy back stock because we believe in our growth initiatives. We will also look to optimize our capital structure by carrying a more permanent level of debt, which we do not expect will exceed one turn of EBITDA. One final item before we wrap up our prepared remarks.
A few weeks ago, we announced that Tom Schmidt would become our new CEO. Tom is a proven strategic leader with an extensive background in network driven logistics businesses. He will join a strong management team that has deep industry and Forward Air experience. When Tom arrives in early September, Bruce will become Executive Chairman and will remain through May of next year to ensure a smooth transition. Actions were also taken in conjunction with this announcement to help ensure management team continuity.
We will make further announcements as we get closer to Tom's start date. But overall, we're excited about our future and our growing ability to keep our customers' businesses moving forward. With that, Ryan, let's open the line for Q and A.
Our first question comes from the line of Todd Fowler with KeyBanc. Please go ahead.
Great, thanks. Good morning. Mike, I was hoping maybe to start, if you can give us some thoughts or some color around the pricing dynamics within the expedited LTL segment. It looks like that base yields were up excluding fuel kind of low single digits. I know there's probably some impact of mix and the small weight per shipment.
But if you could just talk about what you're seeing from a pricing front within the expedited LTL business and maybe how we should think about that going into the back half of the year would be helpful. Sure.
I'll start, Bruce, if you want to jump in. So for the period over period that you're looking at, Todd, recall we had a GRI in October that went into effect October 1, 2017. That was up to 3.9% with some higher minimums and new oversized charge to attack some of the costs that the lighter weight freight are creating on our dock. We also had a June GRI that kicked in, in the middle of June, which was up to a 5.9% increase with an increase to some of the minimum charges. So the pricing dynamics have improved period on period because of these GRIs, which are intended to get at the higher costs that we're facing in terms of our purchased transportation.
Bruce, anything?
No, you heard it right. Okay.
And then you asked ex fuel. And so as I responded ex fuel, we did have to increase our fuel surcharge in February by 2%. Yes.
And all of that makes sense. And I guess I'm just trying to think about just as we look at the reported revenue per 100weight being up 3% with kind of the 2 GRIs in that number. I'm assuming that there's mix that's impacting that. Maybe you could talk a little bit about the other factors kind of impacting the revenue per 100weight in the quarter?
Yes. I mean, as you know, yield is not price.
Right.
And so some of the other effects that are in there, we continue to see the regionalization of supply chain. Our length of haul period on period was down a little over 1%, and that has a pretty powerful mathematical impact on yield. We also have a growth in our door to door offering. Our door to door shipments were up a little over 8%. And they drive a different mix of freight.
So you've got some varying weight per shipment and length of haul characteristics that can get involved in the math of reported yield. When we internally strip that out and we look at revenue per ton per mile, the business is improving. That's been up about 6% year on year.
Okay. That helps. And then, so I mean just kind of the general comment would be it seems like and I'm just kind of putting together some of the comments, but it feels like that the pricing environment is favorable right now and there's no big pricing competition that you're experiencing. I know there's always pricing competition, I guess I should say, but
Well, I think the pricing environment is indeed good, but the other side of that so is the cost environment. So a number or a large percentage of what we gain in an increase goes to our owner operators. They've had 3 raises in the last year 2 months. So we absolutely have to have a good pricing environment.
And Bruce to that point, I mean, so as we think about the margin profile in the LTL segment, and the incremental margins here this quarter, is the expectation that you can still drive margin improvement sequentially through the end of the year if you're seeing the sort of tonnage and yield growth? Or how does the cost part of the equation balance what you're able to drop down to the bottom line and the leverage that you have in the business right now?
Yes. As we go forward, the key number or key cost area that we're focused on is purchase transportation. We have a number of programs in to bring on more and more owner operators. If we do that, and I think we will, that basically goes straight to the bottom line. I mean, it's a great opportunity for us as we go through the year, but we have to get more and more owner operators on board.
And again, I think we'll do that. But the margin, the leverage in the Ford Air expedited segment is all about what we can do in purchase transportation because all the other costs are really being managed extremely well. So if we can just get that PT number down, we'll be in great shape. Okay.
And then just what is your thought, I mean, kind of where you're at from recruiting standpoint? I mean, are you caught up with the recruiting? Is it something that you feel you have to put in more owner operator pay increases going forward? Or how what sort of help would you give us as we think about that cost line item going into the second half?
Yes. It's a hard one to call because every time we think we've got it right, somebody comes along and because they don't know how to recruit and the only thing they know how to do is up their pay. So we have to stay competitive. Right now, we think we're in really, really good shape. We have differentiated team pay from single pay because they should earn more.
And we think that will help us in the future. But next week, Todd, somebody come out and tell us they're paying their owner operators $2 per month.
Yes. Okay. Shifting gears a little bit, on the TLX expedited truckload side, Mike, I understand the comments about getting the cloud up and running. It sounds like there's a little bit more of a focus on growth. The revenue has been down a little bit here in the first half of the year.
Does that trend start to reverse as you move into the second half of the year? Or is the focus not really on revenue in that segment, more on profitability? Just how do we think about growth in that segment and then profitability for the rest of the year? I think profitability growth would come first and then
assuming we can get the fleet count up at TLS. If you take a step back, this I think last call, I drew an analogy to a 4 act play. We took we played the long game and honored some contracts as capacity tightened into the Q4 of last year and incurred a loss in this segment. We went to breakeven in the Q1 as we worked on contract repricing and reducing our volumes where it made sense to do so. And now we've turned the corner and gotten back into profitability.
I think going forward, it's a focus on enhancing that profitability while we try to grow the fleet. And then as the fleet gets larger, the revenue should pick up as a result.
Okay. That makes a ton of sense. And then just lastly, on the guidance sequentially, I know that the 3Q can be down from 2Q. Are you just factoring in normal seasonality? Or is there something in the Q2 that you felt was particularly strong and may not recur in the Q3, kind of the step down in the guidance?
I know that you've got the GRI coming in, which we felt would have helped sequentially. So just maybe at a high level helping us think about your Q3 expectations relative to 2Q?
Well, sequentially, the Q3 is probably more of the same, where you have macro strength, you've got good volumes, but at the same time, you're facing headwinds on purchase transportation. From a forecasting perspective, this purchase transportation is the hardest thing for us to predict.
Okay. So it sounds like if the recruiting efforts come in better that maybe helps the numbers and if it continues to be a difficult recruitment market that's the difference in the ranges?
It's our biggest cost lever.
Okay, got it. Bruce, congratulations on everything. Thanks for your help. My parting gift is no question on pool distribution today.
Well, thank you very much. I appreciate it.
No, seriously. Yes, thanks for everything.
You're more than welcome.
Our next question comes from the line of Ben Hartford with Baird. Please go ahead.
Yes. Thanks for the time guys and I'll echo that. Bruce, congratulations on a remarkable career and hope everything goes well in retirement.
Thank you very
much. Maybe in that vein, can you provide some context behind Tom's hiring? And I know it won't begin until September. I imagine it will have full details then. But what it was about his background?
And how you see it as being congruent or perhaps even accelerating the efforts to continue to diversify and expand the addressable market within the core Expedited LTL business and continue to grow the supplemental businesses as well?
Well, I would start by telling you a bit about the process. Processes we've been in for over 3 years. And when I say we, the Board members who were on the search committee and myself, I think they did just a remarkable job. So we were not in a hurry. I didn't lay down any dictates that said I'm leaving on May 4.
We just wanted to work through and find the right person. When we met Tom, his background, obviously with FedEx, Peer Later and now Schenker, is strong for a company like ours. He has, I think Mike said earlier, the network background knowledge. I think the big thing that we really, really liked about him is as Forward Air goes forward, in the past, our sales and marketing was not really overly refined because we were dealing with one type of customer base, the forwarder, the international forwarder and the airlines. And as we expand, as Mike talked about earlier into these other product lines, we really need somebody with that type of market expertise.
So Tom's big strength to me was his marketing and sales strength. And he's at Shanker now, so obviously he knows the boarder. So we're really excited about the knowledge that he brings here. We don't need and this is not to make light of his skill set, we don't need operators come in. We have operators in our company now that are extremely strong.
Where we do need some assistance is to improve our sales and marketing strategy as we expand into new markets. So I think it's going to be great.
Yes, that's good. To that point, Mike, I think you had said that you're on 190 TMS systems as you roll out this 3PL initiative. What is the target number, if you will, if there is a target number of systems? And again, with Tom coming on board and focusing more on the sales side, how does this specific initiative help accelerate what you guys have underway there in expedited LTL?
There isn't a target, but I'll tell you 190 puts us in a lot. I mean the sandbox that we are in now is pretty big and we are inside of the systems for many of the largest 3PLs. So I wouldn't think of it as a target. We've used it as a way of showing progress. We are starting to see solid improvements in our tonnage, improvements in our weight per shipment on a percentage basis, but they're coming off a low base.
And so what we need to do is continue to get our brand out there, have people recognize us and then capture opportunities in lanes where we have capacity and could use the density.
Are you Go ahead.
Sorry to cut you off. Are you finding that those early returns, I know it's off of a small base, but the growth aside, are you finding that the contribution to incremental margins and therefore overall margins are consistent with budget or plan. Can you maybe talk a little bit about the success of driving additional density and improving margins based on what you have seen to date?
Yes. I mean, I think the team is actually ahead of its internal plans in terms of the contribution that 3PL is bringing. But when you look at the size of the business unit, it's still a small number compared to the legacy operation. But we are seeing good progress. And we have to this is when I say it's early stages, it still is early stages.
I mean, we're still
growing our capabilities
and growing our capabilities and growing our brand, and that's going to take a little while to get even greater traction. But what we have right now, we are seeing the type of improvements that we had hoped in terms of revenue growth rates and absolute levels of revenue, weight per shipment growth rates and absolute levels of weight per shipment and the length of the shipment.
Okay. And then can you give us the number of the percent of brokered power miles in the Q2 relative to a year ago?
Yes. You mean in expedited LTL, broker power was 30.2% of miles compared to 11.3 percent of miles in the year over year quarter.
And do you expect that percentage to rise or fall in the back half of the year?
It better fall. You tell me where
the truckload market is going to go and then I'll answer your question.
Sure. Okay, that's fair. I appreciate the time guys.
Thank you. Thank you, Ben. Next question will come from the Scott Group with Wolfe Research. Please go ahead.
Hey, thanks. Good morning, guys.
Morning.
So just a couple of quick ones. Can you give us monthly tonnage on the LTL side in July?
Yes. Just scanning my notes here. Hold on. For April, it was up 8.7%. For May, it was up 10.7%.
And for June, it was up
6.5%. And any July to date numbers?
Yes. July to date, we've been up 2.8%.
Any thoughts on that deceleration from double digit in May to low single in July?
Basically, Scott, the difference is we have become a bit more selective in what we haul and in particular in eliminating for the most part distributions what we call distributions and that's basically the change in volume. It is not an economic overview. It's strictly us being more selective.
So should we see Bruce a big then acceleration in yield growth in the Q3 if tonnage is slowing?
Well, I think we should see a big yield. We'll have the full impact of the June rate increase for the entire quarter. So we certainly hope it's going to be up. We should see it go up. But again, you have to rely on, hey, is the mix going to stay the same?
Is Linked Haul going to stay roughly the same? All those type of variables that's important to
you. Right. I mean, I get that. But going back to, I guess, the first question, right? We're in this great environment for pricing and we're seeing TLs get double digit, in some case, 20% pricing.
LTLs are seeing mid plus pricing, some high single pricing. You're dealing with some cost things. It sounds like the purchase transportation, depending on what your competitors do, is somewhat out of your control. Why aren't we trying to get double digit pricing here?
Well, at some point, we put our customer out of business. It's one reason. We have hit them with, in essence, 3 rate increases in the last 10 months. The last increase was approximately 6%. The net to that was depending on the week between 3% 4%.
So as we go forward, we think that's a good number for the time being. That can change tomorrow in this environment. So we're not going to sit here and say, hey, that's we're locked in on that for the rest of the year because so many things change in this environment as you know better that we just have to stay on our toes.
Okay. And then maybe just last question. Can you just big picture share your long term margin targets for each of the segments where they stand right now?
Well, Rex, but I'd help you out if we can get our purchase transportation in control. In a good environment, you're looking at 15%, 16%, 17% op margin. That's pushing ruble when I say that, but it's doable. Truckload, probably in the 8%, 7% range, again, assuming a good environment. Our pool should be on an annualized basis between 5% and 7 and you could take it up a little bit higher if we're able to bring in different verticals because that will help us in the beginning of the year.
And then on drayage, with that team, which is an outstanding team, I think at worst they're at 8%, but have a real opportunity to be in double digits all the time.
Okay. That's helpful. And congrats, Bruce, on the upcoming retirement.
Thank you very much.
And the final question we currently have in queue comes from the line of Bruce Chan with Stifel. Please go ahead.
Yes. Good morning, gentlemen. Nice results. I hope the market gives you credit for it here in a few minutes. And Bruce, we're certainly sad to see you go.
I guess the upshot is that it's going to be a little less confusing for me with only one Bruce, but congrats and it's certainly been very nice working with you.
Thank you.
Just to begin with the LTL business on the heavyweight industrial push, Mike, I know you mentioned getting your name out there as being one of the big components of that strategy. Can you elaborate a little bit more from the sales side about what needs to be done between loading your tariffs onto the TMS systems and then actually winning the right type of freight?
I think it's just steady progress at having 3PLs learn more about who you are so that when you show up on these screens, they're not going who's forward air. So I think it's just the sales force executing on their strategies to keep staying in front of the 3PLs and showing them our capability set as an LTL provider. As you do more shipments, you build more of a reputation. So it just takes time to build.
Okay. Great. And you talked about sort of innings or acts of a play a little bit earlier. I mean, do you have a sort of similar prognostication about kind of where we are in terms of adding that 3PL business?
I don't. It's something that should become a part of the company for a very long time. And so I don't think that there's some mountain top and there it is and it's this far away. I mean, we're looking to grow our capability set for all of our customers in expedited LTL, forwarders, 3PLs, various intermediaries that we serve. And having a door to door offering is important part of that evolution and being able to sell an end to end solution across markets is an important part of our growing capabilities.
Got it. It. That's very fair. And then switching to, I guess, a different type of tariff. There's been a lot of talk about some of these trade and tariff issues, sort of in the topic or reason du jour about peak cycle fears.
As far as your intermodal business is concerned, have you seen any signs of these issues cropping up? Any indications of early peak shipping to get around some of the trade issues?
We've had nobody specifically, no customer come to us and say, hey, this is what we're doing. Obviously, we think some of that's going on. From what I've read, I don't think it's near as big as people are publishing. I think it's just a little bit of precaution by the shippers. We expected freight to be as good or the intermodal to be as good as it is now.
We haven't seen it just blow up in terms of high volumes. I think we will see continued good volume for the balance of the year. But we just simply can't see where they where we could support a statement that they have moved it
forward. Great. Well, that's very helpful. And that's all I have. Bruce, once again, congratulations and thank you very much to both of you.
Thank you.
And we do have another question that's queued up, comes from the line of Tyler Brown with Raymond James. Please go ahead.
Good morning, guys. Good morning. Hey, real quick on intermodal. So we hear a lot of anecdotes about what I guess I can only characterize as a crazy drayage market out there. But frankly, I'm still a little unclear whether a really tight dray market is holistically positive or negative for you.
So on the one hand, you've got to think it offers up load and pricing opportunities, but it also probably drives up PT. It seems like EBIT is moving in the right direction, but just how do we think about an Uber tight dray market for your intermodal segment?
Well, so far it has not driven up PT. We've been able to really throughout the balance of the last year drive price increases, which has for the most part taken care of any increased PT. When the market is busy like it is, we're able to get more turns per driver. It's just easier to operate when you have good volume numbers. So I don't see the correlation, but the year end over.
Okay. So when we think about EBIT kind of over the next couple of quarters, is this $5,000,000 to $6,000,000 kind of a good run rate?
Probably.
Okay. And then given maybe the tightness in the market, lots of loads out there, do you think that opens up or closes down M and A opportunities? I appreciate you announced a small one today, but do you think that holistically is a good or bad thing for M and A?
I think it's neutral. If you look at the drayage market, it's really 30, 40 years old. It's relatively new compared to LTL or truckload. And what's happening is the guys that got and ladies that got into that business 30, 40 years ago are getting old like me. So they're looking for ways, it's time for them to find an exit strategy.
So we have a lot of opportunities there. Again, I think it's just strictly a factor of people are getting older and they're looking for extra strategies and nothing more than that.
Okay. And then you talk about getting up to $300,000,000 but does that include any move into the domestic market or is that strictly international?
Well, we do a little bit of domestic. So we don't really define it that way. We define it by who the customer or the competitor is that we're attempting to buy. So we make sure they have good business, they have good drivers, they have good customer relations and then we go forward.
Okay. And then just my last one on the integration effort when you do a small tuck in, what's the process? Do you typically move it on to one centralized system, maybe centralized dispatch? Or do you run separate systems?
No, no. We go immediately to our system. We have an acquisition team on our drayage side. And these guys and ladies are so good. So they will when we finalize multimodal, they'll go up there, implement our systems, implement our way of doing things.
Even if there's nothing wrong with multimodal. We just have to get everybody on the same platform, which is critical to us so that we can drive the cost efficiencies that we want.
Right. Okay. Thank you very much.
Thank you. Q2 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. You may now disconnect.