Ladies and gentlemen, thank you for standing by, and thank you for joining Forward Air Corporation's fourth quarter 2016 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.forwardair.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 fourth quarter 2016 results, which were furnished to the SEC on Form 8-K and on the wire yesterday after market close. Please be aware that during this conference call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the company's outlook for the first quarter and fiscal year of 2017.
These statements are based on current information and our current expectations. As such, they are subject to risks and other factors that may cause actual operations and results to differ materially from the results discussed in the forward-looking statements. For additional information concerning these risks and factors, please refer to our filings with the Securities and Exchange Commission and the press release and webcast presentation relating to this earnings call. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. Today's presentation will include non-GAAP financial measures, including adjusted income from operations, adjusted income before taxes, adjusted income taxes, adjusted net income, and adjusted diluted earnings per share. These non-GAAP financial measures exclude those items that we believe affect comparability.
The reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our fourth quarter 2016 earnings press release. The company appreciates your attendance on today's call and your review of the fourth quarter 2016 press release, including Bruce and Mike's comments and the guideline, excuse me, and the guidance information provided therein. To make the most of your time you have all given Forward Air this morning, we will move directly to question and answer session. Ladies and gentlemen, if you would like to ask a question, please press star then one on your touch tone phone. You will hear a tone indicating you have been placed in queue, and you may remove yourself from this queue by depressing the pound key. One moment please for the first question. First question is from the line of Jack Atkins with Stephens. Please go ahead.
Hey, guys. Good morning. Thanks for the time. Mike, I guess let me, if I can start with a couple of questions around the guidance and sort of what you guys are seeing so far in the first quarter. Can you give us a sense for quarter-to-date volume trends in the Expedited LTL business, and what does the first quarter guidance assume for volume and core yield growth in that segment, if you could share that?
Sure, Jack. Good morning.
Good morning.
For the first quarter of 2017, period-on-period, we're assuming flat LTL tonnage, a little bit of total system yield would be about flat as well, with a little compression in line haul offset by a fuel surcharge and pickup and delivery.
Okay. Is that similar to what you've seen so far in the first quarter?
Yeah. If you step back and look at the, perhaps a broader answer to your question. If you step back and look at the overall picture across the portfolio, there's two things going on in our forecast. The first is we are expecting revenue growth across the board. We are remaining cautious about how much operating leverage we can achieve on that in what remains to be a sluggish freight environment. We're being careful about how much incremental margin we think we can achieve on that. The second is we have some unique year-on-year effects in the first quarter related to income and expense from other operations. We had some things that were moving favorable in the first quarter of 2016, the comparable period, and those things are moving unfavorable in the first quarter of 2017 in our forecast.
Those are the two main drivers, core business revenue growth, some caution around how much incremental margin we can achieve on that in a sluggish environment where capacity is still loose, and then kind of a unique year-on-year effect and other income and expense. I mean, income and expense from other operations.
Okay. That's helpful, Mike. Just sort of to drill down on that last point for a moment, could you maybe talk about what's driving that unfavorable comparison this year in the first quarter, and is that something that you would expect to sort of linger on for a couple of quarters, or is that more of a unique to this one quarter?
It's unique to this one quarter. In this line, we have a variety of things. The first is we have some actuarial estimates for potential future loss development. Those were trending favorable in the first quarter of 2016. We had some accidents in 2016, our expectation is those will trend unfavorable in the first quarter of 2017. We had some favorable Towne facility adjustments in the first quarter of 2016 that are absent in the first quarter of 2017. In the first quarter of 2017, we've got some employee separation costs that didn't exist in the first quarter of 2016. This is kind of a unique circumstance for this quarter. If you look at the first quarter of 2016's press release, this line generated income of $270,000.
If you look at where this line has been in other quarters, third quarter of 2016, it was $1.5 million of expense. In the second quarter of 2016, it was $1.4 million of expense. Those are more where our expectations would be around this line. If you think of that swing, it could be upwards of $1.8 million of variance period on period, which is anywhere from $0.03-$0.04. We don't know where some of these things will land, that's a little more color as to what's going on in this line.
Okay. That's very helpful, Mike. Thank you for that. Shifting gears for a minute and sort of thinking about 2017 more broadly, Bruce. Can you help us think through some of the targeted yield actions that you guys are planning to take in the LTL business this year? I know you all seem to be a little bit hesitant, at least that's what you said in the past, to sort of push a broad-based GRI. You're doing some more targeted things. Can you help us think through the overall impact that you think that's going to have, in terms of yield or yield-like revenue in 2017?
We feel at the moment, Jack, and this is subject to change as we go forward, that we're going to hold where we are and not come out with a GRI. That obviously could change as the year goes on. We have done some tightening in terms of what we call spot rates, or what you could view as an outsider as temporary rates. The net impact of that is to drive our yield up. For two weeks now, year-over-year, our yield has improved. We're pleased with that. Until we feel really comfortable with the market and the fact that we see growth in the market, we'll hold our typical rates where they are today.
Got you. Are there other things that you could do, whether it's adjusting your dimensional factor like you've done in the past, or going after some ancillary charges on some of the heavyweight, more e-commerce leverage stuff flowing through your network? Are those some things that you can maybe tackle this year which could have a positive impact, whether it's, I know dimensional flows through tonnage, some of those things would perhaps flow through yield as well, correct?
We're happy with where the dimensional is now and think it's fair both for us and for our customer. We're always looking at ancillary. We define ancillary as do you have or does this business cause us additional cost? If it does, then we're going to come in and hit it with an accessorial charge. That's typical of how we do business every day, not just for the current period. If we see things change, in other words, we get into cost situations that appear to be more and more the norm, we will attack that area with an appropriate pricing relief for us.
Okay. Thank you. Last question, I'll hand it over. It looks like Purchased Transportation and the Expedited LTL business stepped up a little bit as a percentage of segment revenue versus where you ran for a good bit of 2016. Do you expect to see some inflation on that line in 2017? Are you seeing any inflation in your cost per mile with your owner operators?
No inflation at this point. What you see in Q4 with our PT typically is a result of the holidays.
Yeah.
If you go back four or five years, that's what you're going to see. We have to shut the network down, bring it back up. We get our system out of sync, similar to when a blizzard hits New York City and you can't get the planes in and out. It takes the airlines a few days to get back, and it costs them a fortune. The same thing goes on with us, not to that degree, thankfully. We anticipate as we go through the year, that we will review where we are monthly with our owner-operator base. We'll wait and see what impact ELD has on the entire industry's owner-operator fleet. We may have to adjust. Today, we don't think so, but that could be coming down the road.
Okay. Bruce, Mike, thanks again for the time.
You're welcome.
Next we go to the line of Jason Seidl with Cowen and Company. Please go ahead.
Hey, Bruce. Hey, Mike. How are you guys?
Good. You?
You know what, bearing with the snow coming down in New York City right now. Couple quick questions for you guys. I guess, switching to intermodal a little bit. You guys seem to have a lot of success in what was arguably one of the tougher quarters for the industry. Can you talk a little bit about what's going on there?
Yeah. We saw a little bit of uptick there. Not a great amount, but we saw a little bit of business come back. Interestingly, the core business of picking up and delivering intermodal containers has remained pretty stable for us. In terms of our profitability, what has changed is we no longer have the amount of storage of containers that we used to have because it's sluggish. The business of intermodal is a little bit sluggish now. That is extremely profitable business for us. When it goes away, you'll see what happened to us in 2016, where we lose a little bit of our margin. Our core business is exactly the way it was. We have a great team there. They do a great job. We're looking forward to them really expanding their reach this year, way beyond where they are today. We're excited about intermodal.
Okay. Switching to pool, you guys talked about a bunch of new business wins coming through there and helping out the top line. How do you think about your base business ex those wins? How does the demand look there?
Surprisingly good. We went into the fall, the peak season, they truly have a peak season, thinking that we were watching pretty closely and would it, in fact, peak? It did much better than we anticipated. Part of that is because this segment of our industry is losing a number of our competitors. During the quarter, we lost two competitors. That helps us. The one thing about our financial strength is we can stand there and battle and get through tough times. We're happy with where they are. They brought in two accounts during the quarter, which is unusual to do in the fourth quarter. Both of them are what we call integratable, so they fit into our existing network, which means the margin is much more solid and will remain so as we go forward.
Okay. Finally, your driver count and the truckload premium company going down here, double-digits, owner-operator picking up the slack. Is that what we should expect going forward?
Yes.
Perfect. Gentlemen, thank you for your time.
Thank you.
Next we go to the line of Scott Group with Wolfe Research. Please go ahead.
Good morning. It's actually Vanc Do for Scott. Just had a few questions on my end. Wanted to follow up on Jack's question on the guidance and, yeah, it sounds like, there's 4%-8% revenue growth and I guess ex special items, EPS is only growing a little bit less on that. Just wondering, when do you expect to kind of return to growth? Is that a second quarter event as you start to lap some of, I guess, the severance costs in 1Q? Just trying to get a sense where we can see kind of the operating leverage from the revenue growth.
Well, we would hope to see it ramping up in the second quarter and then continuing throughout the year. That remains to be seen. Part of our reticence on predicting is a little bit of a sloppy economy, and it's difficult to sit here for any of us, to sit here and say it's going to be XYZ. As we gain, and hopefully this occurs sooner rather than later, more and more confidence in the macroeconomy, you'll see us get much more aggressive. Today on the early part of February, we're not about to go there.
Okay. Just reviewing the quarter again, just looking at the Expedited LTL line haul yields, just wondering what's kind of driving the year-over-year declines there. It seems to have gotten worse relative to third quarter. Wondering why it fell 1.7% year-over-year.
Hey, Vanc, it's Mike. A couple things there. First, in the year-over-year period, we did not have any price increases in the fourth quarter of 2016 compared to the fourth quarter of 2015 because the revenue management actions we took related to the dimensional, and that won't show up in yield. We also had some shorter shipment distances. We saw supply chain regionalization, which is a secular trend, but its effects are being felt. More fulfillment centers, more DC centers. The shorter length of haul is going to suppress the reported line haul yield. Those are the two main drivers.
Okay. Do you expect the regional having shorter haul, is that going to continue throughout the year, or is it a long-term secular trend, or does it hit you especially, is it a more fourth quarter type event?
No, it's going to be a continuing trend as you see. It's what I call Amazon impact.
Okay.
Two years ago, they had, what, 10 warehouses? Now they have 31 or whatever. Every time they build a new DC, that length of haul is going to get shorter and shorter. That's going to be a continuing trend. We modified our network to handle that, and to take advantage of it.
Okay. I guess just one more from me. Looking at the TLX side of it, I saw in your release that you said that you signed on a couple of new, it sounds like you onboard some new business. Seems like a tough environment out there. Just wondering if you can provide some additional color on, I guess, the new business that you onboarded in the fourth quarter.
The TLX growth has been strong. We've been growing in a couple of different segments and growing, providing line haul services for common carriers. It's been good, strong, volume-driven growth. It's just that from a profitability perspective, when it comes on board, sometimes we'll pick up a little more PT than broker-driven Purchased Transportation than we normally would as we adapt to the incremental volume and claw it back to the equilibrium we normally run at. It's growth. It's just in that particular quarter, the profitability wasn't at our target because of an increased use of brokers as we got used to the lanes and the volumes.
They also took a big hit on an accident.
We did have an accident flowing through the insurance and claims line.
Okay. Roughly how much was the insurance?
I don't want to quantify how much of the change was related to the accrual, but there was one in there.
Okay, got it. Okay, thanks for your time, guys.
Thanks for your time, Vank.
Next, we go to the line of David Ross with Stifel. Please go ahead.
Good morning, gentlemen.
Good morning, David.
Just to follow up on the length of haul question, what is the average length of haul there at the Expedited LTL division?
It's right at 650 miles.
I guess how much is that down year-over-year?
Year-over-year, it's not down that much. If you go back five years, it's down probably about 15%-20%.
Okay. The average shipment size, that's been trending down as well. Have you seen that bottom, or do you expect that to also trend down further in 2017?
Actually, that reversed a little bit.
Okay.
We're not seeing that going down quite as bad as it was.
That's good. Then, with capacity, you talked about it still being loose, not looking to take a GRI this year in the LTL business. You did take out town, I guess I'm surprised that it's not a little bit better or more favorable of a pricing environment.
I think you have to think, David, about our customers. If they're unable to get rate increases from their customers, then it's hard for them, if they want to stay in business, to pay us more. Are there lanes where we can jam increases in and just say, "Too bad"? Without question, there are. Long term, that is not a good method to follow. We will look at the GRI. It's not off the table. We'll look at it every month during our management sessions, and if we feel it's something that we need to do, if we have to have an increase for our owner-operators or some other cost impact, we'll certainly go back there and get an increase.
The follow-up to that would be, what is the cost outlook in 2017 for the Expedited LTL division? Are you going to be able to keep costs flat, and that's why there's not really a rush for the GRI? Are costs going up and you're just going to have to figure out how to get it somewhere else?
Our nature is there's always a rush per GRI, but at the same time, we have to be realistic. On the other hand, we think costs this year will remain very stable through the first half, and then we're going to be like everybody else, and that's watching what the impact of ELDs will be on not only us, but everybody else, and does it dry up capacity. We're comfortable on the cost side through the first part of the year. We'll wait and forecast the second part of the year probably sometime in July or August.
The last question really is, if you were to take a 3% rate increase, do you think you would lose a lot of business? If so, where would your customers then go to get their freight moved?
Well, they could go a number of different places. They use LTL carriers. They could go to other regional competition. We've got one somewhat national competitor, so there are places for freight to go.
Just to clarify, you're saying it's still a price over service environment out there?
Depends on the customer. I'm not avoiding your question, it does.
I get it.
Yeah.
All right. Thank you.
Welcome.
Next we go to the line of Todd Fowler with KeyBanc Capital Markets. Please go ahead.
Great, thanks. Good morning. Bruce, maybe just a couple of comments about the quarter in general, especially coming off of the third quarter where things had been a bit inconsistent and then the fourth quarter, a little bit of strength. I guess I'm just curious, maybe a little bit more of a high level as to what you saw in the fourth quarter, different from what you saw in the third quarter and just your perspective on the freight environment right now.
Well, the fourth quarter we thought was good. It wasn't great. We continue to see, as we've talked about, some loose capacity issues. That tightened up in the latter part of November going into December. We were happy with that. The pool business was better than we had anticipated, and we were happy with that because that's a density-driven business. The LTL or our air expedite group, we saw the normal Amazon influx of business that has a pretty big impact on their cost. It's good business, but changes the way we do business for a quarter. We anticipated that, we were ready for it, and we handled it, I thought, in a pretty good way. Overall, the quarter came in at the higher end of our expectations, and we were pleased with that considering where we are in the economy.
As we are today, our comments would be we're off to a decent start. We still feel a little softness. We've worked hard on yield. In terms of getting it up on a year-over-year basis, and we've been successful to date. We're working hard on developing our 3PL customer list and developing business from them. We've had success there. We're certainly not in an exuberant time, but we've got a lot of good projects going forward, or initiatives, whatever you want to call it, and we're excited about the year.
Okay, good. No, I appreciate that. I might have missed some of that in the prepared comments, so. That was a joke, Bruce.
Actually, you're on ball today.
You got to be on time for these calls, I guess. Man, if I was getting a cup of coffee, I would've missed a lot. Hey, just a couple of other follow-up questions. I think in 2016, you talked about the Expedited LTL OR being around in the 86 range, and you were there and you showed some margin improvements. Some of the mix shift that's happening within that business and the freight that you're moving, what's the expectation for the margin profile in the LTL business going forward?
Well, obviously, we want to continue to push that improvement. We think we can if we have the right circumstances. The big thing for this year, Todd, and we'll touch on this every quarter because it's critical, is our big cost bucket, and that's Purchased Transportation.
As I stated earlier and Mike stated, we're concerned what happens to that market of owner-operators as we get towards the end of the year. That's going to be the big driver, is can we improve on an 86? Can we get it down to an 85? It'll depend on the yield market. Are we getting good yields or are we being forced to go lower? It's kind of business as usual with the big unknown, what's going to happen to the owner-operator fleet.
Bruce, what do you have to do with the owner-operator fleet to potentially get out in front of that? I'm guessing it's probably monitoring first, and maybe we'll take proactive measures, does that come down to compensation packages for the owner-operators? How do you stay in front of that so you're not caught flat-footed in the back half of the year into 2018?
Again, it's a constant monitoring. We're actually out looking at pay packages as we speak. I don't know if it'll do anything in the next few months or not. I doubt it. That's part of what we do. We have an aggressive recruiting group. We're out trying to get everybody we can get. When we look at what we provide versus what other carriers provide, with a couple exceptions, if you're an owner-operator, you want to have a home with Forward Air. We're going to do our best to protect that image to help us get through the year.
Okay. Just two last ones. % of miles that were owner-operator versus outside network in the fourth quarter?
For Expedited LTL?
Yes, Mike.
They did very well. Continued to get greater owner- operator utilization. We were 88.6% in the fourth quarter of 2016 versus an 87% number in the fourth quarter of 2015.
Great. Okay, just the last one. What are the thoughts on the truckload expedited margin longer term? I think you've talked about a 90 OR in that business, and I understand that there's some cost associated with onboarding new business here in the fourth quarter. When I look at where you were throughout a lot of 2016, would suggest quite a bit of margin improvement to get down to that target. What's your expectation near term for 2017 and then maybe thoughts longer term on that? Thanks.
You're welcome. We anticipate them to return to where they were in the early part of 2016. We anticipate them to get to the 90% OR as we go through the year. We've got two issues we're dealing with there that, if we're successful in dealing with them, that'll get us to a 90% OR pretty quickly and hopefully even better. We're pleased with where they are, but we do have work, and that's why we get paid.
Okay, guys. Thanks for the time this morning.
Thank you.
Next we go to the line of Benjamin Hartford with Baird. Please go ahead.
Hey, guys. Actually, Zach Rosenberg on for Ben. Thanks for taking our questions. Going back to a question earlier on pool. It seems like pool was a margin bright spot during the quarter and after a couple challenging years into the growth and associated startup costs. Last quarter, you discussed a shift in strategy, focusing less on the growth and more on generating operating leverage during this quarter. Just wondering, given the revenue is still up a healthy 11%, what type of growth should we expect as digestible or phrased differently, if there's a growth bogey above which improving margins becomes more challenging?
Our outlook there is we can grow, we do have a growth factor for them this year that's a double-digit growth factor. We've made it very clear that we will take our existing asset base, our existing infrastructure, we will retain that, we're not going to go out and add a lot of cost to bring on new business where you're basically swapping dollars. We're taking our existing network. We're going to maximize, optimize, whatever word you want to use our ability to get a profit out of it. If there is an opportunity to grow beyond that, it has to stand on its own in terms of an ROI. We're excited about where they've come from because it has been painful in the past, I think they have a pretty bright future.
Do you have some kind of margin improvement target internally or just generally, if you're not comfortable giving a number?
We do have a margin improvement internally.
Okay. Moving on, looking at the intermodal segment, I know you've been looking for some M&A opportunity and looked at some deals. Can you talk maybe about what deals you guys have looked at, or if there's anything in the pipeline there, any kind of opportunities for acquisitive growth there?
Yeah. I think we'll have opportunities. We don't get into discussions of individual opportunities. We will tell you our goals. Our goals are we need to expand geographically. Today, we have a solid, a really good operating network in the Midwest. We need to expand that, take that management expertise, and again, I've said it before and I'll continue to say it's one of the best management teams I've ever been associated with. We will approach it from a geographical standpoint initially, and then respond to the market. As you know, there are days when you can make acquisitions, and there are days when you can't, and you do a greenfield startup and do it on our own. We'll attack it from both angles.
Got you. Anything that's come up that you've taken a look at recently, or are the multiples at the right place for that right now?
Things always come up in that market, so it's pretty much business as usual.
Got you. Okay. Turning back, you gave specific color for the Expedited LTL segment for volume and pricing that's baked into the guidance. Can you talk through maybe some numbers or framing around the other segments as well for Q1 or 2017?
It's revenue growth across the board. That's about as much color as I think we can give.
Got you. Okay. Thanks for the time, guys.
Thank you.
Our final questioner in the queue is David Campbell with Thompson, Davis. Please go ahead.
Good morning, everybody. Thank you for taking the question. Mike, you mentioned at the very beginning that the first quarter, your assumptions are in the LTL Expedited flat yields and flat tonnage. You said you'd have revenue growth across all lines. Can you please explain that? How do you get revenue growth in the LTL tonnage?
Sure. If you think of tonnage, you're talking about pounds moving through the line haul network. We would expect some compression on line haul yield, given the environment that we've been talking about. Counterbalancing that and driving net growth, we are experiencing a growth in our complete product, our pickup and deliveries, as it relates to our increased penetration of 3PL accounts, which have higher complete attachments to them. That's driving revenue growth beyond line haul, and then we are also experiencing a quarter-on-quarter higher fuel surcharge rates that would drive top-line revenue growth. Bruce mentioned earlier about actions we've taken with respect to minimums, accessorials, some of the other things. We believe we can generate revenue growth in a flat tonnage environment. The reconciliation is that it's coming beyond the line haul revenue category.
Some of your other businesses will have pooled distribution. Its outlook is good for revenue growth. I guess you'll get some revenue growth in the other sectors.
We think we'll have revenue growth from the other sectors as well. The question is how much operating leverage we can achieve across the portfolio, given the sluggish environment.
Right. Okay. Thank you very much.
Thank you.
Thank you.
We have no further questions.
Okay.
Thank you. Ladies and gentlemen, that does conclude Forward Air's Q4 2016 earnings conference call. Please remember, the webcast will be available on the IR section of Forward Air's website at www.forwardair.com shortly after this call. That does conclude your conference for today. Thank you for your participation. You may now disconnect.