Ladies and gentlemen, thank you for joining Forward Air Corporation's second quarter 2016 earnings release conference call. Before we begin, I'd like to point out that both the press release and 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, Senior Vice President and CFO, Mike Morris, and Advisor Rodney Bell. By now, you should have received the press release announcing second quarter 2016 results, which were furnished to the SEC on Form 8-K and on the wire yesterday after market close. Please be aware this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the company's expected future financial performance.
For this purpose, any statements made during this call that are not statements of historical facts may be deemed forward-looking statements. Without limiting the foregoing, words such as believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in our filings with the Securities and Exchange Commission and in the press release issued yesterday, consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Now I'll turn the call over to Bruce Campbell, Chairman, President, and CEO of Forward Air.
Thank you, operator, thanks to each of you for joining our call today. In the past, I've not made opening remarks, I feel it is important for me to do so today for two reasons. First, the performance by our Air Expedite group during the quarter was simply outstanding. We have finally been able to see the positive results of the Towne purchase after a year of hard work. Truly a great team effort. Secondly, this is my opportunity to publicly and personally thank Rodney Bell for his 20-plus years of service to the company. Truly a great effort benefiting all of us. Finally, this is my first opportunity to publicly welcome Mike Morris to our team. We are excited he has joined us. With that, I'm now going to turn the call over to Mike.
Thank you, Bruce, good morning, everyone. I'm very pleased to be here today. Before I begin, I would also like to thank Rodney Bell for his nearly 25 years of service and for the value he created helping to make Forward Air the great company that it is today. I look forward to working with Rodney over the next few months, I and the entire organization wish him the best in his retirement. I will begin by highlighting how the TQI impairment will increase our book tax rate for 2016. The goodwill portion of this TQI charge has no impact on our 2016 estimated tax expense because we will never benefit from this charge on our tax returns. It does reduce our 2016 estimated pre-tax book income.
When we calculate our GAAP tax rate, the numerator, our estimated tax expense, is unchanged, but the denominator, our estimated pre-tax book income, is reduced. Therefore, our book tax rate has to rise, as it has, to approximately 50%. For GAAP purposes, we expect to book to this rate for the balance of the year. That said, we will adjust for this TQI tax rate effect in our non-GAAP presentation, which currently reflects an approximate 37% tax rate. We expect to use this rate for our non-GAAP presentation throughout 2016. I will provide some additional perspective on 2016 for your modeling purposes. Regarding intangible asset amortization, the TQI impairment will reduce our quarterly amortization from $2.7 million per quarter to $2.3 million per quarter going forward. Regarding capital expenditures, we expect full year net CapEx to be approximately $45 million.
Finally, regarding shares, our full-year diluted share count should be about 30,500,000 shares, and that is prior to the effect of any future share repurchases. With that, I will turn it over to John to open the line for Q&A. John?
Thank you. Ladies and gentlemen, to ask a question on the call, please press star then one. You will hear a tone indicating you have been placed in a queue. If your question gets answered, you wish to remove yourself from the queue, please press the pound key. Again, star one if you have a question. Feel free to ask as many questions as you want, but we will be going through the queue just one time. Our first question from Scott Group with Wolfe Research. Please go ahead.
Good morning, all. It is actually Vanck Zhu for Scott Group. Just a few questions for me. First, wondering what your LTL margin expectations are for 2H, second half of this year.
We modeled an 83 OR for the balance of the year. That makes a number of assumptions. Business levels stay relatively the same on a year-over-year basis. We don't get impacted by fuel surcharges, on and on. As we sit here today, that's the best we can tell you looking forward.
Okay, great. Looks like purchase transportation took a good step down just this quarter. What's the driver behind the lower PT rates relative to past quarters?
The best thing that happened to us was we were fully seated in terms of having owner-operators on board, and that allows us not to outsource the loads, which cost us quite a bit more than if we pull it with our owner-operators. Our outside miles for the quarter ran in the 5% range, which is really good. Most of that would be caused by us being out of balance, and we simply couldn't cover the load with our owner-operator. If we can continue that for the balance of the year, that really helps our team in terms of lowering PT.
Okay, great. I guess just a question on the current environment. Are you seeing any sort of pickup in June and July across your businesses?
Well, June was better. That's blessed by July being a little bit soft. For any of us, we were talking earlier, the prediction business right now is very difficult for us to predict what will happen the balance of the year. Is at best a guess. I know we have planning processes in place that allow us to adjust to whatever happens, but beyond that, you know more than we do.
Okay. One more question, just wondering, I know you guys did a pricing action last September. Wondering if another one is in the works sometime in September or maybe sometime this year?
We will evaluate that as we do annually towards the end of the year as we go through our planning processes for 2017.
Okay, great. Understood. Okay, thanks for your time, guys.
Thank you.
Next we go to Jack Atkins with Stephens. Please go ahead.
Yeah, this is actually Andrew on for Jack. Bruce, going back to the volumes there, can you walk us through how that trended through the quarter on a year-over-year basis?
This is Mike Morris. I can take that, Bruce. April's year-over-year tonnage was down 11%. May's year-over-year was down 5%. June's year-over-year was down 4%.
Then so far in July, if you have it?
We're basically flat to up 1% or 2%. I would point out to you that when we went through the second quarter, that was really our first quarter that we lapped the Towne acquisition. A year ago, there was still a lot of what we call bad business in the network. You can see from our operating results that by ridding us of some of that business, not all of it, we were able to dramatically improve our operating ratio. This is one of the few times you'll see in a transportation company where a little bit less volume was truly beneficial to us.
Makes sense. Within the 3Q guide, what are you guys expecting in there from a core line haul yield and volume standpoint?
In terms of our guidance for the third quarter, we see line haul yields up in the low single digits. Keep in mind that if you think about tonnage then pricing actions following suit, we're lapping the tonnage now, but the pricing actions will be lapping in the third quarter. I think it was September when some of the pricing actions came in. You're going to see some balancing out on a year-over-year perspective that'll deaden the growth rates of core line haul yields.
Makes sense. Tonnage?
Tonnage is probably up in the low single digits. You've kind of passed the tonnage comp, and that's a pure comp, and now you got the pricing comp to catch up on.
Okay. Last one from me is in the pool distribution business, I guess if I look at it on over the last two years, revenue's up 25% or so but EBIT's actually declined by about $1 million. What's going on in this business, and why haven't we seen the operating leverage in the model?
Well, I think you will see it. It's just in order to take on some of that business, it's a big decision you make when you take on new business is can we handle it within our existing buildings, or do we have to go out and find a bigger building? In both cases this time we had to go out, incur additional costs, incur additional fixed costs. We're hoping that in the second half of this year that trend will reverse. It's equally frustrating to us, and we're hopeful that, again, that we'll see a better result in the second half.
Sounds good. Just one more, I realized. On the buyback, is that a signal you guys plan to become more aggressive there, or is that just replacing one that was already authorized?
It was replacing one that was already authorized.
Okay. Thanks for the time.
Yep.
We go to Todd Fowler with KeyBanc Capital Markets. Please go ahead.
Great, thanks. Good morning, Rodney, congratulations again. Mike, welcome.
What about me, Todd?
Bruce, it's always good to hear that you're still here, thank you. It's good to see you.
Thank you.
You threw me off with that one. It's not hard to do. I guess what I wanted to start off with is with the line haul yields sequentially coming down a little bit in the second quarter. That's different than what you normally see or what we would normally expect to see. Does that have something to do with the change in the dimensional factors? Does that have something to do with the change in the mix? I guess I'm just trying to understand why yields came down sequentially, and I understand kind of the guidance going forward, but how do we think about, I guess, what's going on with the line haul yields?
Two quick answers. One is a little bit of change in mix, and the other is a little bit shortening of the length of haul.
Okay. is there.
Which will bring down yield.
Right. Is there anything, Bruce, to read into either the mix or the change in the length of haul as far as what's driving that? Is that-
No
something different with it? Okay.
Yeah. If you follow us as you do, we go kind of up and down on that. Assuming we've made no structural changes, that number will go up and down, and that's just the nature of the beast.
Okay. Got it. When I look at the salaries on a per pound basis here this quarter, I mean, it looks like you guys just did a very good job there, very strong incremental margins. Was there anything specific going on the salary side that was able to give you kind of that good leverage? Or was it just a good quarter where everything kind of aligned and you're getting the experience that you need with the dock workers and the freight where you want it to be, and that sort of thing?
Yeah, it's the latter and really top-notch execution by our team. They brought that right to the bottom line. They just did a terrific job.
Bruce, is there any reason why that would change into the second half of the year? I mean, are there wage increases that you have to put in or anything like that? Is that the comment that was in the release about, if you see incremental volumes, that you get the leverage off of that?
Yeah, we're convinced we can get the leverage. We're convinced we can maintain that cost structure. We have already taken wage increases. That's behind us. That's reflected-
Okay
in Q2 numbers.
Okay, good. Can you help us understand a little bit what happened in the intermodal segment here this quarter? I know there were some comments in the release about the revenue, it was down year-over-year and down a little bit sequentially, but maybe if you can just give us some color what's going on there. I don't think it had a huge impact on the margins, but there was a little bit of fall off in the top line, then what your expectations would be for the rest of the year.
Yeah. Give you a bit of context. If you'll recall, a year ago, we had the port strike, then right after that, the resulting kind of surge in intermodal business for a period of time. We were up against a fairly tough comp. On the other side of it's simply slow. I mean, we've had a number of people say, "What's the cause of this?" Well, the import levels are just not what they were a year ago. We have the same customer base. Nothing's really changed there. It's just they simply don't have as much business. We're hopeful as we go through the balance of the year that we're going to see that start to tick up. But our CST team did a terrific job of maintaining their margins. They were just top-notch.
Okay, there's no business that's been lost or anything like that. It's just a reflection of the year-over-year comparisons what the environment is today.
Yeah. To us, it's more of a macro issue. We're still out hard at it, selling, trying to gain more customers. They did gain more customers. We're hopeful as we go in the second half that we can grow that. We're mindful that the macro conditions are not the best.
Okay. I guess, two last ones for me. One's just on the guidance. When I think about the sequential improvement into the third quarter, you've got $0.57 here in 2Q stepping it up to $0.61-$0.65. Can you just at a high level help us think about, is that just the normal seasonality? To me, it feels like historically or more recent history, the third quarter's looked a little bit like the second quarter, maybe not as strong in some of the businesses. What are the parts of the business now that step up sequentially or that we should think about that help you add $0.04 or $0.05 sequentially in the third quarter versus the second quarter?
This is Mike. I think it's just, yeah, there's some seasonality in there as you point out, but I think it's also seeing another quarter of the full effects of the Towne integration and realizing the network synergies that we saw in the second quarter.
Okay, that's helpful. You don't think that all that came through in 2Q?
I think it's starting to come through, yeah.
Okay. Got it.
You need to remember, obviously, Todd, that Forward Air Solutions tunes the second half of the year is their half of the year.
That makes sense, Bruce. I got that. That's right. Okay. Just the last one I just want to ask, and I know that you get asked this periodically, but, with your business model and with the shift in e-commerce and thinking about if it's things like Amazon Prime Day, how much more or how much different do you feel the volumes as a result of some of the shifts in e-commerce at this point compared to a couple of years ago, and what do you expect for the second half or maybe the intermediate-term future as a result of some of those shifts?
We've worked over the past three, four years to position ourselves to handle that business. It is a change in how we move freight. We have a good group. They know how to adjust. Probably three, four, five years ago, 90% of the freight that moved across the Forward Air dock was on a pallet, and we moved it with a forklift. Today, that number's probably down to 50%, and we're hugging 50% of the freight. We've had to adjust, we've had to adapt, but that's part of life, and that's what you have to do to continue to be successful.
Okay. All right, guys. Makes sense. Thanks again for the time this morning.
You're welcome.
Our next question is from David Ross with Stifel. Please go ahead.
Morning, gentlemen.
Morning.
Bruce, very lovely to have you on the call today. Congratulations on a terrific quarter.
Likewise.
Just can you talk a little bit about TLX and the shift to owner-operators. Looks like a big growth there in the owner-operators. Was that one of the reasons that you weren't able to flex as much down on the cost per mile when there was rate pressure?
Correct. As you notice, a number of our customers on the truckload side, where a year ago would allow us to broker, today they're demanding that we run the freight with our people. That's why you see the uptick in the owner-operators there. The cost pressures that come with it, because all of a sudden you're concerned with empty miles and that type of thing. We feel good that we're going to be able to stem that cost increase as we get more and more fluid in moving the truckload products across the U.S.
Okay. Shouldn't they pay a premium if they're demanding that you use owner-operators instead of third party?
In some cases they do, and in other cases, they say, "The market's not really good, so if you want this business, this is the price you're going to get it for.
You still have to use owner-operators.
Yes.
Has there been any change to the truck brokerage environment as we've moved into July? Has the spot market gotten any better? Has it been more difficult, less difficult to find capacity?
We ended June, if I go all the way back there, where it got really, not tight, but it was much better. As we progressed through July, it's not back as far as it was in terms of looseness. There's definitely capacity available and there's definitely competition going on for what rate level you're going to be able to charge.
What are you hearing from your customers in the way of inventory levels at the moment?
That's all over the board. I think in general, you could say that inventory levels have probably pulled back a little bit, but they still remain pretty healthy.
On the expedite and LTL side, has there been any difference between, I guess, your international customers, your domestic customers?
Probably the most affected of our customer base are the internationals. You see the numbers for the airlines, and then obviously that impacts international freight forwarders. They've been hurt a little bit harder. It also depends on what part of the world it's coming from. In general, the answer is their business is off more than a domestic forwarder.
Last question, just back to intermodal and the growth there? Can you remind us what the geographic footprint is of the intermodal division? Are you at all the major ports, or do you have concentrations in certain ports, and is there plans to grow more broadly from a geographic standpoint?
Today, we are concentrated primarily in the Midwest. Chicago's our big facility. Also facilities in Milwaukee, Minneapolis, Indianapolis, across that Midwest Grain Belt. Our next step we'll take is to enter the Southeast. We have a couple of startup operations now, but we'll supplement that hopefully in the future with a pretty nice acquisition.
With that startup, would we expect any near-term margin compression as you get the fall up and running, or should that be able to plug into Forward Air's existing intermodal infrastructure without any margin degradation?
I don't think we'll see margin degradation. They do a really good job of controlling that cost. In some cases, they were able to borrow an existing Forward Air terminal, that helps them get up and running. We should be good there.
Excellent. Well, thank you. I hope you all have a great weekend.
Thank you. You too.
Next we go to John Barnes with RBC Capital Markets. Please go ahead.
Hey, good morning. Let's see, a couple of things here. Hey, on the outside miles at that 5% level, obviously you're dealing with a little bit softer freight environment. What is the sustainable number on a go-forward basis when you're in maybe a little bit more normalized freight environment? I know that's up for debate as well, but just what's the sustainable level?
It depends on two things, John. One is how balanced are we? If L.A. pumps out 75 loads tonight, that's going to drive up our outside carrier usage. If we stay relatively imbalanced, and things will get tighter as we go through the balance of the year, we would be happy with a number between on the low side six and on the high side nine.
All right. Can you talk a little bit about maybe what percentage of your freight now is bypassing your hubs and moving directly between your other facilities?
Yeah. Our hub today, our national hub in Columbus, is handling about 34% of our freight. That number stays pretty solid. The balance is either going through a regional hub or going direct.
The numbers you gave on the quarterly progression, the month-to-month progression on the tonnage, the down 11, down five, down four, now flat to slightly up. Can you just discuss a little bit how much of that decline in April, May, and June was due to company decisions that you made about some of that freight you talked about versus what percentage was because you were just dealing in a little bit softer environment?
Yeah, this is what I would call an 80% guess because we don't know factually exactly, but I would say 80% of that down was freight we rid the system of.
That was due to a company action, either to combat poor pricing on it or it just didn't fit the network?
Correct. The other side of that was, it was just horribly priced. In a number of cases, we repriced it, and that's where we lost the business. Interestingly enough, some of it's come back, but it just simply could not go into our network at the price it was at the time of acquisition.
Okay. Do you feel like at this point you've addressed the entire book of business in terms of that type of freight, that poorly priced freight, or is there any left that has maybe not come up for renewal yet?
No, they've done a terrific job, and we're done.
Done. Okay. All right. Very good. Then, the roll-out of the dimensional pricing process and methodology, can you just describe maybe where you are in that process, and how much of the freight now moving through your system is actually being priced through that methodology?
The implementation of the dim process was implemented just about as well as we could've possibly hoped for. The actual freight impact changes week to week, as you might imagine. We've seen as low as 10% and as high as 18% of the shipments that are impacted. That changes, as you might imagine, almost on a daily basis.
Can you remind us, what do you think is the ultimate level you can get to of your freight that'll be priced under this methodology?
I would think the ultimate would be somewhere around 20%.
Okay. All right. Then, my last question is, you went through the period where you were integrating Towne. You got that done. I know that took a lot of attention. Now that that seems to be running pretty well, number one, should we expect you to be turning a little bit more of your attention to kind of the non-expedited LTL type of operations? As you look at those other operations, do you have a thought process on when do they get better, or you have to make a different decision? Whether it be, I go back to the question about pool, where you got revenue that's up, but EBITDA is down. Where do you think you have to make a decision as to, is there a different strategy that has to be employed?
Well, a lot of that I truly can't answer. I would tell you we have plans in place. We have goals in place. We have certain expectations that we expect our people to hit. We'll make measurements as we go forward.
Very good. It's safe to say that, have you directed more of your attention to those operations now that the core business is kind of back up and running like you want it to be?
Yeah, that's a very fair statement.
Okay. All right. Very good. Hey, thanks for your time. Always appreciate it.
Thanks, John.
Next question's from Kevin Sterling with BB&T Capital Markets. Please go ahead.
Thank you. Good morning, gentlemen, and Mike, welcome to you, and Rodney, congratulations. I've really enjoyed working with you over the years.
Thank you.
What about me?
Bruce, always love working with you, and like Todd said, we're glad you're still on the call, so. Most of my questions have been answered. I just really have one question. Bruce, you guys are replacing the buyback, how about the M&A pipeline? How should we think about that? Are you seeing deals out there? Maybe you're looking at anything new. Maybe you could talk a little bit about what you see in the M&A world.
Our whole strategy, and we've been fairly transparent on that, is to grow CST and help them fill out their geographical footprint. They're such a good model, and there are so many opportunities. Most of them are small, but they help us to fill out and move into the Southeast and other areas that we're hopeful of addressing here in the near term. That's really our whole focus today. Let's get CST up to where they need to be. We think the easiest way to do that in this environment is via acquisition. The multiples are very good now, and we're excited about the opportunities there.
Got you. No, that's great. Going back to the dim question, following John, as you've been dimming your freight, are you seeing some customers that's kind of been pushing the envelope, maybe not pushing as much anymore because they know you are focused on with rolling out dimensioners? How should we think about that?
You would've thought that. In fact, nothing's changed. Now, part of that's driven by the fact that our customer does not always see the freight, so they're relying on the actual shipper. If you look back, we actually thought what you said would happen, but it hasn't. We're dimming as much as we normally have.
Okay. No, I guess that makes sense because, like you said, they don't necessarily always see the freight. Okay. Gentlemen, thanks so much for your time, and best of luck to you. Thank you.
Thanks, Kevin.
Our next question's from Ben Hartford with Robert W. Baird. Please go ahead.
Hey, good morning, guys. Bruce, I guess as we start to put Towne in the rearview and look ahead to 2017 and beyond, how do you see. What is the growth profile of the expedite LTL business? Is it kind of market in line with industrial production type grower that still generates a lot of cash or can this be a mid-single digit type volume growth business for whatever reason?
Yeah, we think it's a mid-single digit from a volume standpoint, Ben.
Right.
With good pricing actions, hopefully we can push that up a little bit more.
Where do you think that mid-single digit volume growth comes from if we assume that overall freight growth is one to 2%?
Yeah, I think you're looking at low side 2, high side, if everything goes right, 5. For us to get really big growth, something will have to happen in the macro environment. Maybe one of the smaller competitors goes out of business. Think of all the different things that could happen
Sure
That might impact that. In the normal course of business, I think that's where we'll be.
Okay. This 83 OR in the back half of the year, is that the new run rate post Towne or will there still be some tailwinds through the back half of the year so you can have another kind of step up on what the representative run rate will be in 2017 and beyond?
When you get into ORs in the low 80s, I start getting nervous from the standpoint of how much more can you improve it. When people ask you how much more can you improve it, I get really nervous. I will go back to what I said earlier. To make this better at this level, a lot of positive things have to happen. They happened in the second quarter. We got a little bit of relief on fuel. We had overall pretty good volumes, and we had the volume that we wanted and got rid of the volume we did not want. We had our pricing in place, and it did a good job. All of those things have to occur to really make an 83 an 82. Again, if things line up, we can do it. If they don't, we're happy with an 83.
Sure. Yeah, not to take away from the work you guys have done. It's been good work. Final one, just back to that inventory question. You had mentioned that they're healthy. We can all point to the same inventory to sales ratios being higher over the past few years. I'm curious, in terms of your perspective and your Forward Air customers' perspective on retail inventories as they stand today, as B2C continues to develop, there's a lot of uncertainty as to whether this is a new normal as it relates to inventory levels or not, or if there's risk to inventory levels. Do you have a view on inventory levels up here in the context of where they have been and where they might go as B2C presumably continues to develop?
Yeah. This is a Campbell opinion, so it's worthless. I think the inventory levels we see today are the new normal. We've had a number of months to get them down, and it simply hadn't occurred. When you talk retail, you can't group it because there are retail outlet stores, whatever, that are doing well, and there are others that are just dying on the vine. It's really hard for me to lump those all together.
Sure. That's good. Congrats again, Rodney and Michael.
Thank you.
We'll go to David Campbell with Thompson, Davis & Company. Please go ahead.
Yeah. Hi, Bruce, congratulations, Mike, on your new job, and thank you very much for taking the questions. Bruce and Mike, I know you said Towne has helped, but could you be a bit more precise on how Towne has helped in the second quarter? It's not there anymore, as it is totally integrated. You don't have a so-called Towne business to visibly benefit from.
If I follow your question, when we say first of all, we got the warts from the Towne acquisition behind us. That's number 1, most important. Number 2, we retained the business from Towne that we wanted to. That was a big step forward. Number 3, it is now priced properly. All of those things together kind of worked themselves out in Q2, took us a year to get there, and they will carry forward as we go into the future.
Towne doesn't exist anymore. That's correct, right?
That is correct.
Fully integrated, and you can see that business through what wasn't there a year ago is there now. Are there any other significant opportunities in the so-called air freight business? Because that is basically what Towne was. Is there anything else you can see, or would you be more likely to buy forwarders? What would be your target?
We won't buy forwarders, I can assure you that. You never know when opportunities will come up within our operating parameters. We do have competitors. Today, as we sit here, we have nothing on the books.
Right. Well, thanks again for having such a good quarter. It really makes a big difference.
Thank you.
With no further questions, ladies and gentlemen, that'll conclude Forward Air's second quarter 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. You may now disconnect.