Thank you for joining Forward Air Corporation's first 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, and Senior Vice President and CFO, Rodney Bell. By now, you should have received the press release announcing first 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 to be 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 the statements may be affected by 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 conference over to Rodney Bell, CFO and Senior Vice President of Forward Air. Please go ahead.
Thanks, operator. Good morning, and thank you all for joining us. This is the first quarter with the recasting of our reporting segments, so allow me to briefly speak to that. Going forward, we will have the following four segments. LTL Expedited, which includes our legacy airport-to-airport service, our Forward Air Complete pickup and delivery offering, and lastly, other accessorial services primarily provided at the terminal level. Next is our Truckload Expedited segment, which combines our TLX Expedited pool truckload service with our TQI pool truckload offering, which today primarily services the pharmaceutical industry. Pool Distribution is our Forward Air Solutions segment, which was previously broken out separately, so nothing has changed there. Lastly is our new segment breakout of Central States that for financial reporting we refer to as our Intermodal segment.
Given our growth plans, we thought it important to begin showing CST as its own reporting segment. Q2 and Q4 in the recast for 2015 in the recast format has been made available yesterday via an 8-K filing. Moving on to the first quarter results. LTL Expedited revenues increased $12.1 million, or 9.9%. This growth continued to be primarily a result of the acquisition of Towne, which closed March 9th of last year. Also positively impacting tonnage was the February 1st change in our dimensional factor. This change resulted in an increase in our billable tonnage. Network tonnage was up 8.4%, while all-in yield was essentially flat, coming in at a negative 0.3% as compared to Q1 a year ago.
The breakout of that yield was the change in the yield consisted of 2.2% from improved line haul pricing, a negative 2.2% from lower year-over-year net fuel surcharge, and minus 0.3% resulting from Forward Air Complete. Our complete attachment percentage was down 4.7% on a year-over-year basis as a result of fewer large distributions. However, we have started to see that pick up in Q2. Our operating ratio improved 50 basis points to 87.3, which grew a 14.8% increase in our operating income. Including those results was approximately $700,000 in non-recurring cost under our other operating expense line item. Moving to Truckload Expedited. Revenues were $38.6 million and $4.1 million, an 11.9% increase compared to Q1 a year ago. Operating income was $1.6 million compared to $3.2 million a year ago.
This resulted primarily due to TLX having higher initial costs associated with new business coming on board, while TQI continued to struggle to replace lost business. Our Pool Distribution segment revenues were $33.2 million, up $6 million and 22.1%. Operating income was essentially flat compared to the prior year quarter. The Intermodal segment revenues increased $1.6 million and 7% to $24.6 million. Our operating ratio improved 110 basis points to 90.2, while operating income increased 20% to $2.4 million. At the consolidated level, revenues increased $23.6 million and 11.5% to $229.5 million as compared to Q1 a year ago. Earnings per share was $0.43 compared to an adjusted $0.40 last year. As you recall, that $0.43 was also the midpoint of our guidance this quarter. Moving on to guidance for the second quarter, we expect revenue growth to be in a range of 1%-5%.
In Q2 a year ago, we were still in the process of evaluating the majority of the Towne revenue. Over the course of the quarter and into Q3 last year, we parted ways with the business as we were unable to get to our minimum yield requirements. That's what's going on with the prior year comparison. We expect income per diluted share to be in the range of $0.57-$0.61 as compared to $0.51 a year ago. Assumed in that range is the 6% rather negative impact from lower year-over-year net fuel surcharges. That concludes our comments. Now back to the operator for your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star then one on your touch-tone phone. You will hear a tone indicating that you are in queue. You may remove yourself from queue at any time by pressing the pound key. Once again, for questions, please press star then one. First question is from the line of Jason Seidl, Cowen. Please go ahead.
Hey, gentlemen. Good morning. How are you?
Good, Jason, how are you?
I can't complain. Wanted to talk a little bit about the broader macro picture, if you will. Obviously, a lot of the pure play trucking companies are taking down expectations. Even some of the rails are talking about weaker than anticipated volumes for 2Q, although I think their cross-cutting is helping. What's your take on the macro and where we're at this stage?
The best answer, Jason, is we don't know.
Well, that's my answer. Come on, you can't steal that one.
When we talk to our customers, it's all over the board. We have some customers who are doing great and who think the economy's wonderful, and we have others who things aren't as rosy. I think that the biggest soft spot we see today is at our intermodal business. That has definitely slowed down, and especially when you compare it to a year ago with the West Coast port interruptions. That's a lot of words to say it's softer. It's certainly not alarming, but it's softer.
On the intermodal weakness, is part of that is just comparisons, or do you think some of this is that diesel's so cheap, truck prices are falling, and it's getting tougher to get some of that transactional business that may have been there in the past?
I'm not sure if freight has been diverted from intermodal. Without question, the comp's a little bit more difficult, but also without question, it's just simply slower.
Okay. No, that's fair. Kind of piggybacking on that, when you guys bought Towne, I think everyone got real excited that all right, now the aggressive pricer is taken out of the marketplace. You guys are going to be going there and start to take pricing up finally being the 900-pound gorilla, if you were, for a lack of a better word, in the space. Is just the slow market really curtailing the opportunity to do that, and once it turns around, we should start seeing that going forward?
Well, I think our number one goal is to make sure our customer stays in business, so we don't want to price him out of the market. Secondly, when we did our DIM change back effective in February, that in essence was a rate increase. It was a rate increase on the proper freight. If you had good freight before, you weren't penalized, but if you had fluffy freight, as we call it, you were going to take an increase. I don't think you're going to see us play like the 900-pound gorilla. We're simply going to continue to improve the efficiencies that we gained from the Towne acquisition and continue to drive that number down. We actually had March the best month we've ever had, so we're really pleased with where they're at and where they're going.
Okay, how does April look from March?
This is how April is. Here's the last three tonnage, if this will help you.
Sure.
On Wednesday, we were +10. On Thursday, we were -10 in terms of tonnage, and today we're flat. If you can draw something from that.
Got it. Totally clear picture for you then.
Exactly.
Understood. Well, listen, gentlemen, I really appreciate the time, as always.
Thanks.
Next question is from the line of David Ross, Stifel. Please go ahead.
Yes. Good morning, gentlemen.
Good morning.
Hey, Rodney, can you talk a little bit about the negative impact from the lower fuel surcharges? $0.06 seems like a fairly big hit for something that is, in theory, a pass-through.
Well, it's really not, David. It really never has been. We've always made on fuel. The way that mechanism works, essentially we're paying our drivers, not essentially, we are paying our drivers on a per mile basis. That's relatively a fixed cost, if you will. Then we're charging our customers on a percentage of the air bill. It's an opportunity if you're being efficient loading your trailers to leverage that fixed cost and make money on fuel. Now, that $0.06 that we have in the guidance, it's conservative. There could be some wiggle room there depending on, fuel has kind of firmed up the last couple of weeks, but I've given up predicting what oils want to do and what diesel fuel's going to do because it bites me every time. That's the reason for that $0.06.
In terms of sensitivity around that, if we end the quarter in May, June, say up 10% from current fuel price levels, would that negative headwind go away?
It certainly helps it. I don't know that it totally goes away. At 10%, that is.
Yeah. If we could talk about pool just for a second. Looks like you had more business in the quarter, which is a good thing, but less profit, which is a bad thing. Is there onboarding costs associated with that new business that's kind of masking some of that margin improvement and you expect it later in the year?
There was really a few things going on with pool this quarter. One is exactly what you said, the onboarding of the new business that came on. We had a competitor go out of business late in the year, and they didn't bring all of that business on till the first year, so there was some onboarding costs. We were a little slower downsizing coming out of peak than we wanted to be, so there's some additional costs there. Unfortunately, we had some equipment damage that took place in Q4 that we didn't know about until Q1 that we had to recognize. We had modeled Solutions to make a penny, and essentially they were flat for the quarter.
Equipment damage, is that trailers, tractors, or sortation equipment at the terminals?
It was two leased tractors that were totaled, and unfortunately, nobody told anybody about it.
Got to love it.
Yeah.
Thank you very much.
Yep.
All right. Next question is from the line of Benjamin Hartford, Baird. Please go ahead.
Hey, good morning, guys. Bruce, around Towne, kind of lapping the one-year mark or so, how pleased are you with the progress that you guys have made of late? You talked about March being a strong operational month with regard to Towne. When you think about what you guys have in your control with regard to Towne, is there the opportunity to continue to drive maybe upside to expectations internally, externally from the better balance, better overall execution within that expedited LTL business as we move through the year independent of the macro?
We certainly hope so. Here's what we looked to get out of Towne when we bought them. One was we wanted to retain 65%-70% of the revenue. We knew unless we wanted to go to low-yielding traffic, we wouldn't be able to keep the other 30%, and we were okay with that. The second thing we wanted to get was line haul efficiencies, where we're running one trailer out of one city rather than two that were ran previously. All of those things, the yield improvements, the line haul improvements and that, took time to do, longer than we thought. What we saw in the first quarter was we were exactly where we needed to be. We're encouraged about what's going to happen there for the balance of the year. The expedited LTL group is on a roll.
Okay. In that vein, as we think about Amazon and some of the news over the past several quarters with regard to them specifically and just B2C generally, how much of a risk do you see to a large e-commerce player coming in and absorbing more of their own line haul capacity relative to your model and your customers?
We handle, obviously, e-commerce activity all the time, and the giant, if we didn't handle as much as we do today, and especially during the holidays, I don't think any of us would lose sleep over that. It's very difficult business to handle.
Okay, good. Thanks for the time, guys.
All right. Next question is from the line of Kevin Sterling, BB&T. Please go ahead.
Gentlemen.
Good morning.
Yeah. Bruce, as I look at your yields, you are getting some really nice pricing in a sloppy freight environment. You listen to the truckers, and they're just crying the blues. I assume the bulk of that is repricing the Towne book of business. Is dim weight pricing contributing yet, or is that on the come?
Dim weight, when we change dims, Kevin, that doesn't change the yield, it changes the weight. That has no impact on yield.
Got it.
Again, we went through a year-long process. It seemed like a forever process to get this traffic properly priced, if you will. Some of it we lost, obviously, but a lot of it we retained, and we're right where we need to be.
Some of that business you lost, I know you didn't mind it walking because I'm sure it was losing money in some of your lanes. Have you seen some of it come back possibly, maybe because of poor service elsewhere?
We have. It's kind of interesting. That typically is what happens when we lose business over prices. It sooner or later will come back, and in some cases, that's what's happened.
Yep. Are you getting pushback on your DIM initiative, or do shippers understand that? The parcel guys are doing it, the LTL guys are doing it. It's becoming pretty standard, are you getting pushback?
Yeah, I think you're exactly right. Everybody has jumped on that bandwagon. Our team did a terrific job. I had two concerns. One was we'd get immediate pushback, and then the second one was we would get 40 days later when bills or invoices came in, they'd all be short paid, and we didn't have any of that. It was really well executed by our team.
Great. Last question here. Looks like you guys have a decent M&A pipeline. Are you seeing valuations come in some with some of the challenges the truckers are seeing and all the regulations that are coming down the pike?
Yeah, we have.
Okay.
They're definitely down.
Good. Thanks for your time, congrats on a solid quarter in a challenging environment.
Thanks.
All right, next question is from the line of David Campbell, Thompson Davis & Company. Please go ahead.
Bruce, I just wanted to ask you, in answer to another question about Amazon, you said that you wouldn't lose any sleep over the traffic if you lost any. Is that because it's all low-yield traffic and you can't make any money on it?
It's not necessarily low yield, it's just very difficult. Obviously, it depends on the product, but we handle a lot of TVs, they're very difficult to handle. They're very easily damaged. It's just a tough product to move.
Right. I guess it would be. What about the outlook for a Truckload Expedited volume in the second quarter? Expect it to be up 2% like the whole company, or?
We do.
About the same as the company. Okay.
Yes.
That's really not bad. It could be a lot worse.
Yeah, we look at it from the positive side, David.
Your margins are going to be better. There was a non-recurring cost element in the first quarter, as you mentioned, Rodney?
That's correct.
What was that for, do you know?
It was some professional fees as well as some cost for rebranding across the product lines. Again, it's non-recurring, it was about $0.015 for it.
Mm-hmm. Is that in the expedited business?
That's correct.
Okay. Thank you.
Thank you.
Okay, next question is from the line of Todd Fowler, KeyBanc Capital. Please go ahead.
Great. Thanks. Good morning. I'm not sure if you gave this earlier, I jumped on a little bit late. Did you have the tonnage trends during the quarter? I heard some comments about April, just on a couple of days. Do you have where April's been trending and maybe what you're expecting for 2Q?
Todd, yeah. We haven't given that, actually. January was 15%, February was up 27%. March was down 8%. Doing slightly better than that, right around that 8% mark so far into April.
I'm sorry, up 8% in April?
Oh, it's negative eight.
On the tonnage side?
Yeah.
Okay.
As we mentioned in the release, when we bought Towne, we brought over pretty much all the business until we had an opportunity to evaluate it, then there was a culling of business that wasn't meeting our yield expectations.
Okay. Rodney, what do you have factored into the guidance for tonnage for the second quarter?
Minus 10.
Okay. That helps. Okay. Bruce, just maybe on the change in pricing with the DIM, how should we see that in the numbers then, as we move through the year? Is it reasonable to think that yields are going to be up in that 2%-3% range going forward, and then we get the adjustment on the tonnage side? Is there anything else that really should start to come through on the yield as you move through the year?
At this point, we don't anticipate any additional yield changes, if you will, factors that will increase it. The only big thing that could increase it would be fuel.
Okay.
If fuel starts to run back up, we would be overjoyed.
Okay. Which we've seen a little bit. I don't want to ask something that I know the answer to, but I'd just appreciate your comments on this. At this point, is the network pretty cleaned up from bringing on the Towne Freight from a network standpoint? Is it running the way you want it to be running? How do we think about, I guess, the margin progression if you're through cleaning up the business and you've got the network where it should be? How should margins progress as you move through the rest of 2016 and maybe into 2017, if you want to comment on that?
I think you're going to continue seeing them improve. We really had validation based on our operation in March.
The big cost we watch, obviously is purchase transportation. We probably set a record with that during March on how efficient they were. We think those trends will continue through the balance of the year and hopefully get a little bit better.
What's the mix of outside capacity versus owner-operators now?
Our recruiting team's done such a good job. We're down to between 5% and 7% of outside carriage.
Okay.
That basically is due to out of balance and not the lack of drivers.
Okay. Just the last one. With the change in the segment presentation and thinking about growth going forward, where would you suggest that you would see maybe the most growth, either organically or inorganically over the next couple of years out of the new segments that you have from a presentation standpoint?
Well, I think as Rodney mentioned during his comments, we segregated the intermodal business due to that reason, that's the one we're going to really push to grow.
Okay. Are there acquisition opportunities there, or is that organic?
Yeah, there are. There are surprisingly a number of them. We're on that road as we speak.
Okay. Very helpful. Thanks for the time this morning, guys.
Thank you.
Next question was from Scott Group of Wolfe Research. Sir, if you still have a question, please press star one at this time. Just want to remind other participants also, if you have a question at this time, press star then one. Jack Atkins of Stephens Inc., please go ahead.
Good morning, guys. Thanks for the time. Rodney, going back to second quarter guidance, what does the guidance assume in terms of core line haul yield changes year-over-year?
Year-over-year, Jack, on the low end, 4%, on the high end, 6%.
Okay. That's an acceleration from what you saw in the first quarter?
It is a bit.
What's driving that? Is that just more traction with some of the yield initiatives that you put in place towards the end of last year?
It is some of that, and then the fact that the current year, that lower yielding counts-
Okay
of the mix.
Yeah. Okay. That makes sense. Then in terms of the DIM factor changes, could you maybe comment on how much of your expedited LTL business from a tonnage perspective that that DIM factor really applied to? I guess, I'm sure it's hard to quantify, what sort of impact did that have in the quarter in terms of incremental tonnage to the system?
Sure, Jack. On any given day, it's impacting about 17%, 18% of our network freight. In terms of tonnage, it's improved tonnage, call it 4%.
Okay. Were there some larger customers that perhaps maybe it didn't apply to immediately that, over time, you expect to maybe get on board with a DIM weight change? What does that do to that?
There were very few exceptions, Jack, but a couple. By mid-quarter, everybody will be on board on the program.
Okay. Great. I know it looks like you guys bought back a fair amount of stock in the quarter, about $10 million worth. Can you talk about capital allocation going forward because you guys did a great job generating cash flow? Are you thinking about being more regular purchasers of your own stock, or is that just an opportunistic thing?
It's really more regular, Jack. We've got a Rule 10b5-1 plan in place. The last couple of quarters, we bought back $10 million worth of stock. That's always subject to the input from the board. We'll talk about that at our board meeting in May. I wouldn't anticipate that changing, but that could change. Before we get to share repurchases, M&A is the number one priority, and more specifically to Bruce's point, the opportunities that we have to using CST as a platform. A good pipeline there. That's the number one use of cash. To your point, we're generating a lot of cash, and there's no reason that we can't do both.
Absolutely. Last question, what was the quarter-ending share count, if you have that, Rodney? Diluted share count.
30.6 million.
Okay, thanks.
Great. Next question is from the line of Scott Group. Wolfe, please go ahead.
Good morning, guys. It's actually Bascome Majors on for Scott. How are you guys doing?
Good. You?
Pretty good. Wondering if we can start by drilling down a little bit more into the macro environment. Any end markets of particular strength or weakness right now?
I'm not evading your question. It's just a really hard question to answer. We don't see any particular vertical just off the cliff either way. We just see it that it has slowed down a little bit. Some of this could be the Easter effect, which was earlier, obviously, this year than a year ago. Again, as we said earlier, we don't think it's an alarming situation, but it's just not as vibrant as it has been.
Okay. In terms of month, I guess tonnage, we saw a decrease in March because of acquisition. Do you have any views as to the trends in second quarter, third quarter, fourth quarter?
Do you have that, Rodney?
Yeah.
I guess it's more forward-looking, just expectations for second quarter, third quarter, fourth quarter. I know that some of the business that was formerly CLP Towne went away because of yield.
Yeah.
Focus on yield, so.
Yeah. Right now, we've got it modeled to be a negative 10% tonnage decline in Q2. That should abate some in Q3. There was some continued off-boarding of lower yielding business. I'd rather wait until we get a little bit further down the line to really speculate on Q3. It should be less than Q2.
Okay. With the volume declines, you can still expect to see margin improvements?
Yeah, there's 2 things going on. Like we mentioned, the business that we did lose year-over-year was low yielding business, in some cases, business that we were losing money on. The other thing is the rate adjustments that we did in late Q3, we're still getting the benefit of that, and then the impact of the DIM change. Yeah, there should be margin expansion even on declining volumes.
Okay, just follow up on the DIM pricing. How is that sticking, and what benefit did you see in 1Q from that?
Sure. As Bruce mentioned earlier, it was received very well. We're DIMing about 17%-18% of our freight, total network freight, and the positive impact on a year-over-year basis is about a 4% increase in tonnage. It's been very successful.
Okay. Could you speak about what your expectations are for annual margins for each of your new business segments?
Sure, Bascome. For the expedited LTL, we're targeting an 86 OR. We think we can do a little bit better than that, but that's what we're targeting thus far. For Central States, OR of, call it 88 or 88.5, in that range. For the expedited truckload group, they should operate at a 90. Solutions for the year should operate at a 95.
Okay, great. One last question. Just wondering if you could speak about ELDs, what percentage of your owner-operators currently have ELDs, and what's the timeline to get to 100%? I guess also kind of impact on capacity.
Yeah, we're at 100% today.
Okay.
We implemented ELDs four years ago now. If you're not a cheating trucking company, ELDs will actually help make you more efficient. If you're a cheater, you're going to get caught. We're in great shape there.
Okay, great. Thanks for your time, guys.
Our next question is from the line of Arthur Hatfield, Raymond James. Please go ahead.
Morning, Bruce, Rodney. I apologize, I got on a few minutes late, and you may have addressed this. If not, you may or may not be able to answer it. My quick question is this. You had mentioned, Rodney, that you're modeling about 10% down tonnage in Q2. Any thoughts of what that would look like ex the culling of the Towne business and what, I don't know, for lack of better words, what organic tonnage is looking like in the quarter?
Art, I had that question yesterday evening, and I'll answer the same way. Our guess, albeit an educated guess, is flat to slightly up from an organic perspective. There are so many moving parts, and with Towne in the mix, you're dealing with the same lanes, a lot of the same customers, so it's very difficult to answer that question. Our sense is slightly up.
Okay. No, I appreciate that. I figured as much, but I just wanted to see if there were any kind of big deviations from what was going on just broadly from an economic perspective. Thanks for the time.
Yes, sir.
Thank you. We have no further questions in queue at this time.
Great. Thanks.
That does conclude Forward Air's first 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 the call. You may now disconnect. Have a good day.