Forward Air Corp. Q3 2008 Earnings Call Transcript

Oct.21.08 | About: Forward Air (FWRD)

Forward Air Corp. (NASDAQ:FWRD)

Q3 2008 Earnings Call

October 21, 2008 9:00 am ET

Executives

Bruce Campbell – Chief Executive Officer, President

Rodney L. Bell – Chief Financial Officer

Analysts

Alexander Brand – Stephens Inc.

Jon Langenfield – Robert W. Baird and Co., Inc.

Ken Hoexter – Merrill Lynch

Todd Fowler – Keybanc Capital Markets

Edward Wolfe – Wolfe Research

Arthur Hatfield – Morgan, Keegan & Company, Inc.

David Campbell – Thompson, Davis, & Co.

John Barnes – BB&T Capital Markets

David Ross – Stifel Nicholas

Operator

Thank you for joining Forward Air Corporation’s third quarter 2008 earnings release conference call. Before we begin I would like to point out that both the press release and this call are accessible on the investor relations section of Forward Air’s web site 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 the third quarter 2008 results which were furnished to the SEC on form 8-K and on the wire yesterday after the market closed.

Please be aware this 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 are not statements of historical fact and may be deemed forward looking statements. Without, or without limiting or, the foregoing words, such as believed, anticipates, plans, expects and similar expressions are intended to identify forward looking statements.

You are hereby cautioned that these statements may be affected by important factors such as, among others, set forth in our filings with the Securities and Exchange Commission and in the press release issues yesterday. And consequently actual operations and results may differ materially from those discussed in the forward looking statements.

The company undertakes no obligation to update publically any forward looking statements whether as, a result of new information, future events or otherwise. And I will now turn the call over to Mr. Bruce Campbell, President, Chairman and CEO, please proceed sir.

Bruce Campbell

Thank you operator, good morning and welcome to our third quarter earnings conference call. We had several significant events during the third quarter and I would like to highlight just a few of them.

First our core airport-to-airport business continues to perform well, even with volumes slowing in the latter part of the quarter. While we will continue to push growth, more importantly our focus will be on cost controls.

Secondly and clearly the star of the quarter was our completing the model initiatives specifically our Forward Air TLX group and our Forward Air Complete group. Both of these important groups contributed nice growth and profits from the quarter with a very solid ongoing growth plan.

Third, on the Forward Air Solution side, we were able to acquire Service Express during the quarter which gave Solutions, the much needed geographic footprint and density to become a consistent contributor to our corporation.

As we have said all year, 2008 is the building year for Solution and we believe we have now positioned them for the long-term consistent success we expect.

I would now like to speak to the fourth quarter. Without question this economic downturn has caused much uncertainty, not only within our company and our sector, but also throughout the environment.

However, and equally without question, the Forward Air model has been and is designed to perform well even during these tough times. With our great team of employees, independent contractors, we will continue to generate industry leading profits and cash, most importantly and cash, which will allow us to position for even better times in the near future.

With that Rodney Bell our CFO.

Rodney Bell

Thank you, Bruce and thank you all for joining us this morning. After my comments we’ll open the lines for your questions.

Total revenue for the third quarter increased 24.2% to $121.5 million. Approximately 65% of the overall growth came from our Forward Air Inc. operating segment which includes our airport to airport business, which grew 13.5%.

This growth in our airport-to-airport business is attributed to nearly 9% increase in tonnage which resulted primarily from our Blackhawk and Pinch acquisitions as well as just over 1% improvement in yield including fuel surcharge. The balance of the growth came from increased revenues from Forward Air Complete.

Our logistics group which is primarily TLX truckload brokerage had another good quarter, growing revenues by approximately 32% to $16 million.

The 24% growth in other revenue was due to additional service offerings at additional facilities gained through acquisitions as well as a better overall job cross utilizing our existing facilities to generate more incremental revenue.

In our Forward Air Solutions operating segment, revenues grew $8.4 million to $13.5 million in the quarter. Approximately $2 million of that growth resulted from our September 8th acquisition of Service Express.

Expenses for the quarter are as follows. Overall purchase transportation improved 200 basis points to 40.2% of revenue. Against increasingly difficult comps our team improved PT in our core airport-to-airport network by 100 basis points. This improvement resulted from good load averages and a favorable mix of less costly owner operator power, offsetting more costly third party providers.

Logistics PT as a percentage of revenue was approximately 72% or a 600 basis point improvement versus Q3 ’07. This improvement primarily resulted from a larger percentage utilization of less costly owner operated power as well as better per mile pricing.

The relatively lower PT component in our Solutions segment had a slightly positive impact on overall PT. This is due to that segment having a higher percentage of its miles provided by company drivers and equipment.

Salaries, wages and benefits increased 100 basis points from Q3 ’07. This increase was primarily due to increased share-based compensation and higher performance based incentives. The remaining increase was a result of increased headcount of mainly terminal personnel and captain drivers associated with our recent acquisitions as well as our Solution segment having a relatively higher salary component as a percentage of revenue.

Operating leases were up 50 basis points due to leased equipment from our recent acquisitions. During the quarter we continued to right size our Solutions fleet by turning in excess leased equipment as well as replacing company drivers and equipment with owner operators where warranted.

Depreciation and amortization increased 40 basis points, due primarily to D&A resulting from our acquisitions. Insurance and claims declined 10 basis points as a result of good claims experience as well as lower premiums.

Fuel was up 190 basis points as a result of additional company trucks necessary to service our pole distribution business as well as local and pickup and delivery requirements brought on by our recent acquisitions. Obviously the year-over-year cost of diesel also contributed to this increase.

Other operating expenses were down 30 basis points. Income from operations was $19.3 million compared to $16.9 million, an increase of 14.2%. Operating income as a percentage of revenue declined to 140 basis points for the quarter as a result of our changing business mix along with a difficult economy.

Below the operating income line, there was nearly $350,000 swing from interest income to interest expense. Which resulted from using available cash and borrowings over the last 12 months to finance share repurchases, the funding our Dallas facility now under construction and three acquisitions.

Our tax rate for the quarter was 37.1% compared to 37.3% for the third quarter last year. And the cumulative rate to the end of the second quarter was 39.4%. In Q3 ’07 we had the cumulative benefit of a tax credit which reduced the rate. And this year we settled a state tax dispute for less than the amount it was originally reserved for. We anticipate Q4, the Q4 tax rate to be approximately 39.3%.

Net income increased $1.3 million to $12.1 million for the quarter, which is an increase of 12.5%. Our EPS increased $0.06 per share or 16.7% to $0.42. Included in the $0.42 was approximately $1.7 per share that resulted in the previous mentioned state tax settlement which impacted income taxes, interest and other expenses.

Year-to-date revenues were up 26% reflecting the benefit of our three acquisitions as well as nice growth from TLX Truckload Brokerage and Forward Air Complete. For essentially the same reasons cited for the quarter we operated 240 basis points worse for the first nine months of 2008 as compared to 2007. However, year-to-date operating income exceeded last year by 10.1% and EPS was up 9.3%.

Other key information and metrics for the third quarter are as follows. Total assets grew from $242 million to $305 million from year end. Cash flow from operations were down $5.7 million to $38 million from $43.8 million resulting from timing and negative trends in accounts receivable as reported last quarter.

We are pleased to report that we have made progress reversing that negative trend and were able to reduce DSO by four days in the quarter and expect additional improvement through the end of the year. We ended the quarter with $17.6 million in cash and short-term investments and $50 million outstanding on our line of credit compared to $4.9 and $30 million respectively at the year end.

No shares of the company stock were repurchased in the quarter and approximately $1.8 million remain on the 2007 repurchase plan. Average weekly line haul tonnage increased 7.1%. Average shipment size for Q3 driven in part by an increase in heavier airline shipments was up 6.7% to 773 pounds per shipment. Shipment count was up approximately 2%. We ended the quarter with 83 airport-to-airport terminals and 24 air Solutions terminals.

Guidance for the third quarter is as follows. We anticipate revenue coming in between 14% and 19% while EPS is expected to be between $0.40 and $0.44 per share. That concludes our comments; now back to the operator for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Alex Brand – Stephens.

Alexander Brand – Stephens

Let me start with a question on the costs on your line haul PT. I didn't expect to see sequentially that get worse since your tonnage was still growing. Is there something that accounts for that going back up as a percentage of revenue?

Rodney L. Bell

Are you taking the total PT?

Alexander Brand – Stephens

Just the line haul PT from Q2 to Q3. It had done such a good job in Q2 and I just want to make sure that I understand that there's anything unusual that drove it back up a bit in Q3?

Bruce Campbell

It was a pay cut. We implemented a driver pay increase in the quarter, Alex, in Q3 which resulted in dollars about a quarter million, about $250,000 annualized. It will be closer to five per quarter.

Alexander Brand – Stephens

That would explain it. I know it would be a guess at best but if you pulled out Pinch and Blackhawk do you have any idea what your tonnage would look like? What that sort of core, what I guess is it's shrinking now, what that would look like?

Bruce Campbell

Alex, we talked about that before; it's a bit of a blur. We thought in Q1 we were up a point or two. With the decline intuitively and looking at some other data we feel like we're down organically, if you will, 4 or 5%.

Alexander Brand – Stephens

As your tonnage progressed through the quarter I assume that you had that surprising quarter where July was the better month and September was unusually weak. Can you quantify what that looked like sort of as we progressed through the quarter and sort of what the trend line looks like for October?

Bruce Campbell

I think perhaps you have overstated it a bit and maybe that's the result of the environment we live in. July was okay, August was okay and September was okay. What wasn't okay was we never got any kind of pop like we typically would expect to receive at the end of the quarter. We did receive some but not much.

I mean I read the same things you do and people talk about July was great. I thought July was okay. I thought August was okay and again I thought September was okay. We are just missing the pop.

As we look at October, without question that trend has continued into the quarter. There is not a peak, and actually we have been saying this for six months, we didn't think there would be a peak. There is not a peak occurring outside of our Solutions business which is doing very well, but in the airport-to-airport it's just moving along. I think last week we were up 1%, is that right, on volume. So you know it's just kind of a ho-hum month to date.

Alexander Brand – Stephens

The last question for me and I'll turn it over, your IT system in Solutions is sort of the key, as I understand it at least, to significantly improving profitability in that division in '09. How good do you feel about finishing that and sort of getting those efficiencies and getting that profitability up to where you'd like it?

Bruce Campbell

I mean IT is certainly an important part of that, but there are a few others. One of them we touched on earlier. We had to get the density and the geographic footprint where we can go to customers and say we can handle this entire area for you. And then secondly, that allows us to drive the actual delivery truck with more density, which is basically a higher profit opportunity for us when that occurs.

The IT supports all of that and our group in Dallas they've made great strides. We have piecemealed some of it out as introductory phase-in but it's not all there yet. It wasn't expected to be there yet, but we're very comfortable with where they are today and where we think they will be in the next few months with that.

Alexander Brand – Stephens

So net-net your confidence in significant profitability improvement in Solutions is pretty high.

Bruce Campbell

Yes, we feel good about Solutions right now. We have done a lot of work and in particular [Scott] and [Jerry] and that group taking it literally from the dark ages to where they are now. We've got more work to do, but they are doing much, much better having some real individual customer successes so it's not being built just on our acquisitions. We now have them, as we said earlier at a size that we're comfortable with, that we can think it's a platform to take us into the future.

Operator

Your next question comes from Jon Langenfield – Robert W. Baird.

Jon Langenfield – Robert W. Baird

Bruce, can you just reflect on kind of the earnings cyclicality here and maybe just kind of flashback to the early 2000, I mean, I think you have a much better model, much better position, but when you kind of think through how bad earnings got last cycle, there were quarters in there where you were down 20 to 30%. What's different about the model as it relates to the core business not the Solutions side but as it relates to the core business today that helps you kind of maintain your earnings if not even grow them in this type of environment.

Bruce Campbell

I think the key has been, Jon, completing the model initiatives where we're not totally reliant upon the airport-to-airport. Again, that's a wonderful business; generates cash all the positives you could want, but it’s going to go through pullbacks like any other business. Part of the criteria behind those initiatives both the Complete and the TLX was to give us a more stable platform as we go through economic downturns and in fact that's occurred. So we are real happy with that.

Jon Langenfield – Robert W. Baird

And wasn't your business mix, you had more reliance on true airfreight type business versus kind of the ground line haul type business at that point. I mean, I know it all still went through the ground, but wasn't that also part of the earnings cyclicality as well as the pricing being much more aggressive because of some alternatives that were out there at that time that aren't there today?

Bruce Campbell

I think those are all fair statements. It's very hard to quantify your initial statement because who knows? But I think you're right and I think the competitive landscape you're absolutely right on, so all of those have been a positive this cycle too.

Jon Langenfield – Robert W. Baird

Do you think if the environment just stays like you've been seeing, this ho-hum environment for the next 12 months, I mean, can you grow earnings? Are there enough levers in the company to do that?

Bruce Campbell

There is one side of us that says we'd kind of like for it to be tough for the next three, six, nine months because we will see a landscape change like we’ve never seen before. And I don’t need to elaborate on that. On the other side we’re not counting on that. What we’re counting on, when revenue growth becomes tough your alternative at that point is to control cost. And we’ve challenged our people and they’ve already done a superb job.

And we’re going to continue to push that very, very hard to control the cost of it so that in fact we can lever those things that you talked about earlier. And then on top of that we continue to show nice growth, revenue growth on both Complete and TLX as we discussed earlier. And that’s just so critical during a difficult time like this.

Jon Langenfield – Robert W. Baird

So those are the positives. The negative would be the negative leverage within the line hall. But it sounds like you feel that you have enough leverage to offset that.

Bruce Campbell

You know I hate to predict but I really think we’ve got a grip on the PT and as we go forward in the quarter we’re going to get better and better. We added a number of younger operators to our fleet this quarter primarily to get away from the more expensive outside carriage.

We had worked very hard on empty lanes and any time – if you improve empty lanes by 1%, that’s 1% to the bottom. So we have just really worked that area. [Jeff] and [Tim Parker] and that group have really done a good job in fine tuning and any place we can make an improvement we do. Now we work hard on controlling discretionary cost, but as you well know, and others, the big bucks are on the PT and that’s where we have to make the strides.

Jon Langenfield – Robert W. Baird

And how would you characterize pricing as you move through the quarter relative to what you’ve been seeing over the previous six months?

Bruce Campbell

You know, I would – it's overall I would say stable. We've had pockets where we get into some issues. But overall there appears to be some sanity out there.

Jon Langenfield – Robert W. Baird

And those issues though, those pocket of issues, you were talking about those three and six months ago right?

Bruce Campbell

Yes, and we’ll be talking about them three and six years from now.

Jon Langenfield – Robert W. Baird

And then on the Solution side, you know, we’ve seen kind of this come in a bit below expectations here. I know it’s not a big needle mover one way or another, but in terms of the profit line coming in a bit below expectations for the last several quarters.

But you sound like you have a lot of confidence in the business on the right track. I mean how confident are you, again, even in this type of environment that you can get this solidly on a double digit type margin clip as you leave next year, which I think was your target?

Bruce Campbell

You know, put a number on it above 70, 75%. This group has done a really good job. Part of what we had to do was put them in position to be successful. As we’ve told you, you know this throughout the year, we’re approaching ’08 not on a short-term basis of making money in Solutions, but on a longer term basis, pardon me, of positioning this operating group to be very successful in the future.

We think we have done a lot of that. We have work left to do there. But we like this business. We think within the next three to six months it’s really going to take off on its own. And it’s going to act just like our truckload brokerage and our Forward Air Complete Group in that it’s going to give us a little bit more variety in our revenue sources. So that we can tend to stabilize our revenue base as opposed to be totally dependent upon airport-to-airport.

Operator

(Operator Instructions) And our next question will come from Ken Hoexter – Merrill Lynch.

Ken Hoexter – Merrill Lynch

Good morning. Bruce just a follow on that Solutions line of questioning. I know I think the earlier questions you were saying there are IT issues that need to get resolved in order to get profitability up. Are there other investments you're making now that as we move forward you won’t have more? And then I guess when you look toward that ’09 target are you thinking about continuing to make even more acquisitions within that Solutions sector?

Bruce Campbell

Well, Ken, our investment side there will be minimal. We do have, you know, we’re putting in some automations and some conveyors, that type of thing; not huge dollars. We probably will do some equipment replacing next year but that will be minimal as we really scale back our CapEx going into ’09.

IT is important to them but its not, I mean they’ve had to operate all this time without IT so it's not like it's not like it’s something that can’t be done. We just think it’s critical to help make us better and be better managers in that in area. So, all of those things are important but we can still hit our goals if necessary.

We would look at buying somebody in this market only if it represented a really, really good opportunity. The reason we’ve slowed down on that is not the environment, but we think we can, if we need to operate in a geographic area where we aren’t today, that as we establish rapport and good relations with the customer base, we can go to them and try to build it on a de novo basis. Having said that, if a deal comes along that was just too good to pass up, we would probably do that, but it’s not on our screen today.

Ken Hoexter – Merrill Lynch

So I guess, without – I think Rodney mentioned that on the Solutions side, you’re not seeing that great of a slowdown on the retail side within Solutions yet, or are you seeing that portion of the business start to get impacted because –

Bruce Campbell

I know what you read is the same thing I read, and that comes somewhat as a shock that we don’t see it. Not only that, but from some of the customers, we get basically a three-month forecast from them as to their volumes that they’ll be shoving through the network.

In both the cases, and these are two large retailers, their volumes are up. Now, I can’t bring that back and reconcile it with what we read. I’m just telling you what we see.

Ken Hoexter – Merrill Lynch

Is that because they’re eliminating more traditional type of carriers for this product, or is that how you would view it then?

Bruce Campbell

No, they’ve always done business this way, so the only way I can reconcile it is, they’re selling more product in their store. Again, that does not coincide with what you’re hearing on the street.

Ken Hoexter – Merrill Lynch

Okay, then you mentioned CapEx, you’re going to cut it into next year. Did you set what your target is?

Bruce Campbell

We’ll have all that established probably within the month and certainly will release it then. We have minimal spending to do next year as opposed to past years. We’ll clean up our new terminal in Dallas. That will consume a decent amount of money, and really beyond that we will have some IT spend as we always do because we believe in continuing our investment in that area regardless of the economic times. And beyond that we will not have any spend.

Ken Hoexter – Merrill Lynch

Just a last quick numbers question. Did you quantify what you paid for Solutions Express?

Bruce Campbell

We did not.

Ken Hoexter – Merrill Lynch

Can you, or is a reason why – is it too small, or is in the K?

Bruce Campbell

I don’t know, I will be in the Q. What was it, 12.5? It’s not like it’s a –

Rodney L. Bell

Ten five.

Bruce Campbell

It’s disclosed now. If it’s in the Q, you might as well.

Operator

And our next question will come from Todd Fowler – Keybanc Capital Markets.

Todd Fowler – Keybanc Capital Markets

Hey, Bruce, back on the airport to airport network, can you talk a little bit about certainly the tonnage? I mean, is your sense that the decline in your organic tonnage during the quarter, is all of that macro related? Or do you get a sense that there is a shift in some of the tonnage going to different modes, if it’s more traditional LTL or more traditional truckload as some of the shippers are looking to reduce costs in this environment? Or do you think that it’s pretty much related to the macro environment?

Bruce Campbell

Todd, I think it’s probably 98% related to the environment, and that’s what our customers are telling us.

Todd Fowler – Keybanc Capital Markets

Okay, and then I guess on the cost side then, we’ve always looked at your guys as running a pretty lean operation. What specifically are the levers that you can pull to reduce costs. Sounds like some issues on the purchase transportation side, but as far as cost savings or as far as anything else outside of the PT side, what are the biggest opportunities that you have right now?

Bruce Campbell

Well obviously as you stated, PT is our biggest opportunity, and also the most difficult so a lot of effort will go into that as the quarter goes on. When you get into the all other category, it is literally as many as 500 items that you have to oversee.

The big ones there, obviously you have to control your labor spend, both on the dock and office and other functions that you would expect. That’s probably your next biggest opportunity. Then when you get beyond that, it’s literally a-day to-day managing of down to the smallest items during these times.

Our people are skilled at this. They understand how to do it. We have a great management team that oversees it to make sure that occurs, and I can promise you that’s what we’re doing these days.

Todd Fowler – Keybanc Capital Markets

Okay, and then on the PT side. I’m not sure if you’ve given this before, but right now how much of your capacity is being sourced through owner-operators in your network versus third party carriers?

Bruce Campbell

You know, that changes with the volumes obviously. I can tell you traditionally our goal was to get it down below 10% of outside carriage. Again, because of the cost considerations and also the quality considerations, better service, and they’ve taken that as low as 7%, 7.5%, 8% in recent weeks, and that’s big.

Todd Fowler – Keybanc Capital Markets

Okay, and then just a couple of things on the Solutions side. I guess if I do the math right on the recent acquisitions, it looks like you’ve acquired somewhere between $75 or $80 million of revenue. What sort of run ratio when we think about that as we get into 2009?

It sounds like there’s been some growth or some account wind within the segment here during the quarter. Is that a 10% grow as we get into next year or does a lot of it depend on the environment, or do you think that there’s a lot of opportunity based on your kind of a niche that you guys are building out and the presence that you’re building in the market?

Bruce Campbell

I think at minimum we expect 10% growth from them next year. That’s aside from any acquisitions. If you’ll recall, we purchased U.S.A. Carriers in August of last year, and then within a short period of time lost a certain customer there.

Let me go back. The only comparison we can do today is go back and look at what we were doing a year ago versus today without the Service and the Pinch acquisitions.

So having said that, comparing where we are today versus U.S.A. Carriers, our organic growth, even with the loss of the large customer, was 6% last month, so we’re real happy with the fact that, while they’ve lost a large customer we’ve been able to go in and replace that business. We think we can continue that next year.

Todd Fowler – Keybanc Capital Markets

And then most of the, like the account wins or the growth on that side of the business is that with customers maybe that came from U.S.A. Carriers, and as you do an acquisition in a different geographic area you’re doing more business for those customers? Or is it doing business with new customers in the geographic area that U.S.A. Carriers was, and you’re just growing the U.S.A. Carriers business?

Bruce Campbell

Yes and yes.

Todd Fowler – Keybanc Capital Markets

Okay, any additional color around that, or –

Bruce Campbell

That’s obviously a selling point. I mean, we go out and if we do business with XYZ, and then we make an acquisition and that allows to service Atlanta, as an example. We will cross sell that geographic territory and that’s a critical component of building this that we’ve had some success with. A lot remains to be done but that’s a key thing.

On the other hand, we look to diversify this product line in who they do business with. We love the retailers. We have not seen the ups and downs that perhaps a lot of people expected there. Perhaps we will down the road, but we have not yet.

But we do see the need to diversify into different product lines besides just retail. I mean we’re working very hard on that and will continue that push.

Todd Fowler – Keybanc Capital Markets

So, what are the other opportunities outside of retail? I mean, what would be like a traditional, and what would be a market where this product would –

Bruce Campbell

Any market, Todd, where you would have a shipper who could have enough density to hit a certain area, you could have a dealer network in and around the city of Atlanta, for instance, and be manufacturing all of his product or distributing it from Moline, Illinois.

So, we would offer them that advantage of not having to ship LTL, but to ship it in a pool which would be more efficient for them. So there are a lot of different product lines. There are drug opportunities, legal drug opportunities. There are –

Todd Fowler – Keybanc Capital Markets

An important qualification.

Bruce Campbell

I kind of thought of that a bit late.

Todd Fowler – Keybanc Capital Markets

How much revenue and, if any, earnings are in the fourth quarter from the Service acquisition?

Bruce Campbell

Two cents I think we have in it. I can tell you about the fourth quarter. People are a little bit concerned about our guidance. I can tell you that it’s not that we're negative to the fourth quarter, it's just that we've never been through a time nor ahs anybody else quite like this.

We're not going to come out and shoot off the hip and tell you it's going to be wonderful or it's going to be bad. We simply don't know. Anybody in our sector who tells you they know what's going to happen this fourth quarter, I suggest you not go trick-or-treating with them because you're going to be in for a bad time.

Todd Fowler – Keybanc Capital Markets

Just to be clear, the $0.02 is from Service Express or the $0.02 for all of Solutions

Bruce Campbell

Todd if I could, the – you asked revenues. We're estimating revenue right at around $12 million for service in the fourth quarter and it was $0.01 accretive as opposed to the $0.02 contributed.

Operator

Your next question will come from Edward Wolfe – Wolfe Research.

Edward Wolfe – Wolfe Research

If you said this I, forgive me, but did you talk about what the yields and tonnage growth internal net of the acquisitions were in the quarter?

Bruce Campbell

Our yield was basically slightly up year-over-year. Tonnage growth, as Rodney talked, on a quarter-over-quarter basis pulling out, well, you want it without acquisition, Ed?

Rodney Bell

Without the acquisition, Ed, that's a tough one but it's negative four, negative 5.

Edward Wolfe – Wolfe Research

That's for the quarter?

Rodney Bell

Yes.

Edward Wolfe – Wolfe Research

And what is it – you had said something about negative one for October, or the last week of October. Is that the equivalent of the positive seven that you reported or the equivalent of the negative four, five? I'm guessing it's the equivalent of the positive seven.

Rodney Bell

Right.

Edward Wolfe – Wolfe Research

So we should assume that internal growth is down almost double digits at this point?

Rodney Bell

Not quite.

Edward Wolfe – Wolfe Research

What, how do we think about the fuel impact in the quarter? What are the puts and takes?

Bruce Campbell

Yes, we obviously buy more fuel now primarily for our Solutions Group. So that has an impact on us. We continue to, as most companies do, Ed, charge a fuel surcharge. That tends to be an offset. We charge a fuel surcharge on the Solutions side where we then go back in and measure trying to make sure that we get remunerated as we should. So overall it's probably slightly positive.

Edward Wolfe – Wolfe Research

And is there any impact on revenue or other on the line haul piece? Or is that eliminated because of the owner operator?

Bruce Campbell

You cap the fuel surcharge in the revenue. We do.

Rodney Bell

Yes we do.

Edward Wolfe – Wolfe Research

Then it's 100% passed through the owner operators or can you, when fuel's quickly coming down make a little and when it's going up get hurt a little?

Bruce Campbell

We do not have the truckload advantage. What we pass through to the owner operator, Ed, is a rate per mile. What we charge the customer in the airport-to-airport side is a rate per pound. Which means that if we have a strong load on any given load we will make money on the fuel surcharge. However, if we have a weak load average or an average move we will lose because owner operator gets paid regardless.

Edward Wolfe – Wolfe Research

On the pooling side, the Solution side, the margin right now is zero. Where should that be in two, three, four years in a normal economy and in a not normal economy, in a weakening economy, when you're putting a lot of things together where should that be in the near term?

Bruce Campbell

Yes, we want a near term minimum of a 7, 8, 9% return there, Ed, and as the economy returns to more normalcy we want them in the 10 to 15 range. They should be in the 10 to 15 range any fourth quarter as long as they stay concentrated on the retail side because of obvious reasons.

The tick there is we've got to get them more profitable in the first three quarters of the year which we think we can do.

Edward Wolfe – Wolfe Research

So you think this quarter is, they could be in the 10 to 15 range?

Bruce Campbell

We'd like to see that. Yes.

Edward Wolfe – Wolfe Research

So based on your guidance that means that the line haul business will be down a bit even though their margin improves in third quarter.

Bruce Campbell

Based on guidance, yes. I want to be clear on that. I'd like to see them do that. We did not build our guidance around that.

Edward Wolfe – Wolfe Research

What's in your assumption, more that 7 to 9 for fourth quarter?

Bruce Campbell

Yes.

Edward Wolfe – Wolfe Research

And so just in thinking about pooling, what you're saying is even now you have a chance to get to 10 to 15 in the fourth quarter but the first quarters are going to be somewhat flattish and the goal is to make all of those quarters get into the 5% range and then get into the 15 in the fourth and then you average it all up? You're getting close to that 10 to 15 range? Am I thinking of that right?

Bruce Campbell

That's correct and then the second issue there, Ed, is to bring business into our Solutions Group that is not historically retail. We want to bring other products in which would allow them greater revenues in the first three quarters of the year to kind of smooth that over as opposed to we're doing everything for the fourth quarter.

Edward Wolfe – Wolfe Research

And what percent is retail right now?

Bruce Campbell

A hundred percent retail.

Edward Wolfe – Wolfe Research

Rodney, the tax rate of '09, you gave us guidance for the fourth quarter of over 39. Are we back to 38 or so for '09? How do we think about that?

Rodney Bell

Ed, in '09 it'll consistently be in the low 39 to 39.3, 39.4.

Edward Wolfe – Wolfe Research

Bruce, should we assume right now that your appetite for acquisitions is diminished going forward or are you still looking?

Bruce Campbell

For the right one we would do it but we have – our goal this year was to position as we said earlier, the Solutions Group and get them where they needed to be. We've accomplished that. We're happy with that. If something came along today, again, as we said earlier, that was the right one we'd jump at it, but right now we're not. We're not actively involved in anything.

Edward Wolfe – Wolfe Research

Last question and I'll let someone else have it. [WRCW] obviously in a lot of pain; are you starting to see opportunities and if so where would it be from Yellow? Is it in their Exact Express? Is it in their regional business, their long haul business? What kind of stuff – they have so much revenue all over the place I'm guessing there's some opportunities.

Bruce Campbell

I can tell you what our customers say on the airport-to-airport side that is a – when they see Yellow business that's business that they go after, Ed. So we can presume from that that we are seeing a little bit of bleed off there, but certainly that's not quantifiable and I'm just sharing with you what they tell us.

We do see a little bit of business on the pool side. They have a fairly large pool operation, similar to our Solutions Group and we have seen some opportunities there.

Edward Wolfe – Wolfe Research

Okay, but am I thinking about that right on the airport side that where your customers are probably seeing is that Exact Express, that near airfreight product they've been –

Bruce Campbell

I think that's probably a fair statement, yes.

Operator

And your next question comes from Art Hatfield – Morgan Keegan.

Arthur Hatfield – Morgan Keegan

Bruce, and maybe Rodney can answer this, you've answered a lot of questions here, but I'm kind of curious, have you seen the credit quality of any of your customers deteriorate in the last quarter or two? And if not how do you kind of stay ahead of that curve if things worsen in the economic environment and when we see a lot more retailer bankruptcies and how that may impact the finances of your customers and ultimately you if things to worsen?

Bruce Campbell

Art, we keep – and it's nothing new around here. We know our customers, the freight forwarders, which is probably the most challenging customer from a collection standpoint. And you throw the airlines in the mix and it's a really tough situation, but we put some additional horsepower into our A/R group and really redesigned the entire group, focusing people on various areas including the airlines and the pool customers and [Mike McLean] and [Terry Wood] and [Leslie Wamper] have done a fantastic job mitigating that risk.

Is there more risk today than there was two quarters ago? Without a doubt, but we're on top of it. We have these guys just hammering on these customers on literally a daily basis.

Arthur Hatfield – Morgan Keegan

So it's fair to say you have increased costs in that area and so that is somewhat already built into the cost structure?

Bruce Campbell

It is.

Operator

And your next question comes from David Campbell – Thompson Davis & Co.

David Campbell – Thompson Davis & Co.

I wanted to ask you what you thought about the decrease in domestic airlift capacity in September by the airlines substantially; biggest decrease than we've ever seen before. Is that a help or a problem in capturing more business?

Bruce Campbell

Probably a help David, you know they were probably a year late pulling out their capacity and so as a result it wasn't that big of a day-to-day issue for us or I think for anybody else.

David Campbell – Thompson Davis & Co.

A year late, you mean you had already anticipated it was going to happen and customers had already shifted to ground mode?

Bruce Campbell

Or there's no freight to ship and I mean they're just not going to put it in the air today. It's minimal what's going to be put in the air.

David Campbell – Thompson Davis & Co.

Right. And with fuel prices down, your fuel surcharge revenues will be lower in the fourth quarter than the third, is that not correct?

Bruce Campbell

Yes.

David Campbell – Thompson Davis & Co.

And so that's incorporated in your revenue forecast?

Bruce Campbell

Yes, sir.

David Campbell – Thompson Davis & Co.

Good. Is there some possibility that you could be high on the revenue forecast potential if fuel keeps going down?

Bruce Campbell

There's a possibility we could be high, low, in between, but we think it's the right number.

David Campbell – Thompson Davis & Co.

But it should help your purchase visitation ratio versus revenue, right?

Bruce Campbell

Yes, in fact on our Solutions Group because they obviously pay directly for their fuel.

David Campbell – Thompson Davis & Co.

Right. Well, that's a different type of operation.

Operator

Your next question comes from John Barnes – BB&T Capital Markets.

John Barnes – BB&T Capital Markets

Most of my questions have been answered but the last couple of quarters I know you've been focused on acquisitions but at $22.00 or $22.40 right now, I mean does the share buyback gain some momentum or is that still kind of a back burner project?

Rodney Bell

Back burner right now, John. You know the day may come where we bring it back but right now we're doing everything we can reasonably to generate cash.

John Barnes – BB&T Capital Markets

And just to clarify, you may have already said this, but in Q3 or going forward, have you or are you going to make any modifications to the network, to the line haul network as far as pulling down direct lanes and is there more volume going through the Columbus hub or can you add some color on that?

Bruce Campbell

Well we basically review that on a daily basis. And so it's an ongoing process. It's never a, gee, let's stop and take a look at this. We have people who that's their full time job is to make sure that our route structure is set up properly. If they start seeing weak lanes and for instance if it's a direct avoiding the hub and all of a sudden they see that load average is pulling they'll change that route structure right then.

So we don't do it after the fact; we try to catch it beforehand.

John Barnes – BB&T Capital Markets

That makes sense.

Operator

And your next question will come from David Ross – Stifel Nicholas.

David Ross – Stifel Nicholas

Just a real quick question on the integration. I remember at the end of the last quarter you were talking about the integration of Pinch and Blackhawk being almost fully digested but not quite and then in this release it says that you're making great progress toward completing the integration of Pinch. How close are you to doing that and what's kind of the hold up and is there any issue integrating service?

Bruce Campbell

Actually on the Pinch, David, I would say we're 90, 95% of where we need to be. We've got a few other clean up issues but they've really done a good job in the quarter. Service was much simpler, much easier. We do have some ongoing normal issues I would call them from an acquisition that wasn't quite as chaotic as what we had to go through with Pinch and we'll get that put to bed this quarter and be ready to go in '09, but nothing big on the service side.

Operator

Thank you for joining us for today's Forward Air Corporation's third quarter 2008 earnings conference call. (Operator Instructions). Thank you for today's participation in today's conference. This concludes your presentation.

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