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Forward Air Corporation (NASDAQ:FWRD)

Q4 2013 Earnings Conference Call

February 11, 2014 9:00 AM ET

Executives

Bruce Campbell – President, CEO and Chairman

Rodney Bell – CFO, SVP and Treasurer

Analysts

Jack Atkins – Stephens

Todd Fowler – KeyBanc Capital Markets

Sean Collins – Bank of America

Reena Krishnan – Wolfe Research

David Campbell – Thompson Davis

Bruce Campbell

Good morning. Thank you for joining our Fourth Quarter Earnings Conference. I would like to just emphasize here couple of points that went on during the quarter and then turn it over to Rodney Bell for our financials.

First, we basically beginning – pardon me beginning in November basically running through the end of the year fought weather week after week we have continue to fight weather and it’s been a most extraordinary winter for us and our team. But I think overall had that not occurred we would have been much better shape. Secondly, we’re extremely pleased to have the CST acquisition finished, we’re extremely pleased to have that team on board and we think we will have a wonderful platform to grow our business in the drayage segment of the market into the future.

And with that, Rodney Bell.

Rodney Bell

Thanks, Bruce. Okay. Starting my comments with the Forward Air, Inc. operating segments which is broken out on Page 7 of the earnings release along with our other two operating segments. Total segment revenues increased $3.7 million or 2.9% compared to Q4 of 2012. Airport-to-Airport revenue, inclusive of Forward Air Complete, was up 3.2%. This resulted primarily from a tonnage increase of 5.9% offset in part by 2.5% decline in overall yield.

With the loss of a large customer out of our prior year comparison for the majority of the quarter, Forward Air Complete grew approximately 8%. Average weekly tonnage was up 5.9%. By month, the quarter progressed as follows. October plus 5.5%, November was up 5.9% and December was up 6.3%. As part of continuing challenge – the continuing challenge of weather, January tonnage increased 5.1% compared to January of 2013.

The Q4 yield decline consist of 1.9% – a 1.9% decline in linehaul processing, a 0.9% decline from net fuel surcharges offset in part by 0.3% positively impacted Forward Air Complete. The decline in yield moderated down to approximately 1% in January and the headwind from net fuel surcharges experienced in Q4 had an equal impact of January. I’ll now announce March 1 and June rate increase were more than offset this year decline. We’re anticipating an approximately 2.75% net benefit from the GRI.

Forward Air Logistics revenues, which is primarily our TLX expedited truckload business declined 0.8% for the quarter, while other primarily fee-based revenues were up 9.1%. Total operating expenses increased $5.5 million or 180 basis points as a percentage of revenue. As Bruce mentioned, weather related expenses and the year-over-year decline in yield was the primary reasons for this. Hit hardest was our purchased transportation line item. Due to the cost associated with the inclement weather giving on – which got our network out of balance and the cost to get back into sea.

Also hit hard was our other operating expense line item which includes costs from things like Snow Removal as well as the impact of cold weather on equipment and facility maintenance. To a lesser degree staffing and labor costs were also become challenging in bad weather. Operating income decreased $1.8 million as a result.

Moving to our Solutions segment. As a result of EPS’s [this quarter] $9.1 million and 32.3%. Disappointingly, we were unable to convert this increase into revenue to the bottom-line as a result, a core operation with execution and sourcing to seasonal increase in volumes. As Bruce mentioned in yesterday’s press release, we have implemented plans solely focused on improving 2014 operating income. As a part of this plan we have already implemented and across the board generate increase which will have net approximately 2% across all revenue for Solutions.

Other operating issues are such that their impact should be measurable within the first half of the year. Lastly, in our TQI operating segment. On revenues of $13.3 million, our operating income was $1.7 million, approximately $600,000 of this was a one-time benefit of taking into income accrual from – for our [indiscernible] which we view is unachievable. With net operating facility – with net – I’m pardon – pardon me with the new operating systems finally on line as well as new capacity from both new company equipment as well as continuous success we’re creating additional owner-operators we feel encouraged for our 2014 TQI growth prospects.

At the consolidated level, our tax rate was 32.5% for the quarter compared to 33.2% Q4 a year ago. With the expiration of a tax credit related to propane usage and not being able to accurately predict the benefit for this by the exercise of incentive stock options we’re modeling our 2014 tax rate to be 37.8%. Net CapEx for the quarter was $1.9 million and $33.5 million for the full year. We have 2014 net CapEx budget at $34.5million. We ended the quarter with $127.4 million in cash, essentially no debt $140.6 million available on our $150 million line of credit. Subsequent to year end we funded CST acquisition with approximately $90 million of cash on hand leaving us at that time with $47 million of cash available.

Lastly, we anticipate first quarter revenue will be in the range of 19% to 23%. At the midpoint we expect January and February benefited at TQI part just in early March to be approximately 6.5% and we expected February and March benefited of the recently closed CST acquisition to be 6%. Income per diluted share is expected to be between $0.36 and $0.40 per share compared to $0.36 per share in Q1 of 2013. We expect the EPS benefit from CST to be neutral for Q1 as the deal cost will offset any resulting operating income.

Few additional items, yesterday in addition to announcing our 2013 results, we announced the board authorized new $2 million share repurchase authorization along with the 20% increase in our quarterly dividend. The share buyback authorization would be used to offset the – accelerate dilution bought down by option exercise as a result of expense to option grants. This change in our quarterly dividend resulted from the – our routine board had evaluation of the adequacy of our dividend. These are actions that we view as a change in our primary strategy to identifying close on quality acquisition candidates. With our cash on hand projected cash flow this year and our availability of debt we simply seeing no reason we can’t do all of the above.

This concludes our comments. Now back to the operator for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). First question comes from the line of Bill Greene with Morgan Stanley. Please go ahead.

Unidentified Analyst

Good morning. And this is Alex [indiscernible] in for Bill. My question is just with respect to – obviously weather was an impact for you guys as well as most of the transports in the first quarter rather the fourth quarter as well as into the first quarter. I was wondering can you pass out sort of excluding weather, how underlying sort of core demand has been trending and sort of a broader macro picture in terms of whether that’s improving or sort of staying stable with perhaps some incrementally positive commentary from other transports. So, we just wanted to get a sense for what your take is on the sort of broader macro trends?

Bruce Campbell

Yes, I think Alex if you heard Rodney’s commentary on our volumes for the entire quarter and then how the first quarter began. Volumes in our premium are almost shockingly good considering the weather. We have been positive in each of those weeks and many of those weeks we were literally shut down in cities like Atlanta, Dallas other very large contributors to our company. So, if there is anything positive that comes out of both first or the fourth quarter and now the first quarter has – if things seem to be really good from a volume standpoint.

Unidentified Analyst

Okay. That’s helpful. Do you have a sense for whether you’re maybe taking some share from your competitor in the A to A business just given the declining service levels there?

Bruce Campbell

All I can do is give you a couple of facts, one is within our one of our larger competitors has basically reconfigured and shrunk their network and we know that factually. And then we do believe in other situations that we are taking some share away but that’s always – that’s a very difficult to put in black and white but we do believe that.

Unidentified Analyst

Sure. Okay, that’s helpful. And then just lastly more of a just technical modeling question, I think you had maybe addressed some of the items but just curious for just more color on the $4 million year-over-year increase in other operating expenses. It sounded like most of that was weather related but I just wanted to clarify what’s in that. Thanks.

Rodney Bell

Alex, a fair amount of that I would say the majority is weather top related and call it 60%.

Unidentified Analyst

Okay, perfect. Thanks very much.

Operator

Thank you. Our next question comes from the line of Jack Atkins with Stephens. Please go ahead.

Jack Atkins – Stephens

Good morning guys. Thanks for the time.

Bruce Campbell

Good morning.

Jack Atkins – Stephens

So, I guess a couple of questions here. Rodney, you kind of touched on this a little bit but could you maybe expand on the – just quantify the impact that weather had in terms of EPS because it sounds like it was more of an OpEx impact than a volume impact in the quarter. Could you maybe expand on how much of an impact that was in the quarter in terms of the earnings? And also what are you assuming in terms of weather impact in your first quarter guidance because I don’t think weather has helped you guys any this quarter either?

Rodney Bell

Thanks a lot Jack. You’re exactly right, starting off with it there is more of an operating impact and it was a top line of impact, there was some of that too but more meaningful was the expense that the additional expand. Note Jack the expenses that rollup in other operating expenses that’s pretty easy, you can go out, you can go in and pick up this was snow removal, this was additional maintenance because of this. But when you get into the PT line item it gets really flossy because the expense getting your network back into balance gets up. We’re – our best guess is somewhere between $0.02 and $0.03 was the impact on Q4. In the first quarter guidance we got there between a $0.01 and $0.02 on the low and the high end of the range. That – it’s – there is bad weather again in the south today. So, it’s – I’m not trying to haze but maybe I am.

Jack Atkins – Stephens

Okay. I understood, I understood. And then it is glad to see you guys announced the GRI that’s going to go in place in the first week in March. Could you maybe talk about what’s taking place in the market over the last couple of months to give you guys a confidence to go forward with the GRI because it’s certainly a change in town versus call at 6 months ago?

Bruce Campbell

Yes, with that question it is if we go back – if we could do things in reverse which is always nice we’re in hindsight, we may then in particular I’ll take the blame for not taking GRI effective in September of last year, we had to make that call in mid into July and in our best premium at that moment it was not the right thing to do at that time, in retrospect it would have been the right thing to do because the volumes did come back, in some cases surprisingly came back. And as a result of that and as a result of the volumes continuing to hold a nice level thus far in the quarter, we’re very comfortable that we can get to GRI and if not in our rate just GRI. So, it’s not like we’re going to try to put people out of business, it’s simply one that helps us to recover incur a cost that we can’t offset in our normal operations.

So, we feel it’s earned. There is one other important area on the rate side that we look at on a daily basis and that’s what we call spot rates where we give discounts one what you could call one-time discount to one of our customers because they have a large shipment, they have seven going in the lane that we needed in, that type of thing. And we have really tightened that down. So, it’s kind of a two-pronged approach, to try to get our rates into with the volumes and the capacity requirements.

Jack Atkins – Stephens

Okay, great, great. And then on the Solutions business, I know you touched on the prepared remarks that you all are focusing on profitability there at 2014 but in addition to the GRI could you maybe just address some of the other initiatives that you got in place there improved margins in 2014 and how should we be thinking about the profitability of that business in 2014?

Bruce Campbell

Well, let’s back up and go to the quarter. We completed November in the Solutions segment with a best – a record month for them they just did exceptionally well. And then in December, they got hammered also in weather situations, they got hammered with the shortened retail cycle because of the way Christmas fell this year. So, December hurt them and it shouldn’t have hurt them. So, that was to us disappointing. However, going forward, we spend a great part of our planning process for the New Year to really tighten them down and when you ask for specifics and I take it down to dock cost if that’s what you’d like to see.

And then fairness for them through the January month, they had a really good controllable expense months. And so our whole focus is on those expenses that we control. And then the other focus was we have – in many cases we had raised what we consider to be underwater and we had to have those rates increased and it wasn’t one of those situations where we went through a lot of negotiations, it was a simple matter in order for us to make this a viable long-term business, these rates had to come up, unfortunately for – because our team did a good job, we were able to get that pushed all the way through.

Jack Atkins – Stephens

Okay, that’s great. Last question and I’ll turn it over. Bruce, as far as the Central States acquisition, congrats on getting that acquisition source in closed. But can you talk about what attracts you guys to the drayage market and the opportunities that you see there. I would think that their opportunities to leverage Central’s capabilities with your legacy business and the first that comes to my memory is what you guys in the Complete service offering of yours and do you expect that the Central acquisition will allow you to do more of your own in-house drayage I suppose?

Bruce Campbell

It should and let me back you up a bit here also on with in the Central States cracking revenue profile, they do a small Airport-to-Airport operation that’s based primarily in the Midwest. So, we’re going to be able to do lot of things together there to improve both their operation and ours and we look forward to getting that done soon. They also run CFS operation in most of their terminals in the Midwest with the big one being in Chicago and it’s an extremely well run smaller operation as CFS is a Container Freight Station where basically you’re taking business from airlines and clearing it for the various customers. So, it’s a perfect business for us, we have CFS stations across the U.S. it’s just never been a real push. And so hopefully we’re going to use this as a platform to help us expand the CFS business across the U.S.

And then finally the dray, we’ve always wanted to get into this market as you may or may not know, we have a nice drayage operation today in Houston and they do it very well. And it’s a model that we really like using owner-operators. And so as we got more and more into that type of business, it was a business we decided that strategically could take us place us into the future but we had to find the right platform. And there are many bad platforms out there. In the Central States case, it’s just really well run, it’s a great management group, good people and surprisingly good margins for this type of business. So, when you look at that and you look at what they’ve been able to do, how the two companies stick together, we think we can get just a really good head start in this business and then be able to use it to continue our expansion into drayage.

Jack Atkins – Stephens

Okay, great. Thanks again for the time.

Bruce Campbell

You’re welcome.

Operator

Thank you. Our next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Please go ahead.

Todd Fowler – KeyBanc Capital Markets

Great. Thank you. Good morning. I guess I wanted to start with a high level question about the network I mean with tonnage now growing in the mid-single-digit range from a facility standpoint, how is capacity within the network, I guess aside from weather are there any issues as far as needing to expand the network given the increase in your single tonnage?

Bruce Campbell

No. How is that very quick answer?

Todd Fowler – KeyBanc Capital Markets

Fair enough. Bruce, how much more tonnage you think you could handle I mean do you think you can through another couple of years of growing mid-single-digits and you won’t have to do significant expansion where you get to a point where and you’re seeing some pinpoints in certain parts of the network?

Bruce Campbell

Well, typically what happens Todd is we’ll get a single terminal or maybe two terminals out of the 89 where we have a capacity issue. So, it tends to not be across the board. And we may or may not run into that this year as I tell our people all the time it’s a great problem we have.

Todd Fowler – KeyBanc Capital Markets

Okay. And then I guess that on the rolling stock side of the question, it sounds like that some of the issues in the quarter with the net revenue margins or the purchased transportation costs were predominantly weather related. How do you think that you’re set up with your owner-operators from a capacity standpoint with what you’re seeing on the tonnage side as well?

Bruce Campbell

Todd there’s not been an owner-operator issue as much as it has been, you simply get out a bounce and that occurs because what’s the reason is current shutdown at Atlanta, Boston, Chicago and other cities are still picking up freight and we eventually have to get it there, in the meantime you get your power completely out of whack and other way you can fix out is either run empty which is expensive or to go to outside carriers to try to offset but empty miles and that’s also expensive especially when they know that they’re in demand. That’s also part of our life and we have to deal with that our entire existence but it’s just that’s what been over and over and over again like it has been recently.

So, and that let me take you back to total owner-operators we continue to grow our owner-operator fleet, we continue to have people who want to work for us and so you’ll see us start to expand our owner-operators as we can get our network back and bounce and then we can efficiently utilize them.

Todd Fowler – KeyBanc Capital Markets

Okay. So, if we continue to see this mid-single-digit increases in tonnage, we shouldn’t be concerned about any sort of mix where you have to go outside of the network more and rely more on third party capacity to handle the incremental volume that you’re bringing in?

Bruce Campbell

Yes, actually we’re open for the ops let’s say.

Todd Fowler – KeyBanc Capital Markets

Okay, okay. And then just two last ones, you’re looking at total quality here in the quarter, it sounds like if there was $600,000 of maybe benefit running through the P&L from in and out of adjustment. But if we take that out is that an appropriate or is that – or the right way to think about the margin profile of that business, so is there anything seasonal in the fourth quarter well maybe that’s a little bit stronger than what we should expect for the first couple of quarters of 2014?

Bruce Campbell

Well, I would say normally there are no different than most transportation companies and that is the fourth quarter is typically a strong one for them. Now here is what happens, with their business in particular, we will see business fall off fairly hard during the Christmas period because pharmaceutical shippers will not ship and lap a load way over. So, we do get hurt a little bit on revenues from that standpoint but typically again in the fourth quarter we’ll tend to be better than the other quarters. First, second, third are all what we call adequate to good quarters. Again, they don’t have quite the swings that other businesses do but they do have some heavier demand in the fourth quarter.

Todd Fowler – KeyBanc Capital Markets

Okay. And then the target there is for double-digit operating margins on a full year basis in the [indiscernible].

Bruce Campbell

Yes, yes.

Todd Fowler – KeyBanc Capital Markets

Okay, okay. And then just the last one I had and I’ll turn it over. But thinking about ticking up the share buyback doing the acquisitions, I know that you still have capacity on the balance sheet but is the message that if you’re willing to take on some balance sheet debt or some leverage if the right acquisition was there or if you want to be more aggressive in buying back the stock?

Bruce Campbell

Yes, and if I could start with the buyback portion first. One is we need to get rid of our delivers impacts that’s been going on for the last two, three years. If nothing else that’s our go. And then secondly, if we signed a right acquisition that generates good income, certainly we’ll be willing to take on debt. We just been fortunate that we can fund our own purchases.

Todd Fowler – KeyBanc Capital Markets

Okay, that makes sense especially about the dilutive piece. Okay, guys. Thanks a lot for the time.

Bruce Campbell

Thank you.

Operator

Thank you. Our next question comes from the line of Ken Hoexter with Bank of America. Please go ahead.

Sean Collins – Bank of America

Yes, hi guys. This is [Sean Collins]. I work with Ken Hoexter. Good morning.

Bruce Campbell

Good morning.

Sean Collins – Bank of America

Guys, can you just comment a little bit further on the Central States acquisition and just how it fits in with your other three divisions. Am I correct to think that, that revenue would be accounted under the Airport segment?

Rodney Bell

Sean, yes it’s in the Forward Air Inc. segment which includes our Airport-to-Airport segment. What our intend is and we’re still having some internal discussions in the Bay that our intent is to fold their Airport-to-Airport operation into ours and we already have a legacy drayage business that Bruce mentioned out of Port of Houston and combine those but those would all both of those pieces would roll up under the FAR segment.

Sean Collins – Bank of America

Okay, great. Thank you. And can you – would you be able to comment a bit further on margins at Central States versus your other businesses kind of what you’re seeing on an operating income basis?

Rodney Bell

Sure. Post deal because there is – we pick up some additional amortization we book in conjunction with the deal. We’re looking at EBIT margins in the 12% to 13% range and then the math pretty easy to get to EBITDA, the EBITDA margins of call it 18%, 19%.

Sean Collins – Bank of America

Got it. Okay, great. That’s helpful. And just my last question, the Solutions business, revenues certainly came in more than we expected. Is that a trend that you expect to continue and kind of what are you seeing in that business from a volume and pricing standpoint?

Bruce Campbell

Yes. They’re extremely heavy at the end of the year so our revenues fall back in the beginning of the year. But on a year-over-year basis that you’ll continue to see pretty solid growth solid meaning 30% and then we will start hitting periods where we brought on business a year ago so the comp will reduce but not it will go down to let’s say between 12% and 15% for the balance of the year.

Sean Collins – Bank of America

Okay, understand. That’s great. That’s helpful. Okay. Thank you very much for the time guys. I appreciate it.

Bruce Campbell

You’re welcome.

Operator

Thank you. Our next question comes from the line of Scott Group with Wolfe Research. Please go ahead.

Reena Krishnan – Wolfe Research

Hi, good morning guys. This is actually Reena Krishnan sitting in for Scott Group today. A lot of our questions have been answered, but just wanted to maybe get some color on how you guys are maybe thinking about the acquisition pipeline going forward and then following Central States and TQI. Just what are some other services or businesses you’re looking to maybe integrate into your current business or is that you think would fit well or some new markets that you’d like to go into?

Bruce Campbell

Well I think the first thing we have to do is get our new businesses under solid controls and solid opportunities looking into the future. Our first initiative will be to grow the CST platform as fast as we can yet still providing the good product and a good margin. So that’s our number one priority. Our second priority will be to start looking for acquisition opportunities for TQI and that may not be an additional let’s grab another refrigerated truckload carrier what we look for is as they’re probably somewhere in the segment of three TLs I think handle in healthcare and pharmaceuticals so that we can continue to improve the opportunities they have within that product line. All of that – none of that is in the works as we sit here today that will be our first quarter objectives to identify and press on to successful conclusion, but that’s going to be a full year’s work right there.

Reena Krishnan – Wolfe Research

Okay, great. Thank you for that color.

Operator

Thank you.

Bruce Campbell

You’re welcome.

Operator

Next question comes from the line of David Campbell with Thompson Davis. Please go ahead.

David Campbell – Thompson Davis

Yes. Thanks for taking the time. I wonder Rod if you could quickly go over your first quarter comments about revenue I think I heard you say that you expected revenue to be up 19% to 20% for the quarter and how much of that is CST?

Rodney Bell

Sure, David. We’re expecting 19% to 23% at the midpoint about 6% of that 21% would be CST for the month of February and March and then since we bought TQI in March, the January and February benefit of that acquisition will be about 6.5%.

David Campbell – Thompson Davis

Okay. And you’re estimating all of that produces $0.36 a share?

Rodney Bell

$0.36 to $0.40.

David Campbell – Thompson Davis

$0.36 to $0.40. Okay. Thank you.

Rodney Bell

You’re welcome.

Operator

Thank you for joining us today for Forward Air Corporation’s fourth quarter 2013 earnings conference call. And please remember the webcast will be available on the IR section of Forward Air’s website at www.forwardair.com shortly after this call. This does conclude your conference for today. We thank you for your participation.

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