Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Forward Air Corporation (FWRD)

Q2 2010 Earnings Call Transcript

July 23, 2010 9:00 am ET

Executives

Bruce Campbell – Chairman, President and CEO

Rodney Bell – CFO, SVP and Treasurer

Analysts

Sterling Adlakha – Stephens

David Ross – Stifel Nicolaus

Todd Fowler – KeyBanc Capital Markets

Matt Brooklier – Piper Jaffray

Nate Brochmann – William Blair & Company

David Campbell – Thompson Davis & Co.

Edward Wolfe – Wolfe Trahan

John Barnes – RBC

Ken Hoexter – Merrill Lynch

Kevin Sterling – BB&T Capital Markets

Ben Hartford – Robert W. Baird

Art Hatfield – Morgan Keegan

Operator

Thank you for joining Forward Air Corporation's second quarter 2010 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 website at www.forwardair.com. With us this morning are Chairman, President and Chief Executive Officer, Bruce Campbell; and Senior Vice President and Chief Financial Officer, Rodney Bell.

By now, you should have received the press release announcing second quarter 2010 results, which was furnished to the SEC on Form 8-K and on the wire yesterday after market closed. 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 the statements of historical facts may be deemed to be forward-looking statements. Without limiting, the foregoing words such as believe, anticipate, plan, expect, and similar expressions are intended to identify forward-looking statements.

You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in our filings with the Securities and Exchange Commission and in the press release issued yesterday. And 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 statement, whether as a new result of new information, future events, or otherwise.

And now, I’ll turn the call over to Bruce Campbell, Chairman, President, and Chief Executive Officer.

Bruce Campbell

Thank you, operator and good morning to each of you and thank you for joining our second quarter 2010 earnings call.

I'm going to discuss our results this morning by operating segment, beginning with Forward Air, Inc. segment, which includes our legacy airport-to-airport service offering; TLX, which is our expedited truckload brokerage service offering; and Forward Air Complete, which is our pick-up and door delivery service offering.

Obviously, each of these service offerings enjoyed excellent revenue growth, achieving in aggregate a 26% year-over-year result. Equally impressive was our team's ability to control the cost side of the equation, allowing us to convert much of the incremental revenue to the profit line. It was an excellent job across all product lines by our team of professionals.

While our Forward Air Solutions group produced a slight loss, adversely affected by a still sluggish retail specialty market and unusually high health care costs, we did make good strides on our strategic initiative to position the segment for future growth and profitability. As previously discussed, we discontinued conducting business with a large profitable customer, yet we are able to replace much of this loss business with good profitable business.

Along with the cleaning-up the revenue side of our business, we continued our push for even better costs controls and we feel we have made good progress so far, but have work remaining. Our – on a longer-term basis, we completed our background work on expanding our revenue verticals, which we feel is an essential building block for our future growth and year-round profitability. We will be working this new area of opportunity very hard over the coming months.

I would like now to introduce Rodney Bell, our CFO for the financial results.

Rodney Bell

Thank you, Bruce and thanks all of you for joining us this morning. Following our prepared comments, we will open the lines for your questions.

Operating revenue for the second quarter was $122.1 million, an increase of 22.5% from the second quarter of 2009. In our Forward Air, Inc. business segment, airport-to-airport revenues were $105.6 million, an increase of $22.3 million or 26.8% compared to last year. This resulted from an 18.5% increase in network tonnage and a 5.7% increase in yield. The yield improvement consisted of 1.8% from line-haul processing, a 3% benefit from net fuel surcharges, along with a 0.9% positive impact from Forward Air Complete.

Logistics revenues were $17.9 million, an increase of just over $5 million, which improved – which increased 41.5% compared to Q2 2009. In our Forward Air Solutions segment, revenues were $16.9 million, an increase of 1.2% compared to Q2 2009. New business wins were not enough to offset the loss of the customer that contributed to Q2 2009 revenue base. Additionally, as Bruce mentioned, specialty retail sales continued to be sluggish throughout the quarter, resulting in same-store sales being flat.

Moving to expenses for the second quarter, our operations and line-haul did another outstanding job, managing load factors and network miles. In total, overall PT improved 70 basis points. Salaries and wages were up $3.9 million or 13.4%, but were down 220 basis points as a percentage of revenue. The dollar increase resulted primarily from a $2.1 million increase in the second quarter performance-based incentives and a $1.7 million increase in volume-driven variable wages.

Operating leases, D&A, and insurance and claims, and other operating expenses were down 160 basis points, 60 basis points, 50 basis points, and 60 basis points, respectively. Our operating ratio was 88.9 for the second quarter compared to 95.1 last year, resulting in a 620-basis point improvement.

Operating income was up 175.5% or $8.6 million on $22.5 million of additional revenues. Net CapEx for the quarter was $3.3 million and $8.7 million year-to-date. Cash increased in Q2 by $3.3 million in the quarter to $47.9 million. We ended the quarter with $50 million outstanding and $38.2 million available on our line of credit.

Lastly, we anticipate third quarter – we anticipate that third quarter revenue will be in the range of 20% to 25% over the comparable 2009 period and expect income per diluted share to be $0.28 to $0.32 per share compared to $0.13 per share for Q3 2009.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from the line of Alex Brand from Stephens. You may proceed.

Sterling Adlakha – Stephens

Hi guys, this is Sterling. Good morning.

Rodney Bell

Hi, Sterling.

Sterling Adlakha – Stephens

Can you discuss the health care issue that you had in pool, what size was that and would that have substantially offset the loss you had there?

Rodney Bell

Sterling, the part that was unusual was – were stock losses that hit the maximum, it was a handful of high claims that hit that 135 stop loss that we have there that – where we are self-insured, is about $500,000.

Sterling Adlakha – Stephens

Okay, great. And in the airport-to-airport segment, we have volume here. How did that trend each month in the quarter, if you could give us volume each month in the quarter on a year-over-year basis?

Bruce Campbell

So the simple answer to that, Sterling, is it went up each month.

Sterling Adlakha – Stephens

Okay. Very good. In the pool business, you had one large customer – one large competitor announced their exit from the business. Can you talk at all about if you have been able to pick up some of that customer base, if some of that was signed in the second quarter, if you expect more of that customer base to come online in the third quarter?

Bruce Campbell

The majority of it came on during probably mid-quarter to – let's put it this way, mid-May and then additional startups throughout the month of June. So we reaped some revenue benefit, but we didn't obviously get a full quarter of the revenue benefit. We probably have two additional opportunities going into third quarter as a result of this.

Sterling Adlakha – Stephens

Okay. Thank you very much, Bruce and Rodney. Have a good day.

Rodney Bell

You too.

Operator

Your next question is from the line of David Ross from Stifel Nicolaus. You may proceed.

David Ross – Stifel Nicolaus

Yes. Good morning, gentlemen.

Bruce Campbell

Good morning.

Rodney Bell

Hi, David.

David Ross – Stifel Nicolaus

On the TLX side, you saw your margin expand there as revenue per mile grew faster than cost per mile. That's pretty impressive given what we are hearing with the tight capacity environment in the second quarter. Can you just give us a little comment on what you are seeing in the brokerage capacity market?

Bruce Campbell

Well, I think we did in fact experience some pressure there, but we also a year ago weren’t going to our core group of carriers and beat them up for lower pricing. We were very fair to them and as a result, they are very fair to us today. But with that question, we have seen some costs go up.

What really helps us in that area is the fact that we moved our owner-operators over into the TLX where we need to balance a lane or where we need to do certain things with the operator. And as a result of that, that's a much lower cost to us to move the truckload, the shipment. So we will experience in the future certainly from escalating outside carrier costs, but we think we can mitigate that by utilizing our own owner-operators when it makes the most sense.

David Ross – Stifel Nicolaus

Yes, because your owner-operator versus outside carrier split didn't change much quarter-to-quarter, but you were able to get a lot more revenue than you had to pay out.

Bruce Campbell

Yes. And that's a great point, David, because a year ago, we were really fighting as everybody was, a market where the price was $1 yesterday and it's $0.90 today and if you don't want it, we got a hundred carriers that will take it. And obviously, that reversed beginning with really the first quarter now into the second quarter. So there is a bit of pricing power there that's helped us.

David Ross – Stifel Nicolaus

And seasonality in your business has been a little bit tough the last couple of years with the market acting the way it has. Second quarter used to be often your best operating ratio quarter for the core line-haul piece. Do you think that holds true this year or are there further leverage opportunities as you move through the year where you could see a better OR in the third and fourth quarter for Forward Air?

Bruce Campbell

Yes. I think David, if – and I should say we think as we go forward this year that it will continue to get better and as a result, the leverage will continue to improve and obviously, that drives profitability.

David Ross – Stifel Nicolaus

And lastly, Bruce, anything concerning you in Washington right now with all the regulations that potentially could impact the trucking industry, what might have the biggest positive or negative impact on Forward Air?

Bruce Campbell

I think in general, my answer to that would be there are so many things going on in Washington today. I – it's confounding at best. Our largest concern is dealing with CSA as we go forward. We do have a – we think a good grasp on it at this stage, but we also feel that will change, the regulations will change between now and – we now call it CSA 2011, it will probably be called 2020 before it's all over. But we are aggressively positioning the company so that we are not harmed in the long run.

David Ross – Stifel Nicolaus

Excellent. Thank you very much.

Bruce Campbell

Thank you.

Operator

Your next question is from the line of Todd Fowler with KeyBanc Capital Markets. You may proceed.

Todd Fowler – KeyBanc Capital Markets

Thank you. Good morning, Bruce. Good morning, Rodney.

Rodney Bell

Good morning, Todd.

Todd Fowler – KeyBanc Capital Markets

Bruce, can you share with us your thoughts on – we've heard some of the international forwarders and UPS talk about the strength in the international air freight market. Can you talk a little bit about what you think is driving this strength that you are seeing in the domestic deferred air freight market right now and what your expectation would be for that as the year progresses?

Bruce Campbell

Yes. We have said probably now, Todd, for almost all of 2010 we represent an interesting dichotomy, because in our airport-to-airport business, that is primarily a B2B business and we think there has been a fair amount of companies expanding their CapEx or buying CapEx type of equipment, which most people realize is all high-value equipment and that feeds us, that helps us greatly. We just have not seen throughout the course of the year any let-up there. We very rarely even have a bad day, let alone a bad week and certainly have not gone through a bad month. So that part of it is very encouraging.

What we – on the dichotomy part of this, the other side of it is the solutions business is, as you know, all consumer related. And we have not seen an improvement there, except maybe the last two, three weeks were hopeful. But that is a very quick response to a couple of weeks. We are not – we are – we are not confident that will carry on through the end of the year, although we are very hopeful that it does. So a quick recap of that. Airport-to-airport represents B2B and it's doing well. Solutions represent a consumer-type business and it's just struggling along.

Todd Fowler – KeyBanc Capital Markets

Okay, got it. That makes sense. And then what's the expectation for core line-haul yield? I mean, it was up – I've got roughly 2% here during the quarter. I think that you had the GRI in the first half of the year. Do you expect to see continued sequential improvement in that as the year progresses?

Rodney Bell

We do, Todd, but for a couple of reasons. The first was in the second quarter, we only had two out of three months benefit of the GRI. So automatically that extra month is going to be – going to have a 1.7% impact on Q3 and beyond over – sequentially over Q2. But also, we continue to tighten down our spot rate – spot rate processing. It's half of what it was a year ago. Our people are continuing to bang on that and so that will have a positive impact on the yield as well.

Todd Fowler – KeyBanc Capital Markets

Okay, got it. And then on the capacity side, it seems like you are not having an issue in and – it seems like your capacity base is relatively stable and you are not losing any owner-operators to the strength in the market. Is that a true statement and is that something that you have some potential risk as we continue to see firming in the truckload environment in general looking ahead?

Bruce Campbell

Well, it is – your statement is correct in that it has not affected us so far, although obviously we see tight situations across various geographic points throughout the year. Now, the other side of that – yes, the other side of that is we work very hard to make sure we don't have that issue. So our owner-operators are – it's a very stable workforce. They've done a great job for us and we've been able to add to that. And then – again, we take care of the carriers that take care of us. We've been able to track the outside carriage where we need it.

Todd Fowler – KeyBanc Capital Markets

Okay. And then the last one that I have, is there a way to think about – the point that you would actually need to bring back in some cost to the airport-to-airport network, either on pounds-per-week type basis or a total pounds during the quarter? To me, it seems like you still have a little bit of capacity in the network that you are bringing back. The volume is coming back and you are adding any more cost. Can you talk about either from a network capacity standpoint or a pounds-per-week standpoint when you think about some incremental cost would come back into the network?

Bruce Campbell

Well, we will have always incremental costs come back that deals – any type of expense that deals with touching freight. For instance, obviously dock labor, those types of things. So that's very normal. We expect that type of expense to come back as we grow volume. What – where we think we have the company positioned, because we did not let up on this a year ago, is that we have almost – an example would be our terminal facilities.

We will not have another move for the balance of the year and probably won't other than where we have leases expire for quite a while. In other words, we have our facilities and our system and our network exactly where we want it. That was completed over the last two weeks when we finally got into our new building in Philadelphia and last weekend when we finally got into our new building in JFK. And at that point we were really done there, Todd.

So we think if you look forward, the only costs you will see really added to the model will be again the costs that concern freight.

Todd Fowler – KeyBanc Capital Markets

Okay. And were there any costs in the quarter associated with moving those facilities?

Bruce Campbell

There is always some costs.

Todd Fowler – KeyBanc Capital Markets

Okay, but nothing worth calling out?

Bruce Campbell

Yes.

Todd Fowler – KeyBanc Capital Markets

Okay. Thanks a lot for the time and congratulations on the nice quarter.

Bruce Campbell

Thank you very much.

Rodney Bell

Thanks, Todd.

Operator

Your next question is from the line of Matt Brooklier from Piper Jaffray. You may proceed.

Matt Brooklier – Piper Jaffray

Hi. Good morning, guys.

Bruce Campbell

Good morning.

Matt Brooklier – Piper Jaffray

On this – if we look at the incremental margins on your airport-to-airport business, I think it was roughly 50% cited in the press release and we think about the third quarter, is it – and also you guys are getting more price on that freight. I'm assuming that the incremental margins are something similar to what they were in the second quarter, if not better in third quarter. Is that a fair way of looking at it?

Rodney Bell

They should be as good certainly as the second quarter, Todd.

Matt Brooklier – Piper Jaffray

Okay. So if – under that assumption and looking at your revenue guide for third quarter year-over-year, I think it's 20% to 25% growth and I assume those incremental margins maybe slightly better that would – than what you did in the second quarter. It – and if it take the top end of the guidance – revenue guidance range, it doesn't exactly line up with your EPS guidance range. It – I'm looking at a bigger number. Are there some incremental costs that I'm missing that would take some of that margin and EPS upside away or is it potentially you guys just being a little bit conservative looking at the third quarter?

Rodney Bell

Todd, it would be the latter.

Matt Brooklier – Piper Jaffray

Okay. Very good. On the pool distribution side of your business, understanding that there were some one-time costs you guys – and removing those costs, more of a modest operating loss in second quarter. How shall we look at the second half of this year? Are you guys expecting profitability in the second half? And if so, how does that break out for third and fourth quarters?

Bruce Campbell

Typically, Matt, if you recall, this business is more – has more seasonality to it than our legacy business. Obviously – and we are hopeful, I should say, that it has the Christmas rush and all the other positive things that go on into it – in the second half of the year for them.

So yes, we do expect profitability in this operating segment. We expect it not only because of the improved revenues, but because of the improved operations in our – I mean, we've really pushed hard to clean up the model. And we think we will see some very good things coming out of that in the second half. The third quarter should be better than – it should be just right across a straight line, first quarter, second quarter, and third quarter, and then fourth quarter should be our best quarter in the solutions.

Matt Brooklier – Piper Jaffray

Okay. And you guys had previously discussed diversifying the customer base on pool distribution. I think you are kind of in an evaluation process in terms of different industries or verticals that you can get into. Are you guys ready to talk about what those specific industries or verticals are and where you can add customers and diversify the freight mix within pool?

Bruce Campbell

Well, we are complete with our strategic plan to move into other verticals – I'm dancing on here in case you didn't notice. And the reason I am – we really don't want to share at this point what those verticals are, because all that does is speed the competition.

Matt Brooklier – Piper Jaffray

Okay.

Bruce Campbell

And we are just not comfortable doing that. But I would like to say this. Even though we are expanding verticals and we cleaned out some of the retail specialty, the balance of our retail specialty customers, we really like. We think this is a great model that we can build on into the future, that it has been overshadowed by this unbelievably slow consumer condition. But the good thing about that is it's – Todd, is to rebuild the house, rebuild the foundation, and now – again, we think we have a strong foundation to build off of not only with the new verticals, but with good retail specialty business into the future.

Matt Brooklier – Piper Jaffray

Okay, understood. And just a final question. Looking forward and expanding that business, do you guys need to be profitable before you can potentially add on or make an acquisition within pool or is that something you guys would be able to do in the near-term, even despite the fact that we are running at a slight operating loss in that business?

Bruce Campbell

I think it would depend on the acquisition, obviously, who the candidate was and would it accomplish all the criteria in terms of if we made the buy. So our Board has always been supportive of us. One of the beauties is if you bought somebody who is already in the other vertical, I mean, we are immediately into that business and then we have the opportunity to expand it. So I – our answer to that would be – again, depending on opportunity, would probably be yes.

Matt Brooklier – Piper Jaffray

Okay. Thank you, guys.

Bruce Campbell

Welcome.

Operator

Your next question is from the line of Nate Brochmann with William Blair & Company. You may proceed.

Nate Brochmann – William Blair & Company

Good morning, gentlemen.

Rodney Bell

Good morning, Nate.

Nate Brochmann – William Blair & Company

Hey, why don't you talk a little bit about in terms of the volume strength throughout the quarter, in terms of whether that's coming from an existing customer base or whether you are picking a lot of new customers there? And also, kind of a gentle question in terms of the acceptance of Forward Air Complete, that business seems to be doing better, whether that's because of market acceptance or whether it's because of some of your efforts?

Bruce Campbell

Well, I'll answer the latter. Our people have done a wonderful job with Forward Air Complete. As you well know, it started off slow and it has just really taken off. I would like to think and actually, I believe that without question, our people have just done a terrific job. And as – our customers for the most part, make us prove that we can do what we say as they should and I think over the past two, two-and-a-half years, we've proven that we can deliver a really good product there, no pun intended. And so as a result, they experienced some really nice growth.

Nate Brochmann – William Blair & Company

Okay. And then in terms of the other question, in terms of whether from – some of the airport-to-airport business is coming from new customers or kind of what you are seeing from the existing base?

Bruce Campbell

Yes, we always bring in new customers, but 90% – probably, 95%, 96% of our business is from existing customers who have supported us throughout the years. And they simply are having more business opportunities and as a result, we get more business opportunities.

Nate Brochmann – William Blair & Company

Great. And then just the last question. In terms of – obviously, you are doing a very nice job on the price side. And just wanted to talk about in terms of where you feel that is in terms of market acceptance on that too, in terms of whether you are getting any pushback or whether that's going to be a little bit more easily passed through.

Bruce Campbell

No, we really – and again, I go back and congratulate our team. They did a terrific job of taking out to our customer base. Our customer base was very fair with us. Obviously, we had not had an increase in over three years when we implemented the increase. And at some point, you have to get an increase. And again, our customer base was great with us. We are happy with where we have it positioned today.

The only additional steps we have to take now is to really watch, as Rodney touched on earlier, our spots. Now, that's not to say that we would – that we are eliminating spots because there are many times it makes sense to spot. But we just want tighter control on it. So we are happy where we are in the yield side, and we haven’t said that for a long time.

Nate Brochmann – William Blair & Company

Sounds great. Thanks a lot.

Bruce Campbell

Thank you.

Operator

Your next question comes from the line of David Campbell with Thompson Davis & Co. You may proceed.

David Campbell – Thompson Davis & Co.

Hi, Bruce. Hi, Rodney.

Bruce Campbell

How are you?

David Campbell – Thompson Davis & Co.

How are you? I just want to ask you a little bit about the logistics business where we are seeing the growth. You got new customers and some of it international, picking it up at the airports. What is going on there?

Rodney Bell

David, it's really across the board, but a lot of the – a lot of our forwarded customers, a lot of domestic and international airline customers are – they increased their business and a fair amount of integrated business. So it's really across the board, that strength.

David Campbell – Thompson Davis & Co.

And so it's sustainable at where, $17 million, it's sustainable at that rate?

Rodney Bell

We think so.

David Campbell – Thompson Davis & Co.

Okay. And in the warehousing and customs brokerage and all that stuff, seems to be relatively flat, doesn't seem to be growing like the rest of the business. Any reason for that?

Bruce Campbell

David, that is almost entirely temporary business. So a customer will come to us and say, "Hey, we've got this situation. Can you warehouse something for three months for us"? So it's a very opportunistic business and so you will see it up and down like that.

David Campbell – Thompson Davis & Co.

But there were times in the past where you would say things like the Dallas/Fort Worth fixed-base – not fixed-base, the tax-free operation there and you were going to try to do more of those. Isn't that the kind of thing that grew that business in the past?

Bruce Campbell

Yes, that was our free trade zone operation. And we do that today in a – in each terminal where they have the opportunity. Obviously, in Huntsville, Alabama, there aren't a lot of opportunities for that. We do have opportunities in the gateway cities and we do that – and some of that revenue actually gets put into the airport-to-airport. So my answer to you is it's an important – it's a nice little additional piece of business for us. It is really driven by the local sales and management team. And where they have opportunities, they take advantage of them. But it is not a singular focus of ours today.

David Campbell – Thompson Davis & Co.

Okay. Okay. Well, you can't focus on everything at once. But I mean, you've got – you have identified the growth – places where you are going to grow, that's the important thing. What about stock – buying back stock? You haven’t said anything about that for a while. I know you have been trying to pay down debt. Is that still the plan?

Bruce Campbell

David, I guess, as we look at the cash that we are accumulating, the best way that we could deploy that would be making the right acquisitions. So that's number one. To date, we have not paid down any debt, but as we come closer to our facility coming due and the processing is not nearly – not going to be nearly as favorable as it is right now, we will start paying down some debt. But stock repurchase will be a distant third way that we would deploy cash.

David Campbell – Thompson Davis & Co.

Great. Right, right. And so – and my final question is, you mentioned the consumer business is largely impacting the – your logistics – your pool distribution business. But ultimately, if consumer continues to slow down, isn't it going to have an effect on your airport-to-airport?

Bruce Campbell

I guess if we were economists, we would be able to really answer that question. But I – we have not seen that, David, over the last year and you would have thought we would have during that period of time. So – so far, no; the answer is no. But again, we are not economists.

David Campbell – Thompson Davis & Co.

Right, right. Well, okay, thanks for the help.

Bruce Campbell

Thank you.

Operator

Your next question is from the line of Edward Wolfe from Wolfe Trahan. You may proceed.

Edward Wolfe – Wolfe Trahan

Thank you. Good morning, guys.

Rodney Bell

Good morning.

Edward Wolfe – Wolfe Trahan

I know you've talked about pool margins, but can you talk about when you think that you are going to see profitability in a non-fourth quarter and what do you need to do to make this a 10% kind of margin all year-round business?

Bruce Campbell

We need to continue what we started basically in the second quarter and that – we literally went in and cleaned out some bad situations both on the revenue side and in some cases, just not very well executed operations. We will continue our focus on what I call Forward Air basics, where we operate better than anyone else and we expect the same on the solutions.

So it's a real focus on the fundamental side of the business. I can tell you that their whole focus as we go through the end of the year will be, while we should and will make money in the third and fourth quarter. Their focus will be to make money when we don't have that – the benefit of the – the upsurge in revenue. So there is a lot of work going on there.

Edward Wolfe – Wolfe Trahan

Okay. And I heard underlying those comments that profitability in third quarter?

Bruce Campbell

Yes.

Edward Wolfe – Wolfe Trahan

Okay. Does there become a point or a level where you say we are going to sell this business and focus back on the line-haul or are you close to that point at this point?

Bruce Campbell

Obviously, that's an option, Ed and – but we are not there yet. We still – we think we are very good moving freight city to city and moving truckload brokerage and we really want to fill out the portfolio with a good delivery company and we should be able to do that. We have not been totally successful there yet, but we will be. And then if I have to eat those words, we will certainly look at selling it. But that's not even on our radar today.

Edward Wolfe – Wolfe Trahan

Okay. That's fair. When you think about the economy, certainly we are hearing strength across freight. Do you see any signs from your customers that there is something short-lived with inventory restocking or anything else that might lead you to expect a slowdown or from where you see, do you expect more of the same going forward for the foreseeable future?

Bruce Campbell

I – here – our comment on that would be, Ed, based on conversations with customers, there is a – while there may have been some restocking because they just go so low, I mean, they have very lean inventories at the store level. So I'm not convinced we went through a huge restocking process, especially on the consumer side. I think it's still very narrow there.

Edward Wolfe – Wolfe Trahan

And what's your sense for visibility to the strength of tonnage and volumes?

Bruce Campbell

On the airport-to-airport side, we think we have good visibility at least throughout the balance of the year and it's very – it continues to be strong and we are planning for a strong balance of the year. On the solutions side of the world, we are seeing some improvement there, but our visibility at best is based on historical as opposed to looking forward. Historical, we know we will have a good second half.

Edward Wolfe – Wolfe Trahan

Okay. And when you think about pricing for line-haul, you are getting a better yield than even the 5% you put in. Is there a possibility to get a second bite of the apple this year? Could you get a second increase?

Bruce Campbell

Could we? The answer to that is probably yes. Would we? No, because we have to be fair with our customer base. They were great to us in giving us this increase, it's an increase that accomplishes our yield objective, and I don't want get into gouging.

Edward Wolfe – Wolfe Trahan

Okay. If the world does slow in 2011, can you still get pricing then or is this something that you are kind of going to wait to see where you are then situation?

Bruce Campbell

Yes, we will wait – the way we do yield is there is, is it at an adequate level today that substantiates continued investment in – into our company. And if the yield is still adequate at that point, we probably would not do an increase. However, if things change and they typically do, we will review for GRI again next year.

Edward Wolfe – Wolfe Trahan

Okay. And then last kind of bigger-picture thing. When you think of the way the line-haul, your old ORs used to be 80, sub-80 and here you are, you are massively improved, but you are still up at 86 or so. How do you think about what it takes to grind it back to 78 o 79? Is it you need pricing or is there something beyond that?

Bruce Campbell

We need – what – we have to make sure we are comparing apples to apples, Ed. When we were hitting that 78, 79, all systems were go. And we did not have these ancillary businesses that we've developed over the last couple of years. While we love truckload brokerage, we love Forward Air Complete, they do diminish our operating ratio a bit. They simply don't operate as well, although they still produce good results. So the way we view it today as we sit here, is to get back to the 78, 79 is going to be difficult unless a lot of things occur right. But we do think the model will go back to an 82, in that vicinity, and that's where we are headed.

Edward Wolfe – Wolfe Trahan

Okay. Thanks a lot for the time. I appreciate it.

Bruce Campbell

Thank you very much.

Operator

Your next question is from the line of John Barnes from RBC. You may proceed.

John Barnes – RBC

Hi, guys. Well, let me pick it up right there. Bruce, can you elaborate a little bit on what you think the ultimate timing is? And I'm not asking for a specific quarter, but is it – is it a 2011 event to get back to an 82 or is it going to a little longer than that?

Bruce Campbell

Our response to that would be it's strictly a volume issue.

John Barnes – RBC

Okay.

Bruce Campbell

If we continue to see growth that produces really good revenue numbers, we could get there quickly. If we just move along at the levels we are today, which are good – I mean, we are happy with those, it – it's going to take a while to get the rest of the way down.

John Barnes – RBC

Okay. I think on – maybe it was last quarter, you talked a little bit about you kind of view the world growth in 2010 and improvement in 2010 over some combination of the '08 and '09 results, not just looking at setting parameters based on what you did in '09, but factoring in the good margin performance you had in '08 and that type of thing. Is it fair to assume that we could get back to something in that 15% margin range that you posted in '08 as early as the back half of this year or is that a little soon?

Bruce Campbell

I – we are hopeful. And I think you know and others know that our focus this year has not been on '09, but it's been for comparative purposes on 2008 and that's what we are driving for. And that is achievable again with the expectation for things to stay where they are.

John Barnes – RBC

All right, very good. Again, kind of looking at the balance of the year, do you anticipate a real peak season this year for all of your – for the quarter, airport-to-airport and the – obviously, the pool distribution has the seasonality. Are you anticipating a normal type of peak season?

Bruce Campbell

Yes, I think we would best characterize it as just a normal peak.

John Barnes – RBC

Okay. So nothing out of the ordinary, but just kind of a normal continuation of the normal seasonality?

Bruce Campbell

Exactly.

John Barnes – RBC

All right, very good. Just in terms of your tonnage, the LTLs have all talked about one of the fastest growing product lines has been truckload, we know about how tight capacity has gotten in truckload. So you have seen that spill over into LTL. Do you think you see – do you think your core volumes are being influenced at all by maybe some pickup of non-traditional freight into your system, just given how tight that capacity is and has that volume kind of cascaded down?

Bruce Campbell

We have – we can't sit here today, John, and tell you, "Yes, we've seen that." Now, typically what happens when truckload capacity jumps – or it gets very tight is we see – those are the guys who went after the forwarders and other customers, trying to get their 5,000, 6,000, 7,000-pound shipments, because they could get enough money to keep the truck moving. And what – and what you see happen when truckloads tighten up the capacity is those shipments come back into our network. So we've seen a little bit of that. I think there is – while the truckload capacity is tight, I think people got a little bit carried away with it. I don't think it's that tight yet. Now, it could get there.

John Barnes – RBC

Okay. All right, very good. And then lastly, just – again, a question on the pricing and the yield. You talked about – I think the yield improvement was 5.7% and you talked about something nearly 2 percentage points, so that was – it was the result of base pricing improvement. As the year progresses, should we see similar yield improvement in the third and fourth quarter, but maybe the peer – the peer pricing, the peer rate increase become a larger contributor to that yield number?

Rodney Bell

It will, John. I think I mentioned this earlier, but the – simply the fact that there was two out of three months in Q2 that we had the impact of the GRI and obviously that – we will have three out of three. We tick up about 1.7% right there on base pricing, plus we are going to be hammering on these spot rates. And that's going to – that's going to cause a tick-up as well. So we are – we are expecting improved core processing for the balance of the year.

John Barnes – RBC

All right. Do you have a feel for the breakout of your revenue spot versus contractual?

Rodney Bell

Today, spots – on a percentage basis of tonnage, we are spotting about 10% of the tonnage.

John Barnes – RBC

And what do you think is the right mix?

Rodney Bell

Something probably a little south – something closer to 5% or 6%.

John Barnes – RBC

Okay.

Bruce Campbell

The thing you have to remember about spotting, John, is it's a daily management process that we go through. For instance, on the weekends when we surge, our network gets filled, we don't want to do hardly any spotting, because it doesn't make sense. There is not capacity available, however, Monday night, we might do more. So – it's really important – that's why I said earlier, we need to continue spotting. We just need to be smarter about how and when we spot.

John Barnes – RBC

All right, very good. Guys, nice quarter. I appreciate your time.

Bruce Campbell

Thank you very much.

Operator

Your next question comes from the line of Ken Hoexter with Merrill Lynch. You may proceed.

Ken Hoexter – Merrill Lynch

Hi, good morning, Bruce and Rodney. Just on the – you noted there was a – you were building into a peak. Just want to understand your visibility, kind of your advanced views on orders in airport-to-airport and pool distribution side.

Rodney Bell

Ken, I believe – you were breaking up. Could you repeat the question, please?

Ken Hoexter – Merrill Lynch

Yes. I just want to understand what's your visibility – your advanced views on orders, both in the airport-to-airport and the pool distribution side.

Bruce Campbell

On the airport-to-airport, our visibility is tonight when they bring the freight. And literally it's that limited on the other hand. We know, Ken, historically we can project pretty accurately what the business will be. On the solutions side, depending on the customer, we get as much as a month advance on what they are anticipating to ship.

Ken Hoexter – Merrill Lynch

Okay. So as you are looking at peak, you are really just looking toward maybe the end of August, I guess, was building into a peak, but maybe nothing beyond there.

Bruce Campbell

Yes. Peak is a bit different, Ken. Not to complicate it, but typically our larger good customers sit down with us usually in August and we go through the planning session so that everybody is aware of what needs to be done and all of that. So we will know much better in mid-August or – and towards the end of August exactly what they are anticipating peak to be.

Ken Hoexter – Merrill Lynch

All right. And then on the low-margin contract replacement you talked about, are there more opportunities like that to address some low-hanging fruit?

Bruce Campbell

Actually, we are very pleased with our customer base today now that we are rid of the other.

Ken Hoexter – Merrill Lynch

All right, great. Thanks for the time.

Bruce Campbell

Thank you.

Operator

Your next question is from the line of Kevin Sterling with BB&T Capital Markets. You may proceed.

Kevin Sterling – BB&T Capital Markets

Good morning, Bruce and Rodney.

Bruce Campbell

Good morning.

Rodney Bell

Hi, Kevin.

Kevin Sterling – BB&T Capital Markets

Bruce, you talked a lot about your trends throughout the quarter getting better each month, particularly in your core line-haul. Can you talk a little bit about how July is shaping up now that we are near the end of the month?

Bruce Campbell

We have had a good July so far. How about me saying that?

Kevin Sterling – BB&T Capital Markets

Okay. That sounds good. And there has been a lot of talk about pricing too and with your tremendous yield improvement, is this a sign that the squirrelly pricing from a year ago has abated or is there still some squirrelly pricing out there in the marketplace?

Bruce Campbell

We really think it has abated. I mean, obviously there were some capacity issues in the industry. And that's really been helpful. And in all candor, not only us but the industry needed for pricing to settle down and to gain some sanity.

Kevin Sterling – BB&T Capital Markets

Right. And then you are replacing that large customer in pool distribution. Are you replacing that large customer with a few large customers or are you mainly focusing on a myriad of smaller customers in pool distribution?

Bruce Campbell

It was one large customer and three smaller customers.

Kevin Sterling – BB&T Capital Markets

Okay, great. Well, that's all I have. Thanks so much for your time today.

Bruce Campbell

Thank you.

Operator

(Operator Instructions). Your next question is from the line of Jon Langenfeld from Baird. You may proceed.

Ben Hartford – Robert W. Baird

Good morning, Bruce. Good morning, Rodney. This is Ben Hartford in for Jon.

Bruce Campbell

Hi, Ben.

Ben Hartford – Robert W. Baird

Just kind of to dive into the competitive landscape on the line-haul side, Bruce – and maybe, could you describe how it's trended through the first six months of the year relative to your expectations, given what we know about the trends and capacity leaving and rates firming? Is it better or worse or in line with what you would expect it to be today?

Bruce Campbell

It's what I would say in line what we expected. Nothing dramatic out there, and fortunately, most of us – both our competitors and us are working hard to do a better job for our customer and not doing some of these silly pricing things.

Ben Hartford – Robert W. Baird

You talked about the – some of the acquisitions. It sounds like the focus is on the solutions side. But is there any opportunity, given the inflection in the market, given some of the opportunities that may have emerged over the past six months to do an acquisition either in the line-haul side or the logistics side?

Bruce Campbell

I think that window is opening. I'm sure you are aware that people had sellers were – if they were sellers a year ago, were of the opinion that if they sold, they would be leaving money on the tables, simply not a good time to sell. And then as a result, if anybody was for sale, it was a bad situation. And we didn't want to get into that. But we think that window is changing. So our eyes and ears are open.

Ben Hartford – Robert W. Baird

Okay. Could you do any sort of meaningful acquisition on the line-haul side or is it going to be focused on logistics and some of the ancillary services?

Bruce Campbell

There are probably a couple decent-size opportunities, maybe on the line-haul. But certainly nothing we are chasing today. Our – probably, our bigger focus would be from the solutions standpoint, could we make a purchase of a company who would help us quickly get into the other vertical. And if that were the case, we would be much more serious about that than probably anything else.

Ben Hartford – Robert W. Baird

Okay. And then on the CapEx side, what do you have targeted for 2010 and have you thought about 2011? What should be – what kind of placeholder should we have there?

Rodney Bell

Ben, initially, we said $10.6 million. As volumes have continued to tick up, we are looking hard at our equipment need to whether or not that may – that maybe – that may change upward slightly, the additional folks – additional players, that kind of thing. But we are looking at that now, but as we speak today, it's $11 million.

Ben Hartford – Robert W. Baird

For '10?

Rodney Bell

For '10.

Ben Hartford – Robert W. Baird

Okay, great. Thanks for the time, guys.

Bruce Campbell

Thank you very much.

Operator

Your next question comes from the line of Art Hatfield with Morgan Keegan. You may proceed.

Art Hatfield – Morgan Keegan

Good morning, Bruce and Rodney.

Bruce Campbell

Hi, Art.

Art Hatfield – Morgan Keegan

Hi, just – most of my – virtually, all of my questions have been answered. But just – I hate to pick on the peak season thought process, but as you look out – not so much kind of what your expectations are, but if your customers come to you and all of a sudden there is a spike in air demand into this country and you got a lot of customer freight to move, are you in a position to add the necessary capacity and be able to move that incremental freight profitably?

Bruce Campbell

Yes.

Art Hatfield – Morgan Keegan

Okay. So – and why do you say that so quickly, if I may ask?

Bruce Campbell

Well, we've been through it obviously in past surges. So our people are – they know how to handle increased revenues. We are not restricted from the standpoint of additional equipment. We go out in the market and buy it. If we have a very heavy night out of Dallas, as an example, and we need additional capacity to move that, we can do it. We have well-trained people who can move it across the dock and we have a network that's set up to handle surges.

Art Hatfield – Morgan Keegan

So you are not too concerned about if things are really tight in the truck market that you would be able to access the capacity and access it at a price that you would still be able to make money?

Bruce Campbell

Well, without question, we would still be able to make money, it does impact us. If we are paying $2.25 out of L.A. where we were paying $1.50 three months ago and if we pull it on our truck, it's $1. So it does impact us, but that makes us exercise stronger yield discipline.

Art Hatfield – Morgan Keegan

Got it. Okay. And that's helpful. So while you could theoretically see margin pressure on a particular load, the incremental dollar would be positive to the company?

Bruce Campbell

Without question.

Art Hatfield – Morgan Keegan

Okay. That's helpful. Thank you for your time.

Bruce Campbell

You are welcome.

Operator

And gentlemen, there are no other questions in the queue. And ladies and gentlemen, thank you for joining us today for Forward Air Corporation's second quarter 2010 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 concludes the presentation and you may disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Forward Air Corporation Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts