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Forward Air Corporation (NASDAQ:FWRD)

Q3 2007 Earnings Call

October 22, 2007 6:00 pm ET

Executives

Bruce Campbell - Chairman,President and CEO

Rodney Bell - CFO

Analysts

Brannon Cook - JP Morgan

Matt McGeary - Sentinel AssetManagement

David Campbell - Thompson

Ben Hartford - Baird

Todd Fowler - Keybanc CapitalMarkets

Ken Hoexter - Merrill Lynch

Tom Whitecap - Value Holdings

Operator

Thank you for joining Forward AirCorporation's Third Quarter Earnings Release Conference Call. Before we begin,I would like to point out that both the press release and this call areaccessible on the Investor Relations section of Forward Air's website atwww.forwardair.com.

With us this morning are ourChairman, President, and Chief Executive Officer, Bruce Campbell, and our ChiefFinancial Officer, Rodney Bell.

By now, you should have receivedthe press release announcing third quarter 2007 results, which we furnished tothe SEC on Form 8-K and on the wire today after market closed.

Please be aware this conferencecall may contain forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995, including statements among othersregarding the company's expected future financial performance.

For this purpose, any statementsmade during the call that are not statements of historical facts may be deemedto be forward-looking statements. Without limiting the foregoing, words such as"believes, anticipates, plans, expects," and similar expressions areintended to identify forward-looking statements.

You are hereby cautioned thatthese statements may be affected by the important factors, among others setforth in our filings with the Securities & Exchange Commission and in thepress release issued yesterday, and consequently actual operations and resultsmay differ materially from the results discussed in the forward-lookingstatements.

The Company undertakes noobligation to update publicly any forward-looking statements, whether as aresult of new information, future events, or otherwise.

And, now, I'll turn the call overto Bruce Campbell, Chairman, President, and Chief Executive Officer. Pleaseproceed sir.

Bruce Campbell

Thank you. Allow me to begin byapologizing for the delay. Good evening and thanks to each of for joining ourcall. As we previously announced the Forward Air team faced a very sluggisheconomy during the quarter, which impacted the both our airport-to-airportvolumes and to a lesser extent pricing yields. As we have experienced in priordown cycles, our competitors tend to become desperate in their attempts to gainshare resulting in downward pricing pressures.

We have learnt through the yearsthat what serves us best in long-term, is to respond only to specificsituations rather than irrational across the board permanent pricingreductions. We continue to feel this is the proper direction for our long-termsuccess. Rather than focus on giving away yield, we have continued our quest toprovide our customers the best service possible not only in on-time transitperformance, but also in the various shipment integrity measures and inproviding the industry-leading technologies. We will continue this focus asonce again we feel it has and we will continue to serve our customers and usbest.

We continue to make progress inour completing the model initiatives, with once again our logistics scriptleading the way with a very solid performance. We also saw progress in each ofour three initiatives areas and look forward to their continued progress.

I would like to touch for amoment on our late July acquisition USA Carriers and our subsequent initiativeinto the pool distribution business.

We are quite pleased with theintegration process to-date of this product line into the Forward Air family,happy that they contributed a small profit and we now feel we have a goodoperating platform from which we can develop a more national presence. And nowallow me to introduce Rodney Bell, our CFO to review our financial results.

Rodney Bell

Thank you, Bruce, and thank youall for joining us this evening. After my comments we will open the lines foryour questions.

But, prior to my comments on thepool let me remind you that with the acquisition of USA Carriers we preferredto hear and soon to formally re-branded as Forward Air Solutions. This is ourfirst quarter reporting two operating segments. The impact of approximately twomonths of Solutions is included in our third quarter results. We will providedetails on it to evaluate the overall results, as well as the segment resultson this call and in greater detail later in our Q2 filing.

Financial results for the thirdquarter are as follows. Operating revenue increased $7.3 million or 8.1% to$97.7 million from $90.4 million in '06.

Income from operations was $16.9million which was a $2.9 million decrease compared to $19.8 million a year ago.As a percent of operating revenue, income from operations was 17.3% compared to21.9% in the third quarter 2006. This 460 basis point decline is attributablein general to the challenging business environment that Bruce discussedearlier, which resulted in more proportionate growth from higher cost revenuesources.

Net income for the period was$10.8 million which is $1.9 million less than $12.7 million posted in 2006.Income per diluted share was $0.36 compared to $0.41 in the third quarter of2006.

Operating results for the ninemonths ended 09/30/07 are as follows: Operating revenue increased $18.6 millionor 7.2% to $278.2 million from $259.6 million.

Income from operations was $51.1million, compared to $56.5 million a $5.4 million decline. As a percentage ofoperating revenue, income from operations was 18.3% compared to 21.8% lastyear, this decline of 350 basis points is attributable to the same reason sitedfor the quarter.

Net income for the period was$32.5 million versus $36.8 million last year, a $4.3 million decline. Incomeper diluted share was $1.08 compared to $1.16 per share for the first ninemonths of 2006.

The breakdown of third quarteroperating revenues is as follows: Within our Forward Air operating segmenttraditional linehaul revenue decreased 1.9% from $77.2 million to $75.7million. Logistics revenue, which is primarily our truckload brokerage businessincreased 43.9% from $8.2 million to $11.8 million. Other revenue in thissegment increased 4% from $5 million to $5.2 million.

Our Forward Air Solutions segmentcontributed $5.1 million a poor distribution operating revenue to the quarter.

Operating expenses associatedwith the quarter compared to the same period last year are as follows: Overallpurchased transportation as a percentage of operating revenue increased 30basis points from 42.6% to 44.2%. This is due to shift in the business mix fromsystem revenue in favor of the logistics revenue which is more heavily burdenedby purchased transportation offset by lower PT in the Forward Air Solutionssegment.

The Forward Air Solutions removeour total purchased transportation would have been 43.8% due primarily to theshift in mix.

Purchased transportation for theairport-to-airport network was 39.4% of revenue compared to 39.9% in 2006,evidenced that we continued to control our system cost.

PT for logistics was 78.8% oflogistics revenue versus 72% last year. The percentage increase in logisticscontinues to be due to reliance on relatively more costly outside capacity tosettle the increased growth in our truckload brokerage business, as well as,the impact of lower yielding loss to provide balance for owner operators in ourairport-to-airport network.

Salaries, wages, and benefits asa percentage of operating revenue increased 220 basis points to 22.5% from20.4% in 2006. Approximately 120 basis points are the result of Forward AirSolutions, which is a more employee/labor reliant, than our other operatingsegment. The balance of the increase is due to increased workers comp, andgroup insurance costs along with increased share-based compensation offset byreduced incentive pay.

Operating leases as a percentageof revenue increased 40 basis points to 4.6% from 4.2%, due to higher leasepayments on facility upgrades. Approximately one-third of the increase wasattributable to Forward Air Solutions.

Depreciation and amortization asa percentage of revenue increased to 70 basis points to 3% from 2.3%, primarilydue to pricing and service our Columbus Terminal Expansion in our two newfacilities in Chicago and Atlanta. The small amount of increaseresulted from Forward Air Solutions. Insurance and claims were approximatelyflat at 1.7% for both periods.

Finally, other operating expensesincreased to 120 basis points to 8.8% from 7.6%, cost associated with newfacilities as well as training of key personnel were the cause of the 80 basispoints increase and the balance was due to Forward Air Solutions.

Operating income as a percentageof revenue for our Forward Air Segment declined 460 basis points to 17.3% from21.9%. Forward Air Solutions had operating income as a percentage of revenue of9.8%. As result of a favorable tax credit resulting from propane usage offsetby the impact of FIN 48, our tax rate for the quarter decreased to 37.3% from38.1%, when we anticipate our ongoing tax rate to be approximately 38%.

Another relevant operatingstatistics are as follows: Total asset as of September 30 were $216 millioncompared to $230 million at the end of '06. Cash flows from operations were$18.6 million for the quarter and $43.8 million year-to-date. Our cash andshort-term investment position decreased $2 million to $18.9 from $20.9 millionduring the quarter.

Due to material non-publicknowledge, we did not repurchase any common shares of stock in the thirdquarter. The 634,000 shares available at the end of second quarter along withthe 2 million shares from the 2007 repurchase plan approved by our board in thethird quarter gave us just over 2.6 million shares available at the beginningof Q4.

Through today, we have purchasednearly one half of a million shares and average price of $28.22 per share.Average line haul balance for the third quarter decreased 1.8% to $32.2 millionas per weight, from $32.8 million for weight in 2006. Average shipment size isflat at approximately 725 pounds per shipment, and our total shipments weredown slightly for the quarter.

Finally, guidance for the thirdquarter is as follows. We are forecasting operating revenue between 10% and 15%and EPS in the range of $0.35 to $0.39 per share. Growth attributable to ourForward Air operating segment should be between 2% and 5% contributing $0.34 to$0.38 per share on our EPS. Forward Air Solutions will look out for between 8%and 10% of our consolidating growth and approximately $0.01 per share to ourEPS. Thank you for joining us. And then operator will now start taking yourquestions.

Question-and-Answer Session

Operator

Thank you very much sir.(Operator Instructions) And our first question comes from the line of BrannonCook of J.P. Morgan. Please proceed.

Brannon Cook - JP Morgan

Hi, good afternoon. A question onthe volume trends in the quarter. Volumes just were positive in the secondquarter. Could you talk a little bit about how things progress in the thirdquarter, and how things have looked during October?

Bruce Campbell

July was not good. We saw alittle bit of build up in August, and what I would call an improvement,Brannon. And then September kind of maintained that. Having said that, it wasnothing to jump up and down about, and it couldn't recover July for us. Monthtoday, we're little a bit hesitant to say a lot as you might imagine, the KittyHawk bankruptcy has had some impact. We don't know how permanent that is. Wedon't know what's going to happen there. But we did see a little bit of anuptick and how permanent that uptick is or if it was just simply a matter ofvolumes are picking, we don't have that answer as we sit here tonight.

Brannon Cook - JP Morgan

But looking towards your fourthquarter revenue guidance at 10% to 15%, you get a little bit of more revenuefrom U.S.A.,but it looks like the volume outlook is a little more optimistic?

Bruce Campbell

You hear me hesitating. It's beenso long since we've had an optimistic revenue forecast or volume forecast. I amhesitant to say it, I guess we would say, we're cautiously optimistic that thefourth quarter will see some nice volume trends, but again, we've had our upsand downs before.

Brannon Cook - JP Morgan

Okay. On the pricing front, thethings mimicked the volume trends a bit, where you saw some incrementalweakening in the pricing environment, you talked about the competitors going inand pricing irrationally in some ways and trying to hold off on that. Was thatkind of -- do you see a similar trend progressing through the quarter and anyincremental optimism on the fourth quarter?

Bruce Campbell

Hopefully we are going to able tomaintain the yield a little bit better than we did in the third quarter andcertainly nothing our people did wrong. I mean we really witness some foolishacts by different competitors really on the crazy side. So, I guess when youguess when you're desperate, that's what you do. Hopefully some of that willcalm down here in the fourth quarter. Obviously, the fourth quarter tends to bethe busiest of our four quarters, and perhaps people want as quite as manydesperate things to try to be in the business.

Brannon Cook - JP Morgan

Okay. And a final question juston network size, do you feel like you are kind of where you need to be rightnow, comfortable with the balance in the different lanes?

Bruce Campbell

With the footprint? Yes, we arevery comfortable.

Brannon Cook - JP Morgan

Okay. Thank you.

Bruce Campbell

Thank you.

Operator

Thank you very much sir. Ladiesand gentlemen, your next question comes from the line of Matt McGeary ofSentinel Asset Management. Please proceed.

Matt McGeary - Sentinel Asset Management

Good evening.

Bruce Campbell

Good evening.

Matt McGeary - Sentinel Asset Management

Could you just remind me aboutthe capital-spending program for this year, and any insights you might havewhat they might look like for next year given just a ballpark kind of view?

Bruce Campbell

Sure, Matt, it has changed alittle bit due to the delay in getting started with our Dallas facility. Right now we are doing --we've started in our institutes some ground prep there. We don't think thatwill exceed a couple of million dollars for the balance of the year beyondthat, about $1 million in normal spending for the balance of the year. Nextyear, the lion share of the Dallasfacility call it $13 million, $14 million will be incurred to complete thatfacility and in addition to that our normal spending of about $8 million to $10million.

Matt McGeary -Sentinel Asset Management

Okay. Could you just, you had mentioned something regardingthe margins in your logistics business affected by -- maybe I guess can youjust talk about of sort of what affected those margins. Is it possible to talkabout that business in some kind of more normalized level? I mean are we there,are they going lower, can they get higher, sort of your thoughts there?

Bruce Campbell

We think we have settled in on a pretty good rate. We had anadvantage before we decided to expand this business line, this product line ofusing primarily Forward Air owner/operators to backhaul and put our parentposition where we wanted it and at the same time haul a truckload or a brokeredload. So that's a lot of words to say this. When we were small, we could putcheaper transportation on it and as a result those margins looked really good,and they were really good.

But to run it as a ongoing brokerage business that we cansettle in on for the balance of our time, we are going to see this type ofnormalized ratio about the 78. And if you'll recall, we've talked about thatrepeatedly on the last two or three calls, that we would see that number go up,but now we think we have it where we can maintain it. And it gives us a nicereturn on what we invest and certainly we have hardly anything invested tohandle this business. So, we think it's a good complementary business.

Matt McGeary -Sentinel Asset Management

Okay, good. Thanks. And just lastly, you talked about thecredit facility in the release. What's M&A looking like for you guys? Thereare opportunities, I’ve got to imagine. Obviously, there is a fair amount ofplay in your industry rate?

Bruce Campbell

In general, let me speak in general terms. In general it'sbetter than it's ever been.

Matt McGeary -Sentinel Asset Management

Okay, great. Thanks guys. I appreciate it.

Bruce Campbell

Thank you

Operator

Thank you very, sir. Ladies and gentlemen your next questioncomes from the line of David Campbell of Thompson. Please proceed, sir

David Campbell -Thompson

Yeah. Hi, Bruce. The logistics purchased transportationcosts are 78% and that is higher than it used to be, but you are also reducingyour airport-to-airport costs as a percentage of line haul revenues owing that?

Bruce Campbell

That's very accurate.

David Campbell -Thompson

So, really have to look at both of them combined to see thebenefits of the whole programs?

Bruce Campbell

You are exactly right, David, and if you will notice thatwe've been able to really rein our system. As Rodney touched on earlier, oursystem PT has operated as well as we have ever operated it. So, your point isabsolutely right. We are pleased with where we are. And I think the questionbefore on the 78 was, is it going to settle in there? And we think it will.That's going to stay right in that area and at the same time help our network.

David Campbell -Thompson

Right. The other revenues of $5.2 million in the quarter, itlooks like it's down from last year. Is that an economic problem or does thatshow some of the effect of the economy or is that just a loss of some business?

Rodney Bell

There is slowdown of some business, but we think mostly thatpicks back up in the fourth quarter with some business to replace some that waslost.

David Campbell -Thompson

Right. And now called Forward Solutions revenues, you hardlyhad roughly two months of that in the third quarter can we add a third to thatto get the fourth quarter run rate or is it more seasonal than that?

Rodney Bell

I am sorry. David it's actually more seasonal in the fourthquarter. Thanks for getting that out. And we think it's going to be more thanthe third. It's our first fourth quarter and we are not sure how big the seasonis going to look like with those guys. So, I believe it to be third.

David Campbell -Thompson

Right. Okay. Thank you very much.

Bruce Campbell

Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your nextquestion comes from the line of Jon Langenfeld of Baird. Please proceed.

BenHartford - Baird

Hey, this is Ben Hartford standing in forJon. Good afternoon, good evening guys.

BruceCampbell

Hi Ben.

BenHartford - Baird

Question, if I could touch on the pricing environment.Looking forward, you've got some rationalization in the marketplace. I guessyou can argue, but the issues of lower volumes and excess capacity are stillthere. So, when you kind of look in to the fourth quarter and in the earlierway, what are your expectations kind of taking in the current environment in toaccount?

Bruce Campbell

Our expectations are that people start acting rational andthat we don't have another competitor to go bankrupt. That's what a normalperson would think. However, the odds are they won't do that. So, we willcontinue on with our target price reductions and we do that through a processcalled spot pricing where if the shipment generally qualifies for a lower price,we certainly are willing to give it and send off the competition.

On the other hand, where acompetitor makes a move such as changing the DIM factor from 250 to 500, whichis one of the more ridiculous things I have ever heard in my life. We certainlyhave no intention of matching that. Now, our expectation again goes back, it ishard to predict irrational people. So, we are hoping that we can hold our own.We are hoping that we exercise good prudent management. We are hoping thatthey've heard of good prudent management and might be able to do the samething, that's highly unlikely. So, in any event, we are going to hold the line.We will give pricing reductions where it makes sense and where it does not, wewill go on.

Ben Hartford - Baird

Okay. Has it worsened in thefourth quarter? Has it stabilized or can you talk about a little bit?

Bruce Campbell

Last week it was better. So, weare hoping that will carry on through, but it is like predicting volumes then,it gets very difficult. In this stage it is just really hard.

BenHartford - Baird

Understand, okay, well thanks. Onthe buyback run, I missed the specific count in the quarter in Q4. Could yourepeat that for me?

Rodney Bell

Sure, can Ben. Actually throughtoday in the fourth quarter, we've repurchased almost 0.5 million shares.

BenHartford - Baird

Okay, good. And how do youbalance your outlook on share repurchases with acquisition opportunities,obviously the credit facility facilitates that but how do you guys view both ofthose two buckets?

Rodney Bell

Okay, Ben. Health of theenvironment as Bruce mentioned, is very good right know from the standpoint ofM&A. We are going to keep plenty of power drop but we would process in the27 from 28. We are going to jump all over that too. So, I would view it as ithappened half right now, but based on what we have in the pipeline along withthe current share price.

BenHartford - Baird

Okay, and then real quick on theexpense side. Looking at the two items the personal cost and other, obviouslythe impact from the acquisition, others good run-rates, are there any specificone times, I know you had mentioned that in the other line you’ve got sometraining of new personnel, but should we look at that as a good base goingforward for those two line items?

Bruce Campbell

Hopefully, we’re going to be ableto improve upon that. With this solutions being brought on, we’re going to havehigher labor costs, because it is more employee intense on the dark side, andit also in the driver side for that matter. And it also tends to be therevenues generated only by the delivery and handling, you don’t have a linehaul portion in there. So, as a percentage of revenue, it’s going to drive up.So, we’re going to see a little higher there. We’re hoping better said that wecan reign in some of these health care costs. We have good weeks and bad weeksin healthcare and that’s kind of driven it a little bit more than we originallyanticipated. That’s not too unusual, where we see the spikes that go on.Hopefully, we’re going to be able to draw that down a bit. So, that’s a lot ofwords to say, the run rate is probably a little bit high, it’s our pawned wishthat it’s around 100 basis points too high. We need to let solutions settle inbefore we really give you absolute answer.

BenHartford - Baird

Sure. And then in the forthquarter you had mentioned re-branding is that going to hit in the fourthquarter and is that a material at all?

Bruce Campbell

Yeah actually, it will hitJanuary 1st, where that operating group is. Today, we retained the name of USACarriers, simply to facilitate the integration of the business, and we arepleased with that and we’ve been able to get the Forward Air part of the storyout there now and so we will begin that process of changing the name from USACarriers to Forward Air Solutions and that’s also important for our expansion.

BenHartford - Baird

Okay, great one. Thanks for thetime, gentlemen.

Bruce Campbell

Thank you very much.

Operator

Thank you very much sir. (OperatorInstructions). Our next question comes from the line of Todd Fowler of KeybancCapital Markets. Please proceed.

Todd Fowler - Keybanc Capital Markets

Good afternoon guys.

Bruce Campbell

Hi, Todd.

Todd Fowler - Keybanc Capital Markets

Bruce with USA Carriers, I thinkwhen you guys announced the acquisition last quarter, you said that in 2006,the business basically was about $32 million annual run rate from revenuestandpoint. Based on what you've seen here in the first couple of months, thatbusiness is growing organically, is it feeling some of the pressures of theoverall freight slowdown and what your expectation would be for that business,kind of on a standalone basis going forward?

Bruce Campbell

They are right on target. Themajority of that business that we acquired, I should say, all the business thatwe acquired is retail business and believe it or not, that has not, it doesn'tappear to have slowed down at all.

Todd Fowler - Keybanc Capital Markets

All right. I don't believe thatafter some of the things I've heard so…

Bruce Campbell

It has kind of surprised us too.But so far we're very pleased with it. We haven't seen any dips, we haven'tseen any less shipments coming out, so we are happy with it.

Todd Fowler - Keybanc Capital Markets

I guess is that business a littlebit more insulated then some of the macro-trends you might be hearing from someof the retailers due to the nature of what the business does or is it somethingelse that, due to the size of the business or something else I might not bethinking of?

Bruce Campbell

I honestly can't answer that, Ithink, perhaps, you are right in some of your assumptions but I don't think weknow that answer.

Todd Fowler - Keybanc Capital Markets

Okay. And then I guess you saidthat it's trending on track with your expectations, does that mean that it isgrowing on an organic basis from where it was historically?

Bruce Campbell

Yes. And understand the way theylook at their business. They divide it in first inside the quarter and they sayin their fourth quarter they actually have two-fifths, so that's how peak thatbusiness is. I mean it's almost like going back to those freight days, andobviously driven by the Christmas and post Thanksgiving push.

Todd Fowler - Keybanc Capital Markets

Okay. So, we should see somedecent seasonality in the fourth quarter?

Bruce Campbell

Yes.

Todd Fowler - Keybanc Capital Markets

Okay, fair enough. And just realquickly, Rodney, I think you covered a lot of this with Ben, but I wanted to goback on the operating expenses, the other operating expenses. I think youmentioned that some of the increase here during the quarter that $8.6 millionhere in the third quarter for other operating expenses which related tofacilities openings?

Rodney Bell

In comparison, yes

Todd Fowler - Keybanc Capital Markets

In comparison. Okay. Did that notpre-occurring is that one-time type costs that were more encouraging in thethird quarter or is that because we have new facilities that are open, that wehave got a higher run rate of expenses?

Rodney Bell

Todd, it's not only moving into.It’s the moving out cost as much as it is the moving in cost, if you know whatI am saying, but they won't occur on the large level as they have in this pastquarter, simply because we’re moving into larger facilities and it's morecostly. But we’re constantly are turning in and out of facilities, so there’salways a certain amount there, but it's not to a level that it was this pastquarter.

Todd Fowler - Keybanc Capital Markets

Okay, that’s helpful actually.Thanks a lot guys.

Bruce Campbell

Thank you.

Operator

Thank you very much sir. Ladiesand gentlemen, your next question n comes from the line of Ken Hoexter. Please proceed

Ken Hoexter - Merrill Lynch

Great, goodevening. Bruce, can you talk a little bit about on the volume side. Are youseeing any pickup on the export, and does that help you at all to offset any ofthe decreased import volumes that we’re seeing on the air cargo side?

Bruce Campbell

Yeah, that’s a great question. Weactually see on that on the airlines side, probably most vividly. There was atime two years ago, when the carriers we do business with the air carriers,they were dying for anything to export, and their imports were just going greatguns, and today that has almost slipped.

Ken Hoexter - Merrill Lynch

Does that help you kind ofbalance out the traffic that you had to stick in the rate increase from theWest Coast? Was it about a year or two ago and do you start to see anymeaningful shift or is this just kind of a minor pickup?

Bruce Campbell

I think this right now is minor.I am not sure as we watch the dollar, if they're still going to continue andmaybe become a bigger issue. I think the bigger issue that affected the WestCoast has been the -- especially containers moving away from Long Beach anotherports, and going to Houston, and for instance our Huston business is exploding.So, I think people always find a way or a better way to move their product andthey learned from a few years ago, coming through the West Coast was difficultin the past.

Ken Hoexter - Merrill Lynch

And then, you mentioned thatothers are being aggressive and you highlighted a couple of pricing things. Isthat just from Kitty Hawk bankruptcy or areyou highlighting that it's getting widespread across many different carriers?

Bruce Campbell

Competitors that we look at are Kitty Hawk in town. I think Kitty Hawk because of the struggles they were going through as a resultwe really didn't get into a lot of really crazy things from them. So, havingsaid that, you can assume where most of the idiotic actions occurred, hopefullythey will begin a fee things, but it's unlikely.

Ken Hoexter - Merrill Lynch

It's unlikely because even thoughthere in chapter 11, they are still kicking around or it's unlikely --?

Bruce Campbell

No, I lost you there. Kitty Hawk actually has been of little concern to us overthe last month or so. So, primarily because I think they were obviouslyfighting for their lives. I don’t know what all they were going through. But wewere facing bigger pricing discounts or whatever from other competitors, thereis one main one out of town. And then we see things on a spot basis across the USwith smaller carriers, who on a one-off basis will come in and do somethingsilly. Will that expand? Again, it's difficult to predict irrational behavior.

Ken Hoexter - Merrill Lynch

So, it's sounds like where we arein the economy, it sounds like in a normal cycle, when you get this much excesscapacity, Bruce, is this kind of beyond what you've seen in your past downturnis this in line with where you think you are? And based on your pastexperience, where have you seen it get to from this point?

Bruce Campbell

I think we are probably hopefullyat the end of it, and maybe even since we are going into the fourth quarter andsome of the other things that have occurred. Maybe we’ve seen a slowing down ofit in the last few weeks. I am hoping that’s the case, I think we’re all hopingthat’s the case. And experience would tell us that hopefully that’s where weare going to start an upturn and be through the down part of the cycle. Butagain, a little bit early to predict that.

Ken Hoexter - Merrill Lynch

Okay. Is anything giving you anindication that you said last few weeks, are you seeing pricing competitionsslow a bit?

Bruce Campbell

We’ve seen it slow, but again,we’ve seen this in other periods of time where we think gee is going to finallyabate or at least just simply slowdown a little bit. And then, two weeks later,it will get craze again. So, we really don’t have the time to give you anabsolute on that.

Ken Hoexter - Merrill Lynch

I think you need to see theseasonal volumes up tick then?

Bruce Campbell

Yeah, we would love to see that.

Ken Hoexter - Merrill Lynch

And then, if I can just wrap upon the truckload kind of business that you’ve launched, the brokerage business.Can you kind of give a bit of an update on how that’s progressing?

Bruce Campbell

Yes. They were up 20% year-over-year. They continue to do agood job. We continue to have new opportunities there. I really think as welook into to the future if go at one, two, three years, I mean this is going tobecome a vital part of the Forward Air story and its really a nice piece of business,we have relatively no investment in it with exception of our people and it'sreally performed well and we are excited about it.

Ken Hoexter - Merrill Lynch

Alright. When you talked 28%, you are talking revenue?

Bruce Campbell

Correct. Yeah.

Ken Hoexter - Merrill Lynch

And is it profitable yet or is it a break-even?

Bruce Campbell

It's very profitable. It's just the problem that we have inbringing any new business on to the Forward Air model is nothing is going to beas profitable as our airport-to-airport business. So, we are bringing in thebrokerage and PT cost to 78. I mean, you have some other costs, obviouslypersonnel and some technology, so worst case scenario it's probably operatingat 85, 86 at the worst.

In most countries they will be jumping up and down and sayaren't we good. At Forward Air it doesn't come in first place, because evenwhen we have a bad airport-to-airport quarter we are operating 81, 82. So, it'sall the matter of perspective and how it fits within the model. But, again, ifwe are making $0.15 to $0.14 on $1 for relatively no investment, we are veryhappy with it.

Ken Hoexter - Merrill Lynch

If I can just throw out this out and what's the differencein a recession and actual recession what you are seeing right now?

Bruce Campbell

Oh my God you had to talk to [coddler] on that. We've seen astabilization of the weight per shipment. It is not back to where it was a yearago, but it has stabilized within the last two, three, four weeks we've seenthat. We hear a few more stories that are more positive as to negative. But, Iwill temper all of that by saying this; it's a time of year where we should begetting busier, so I don't know if people are just happy that in fact we aregetting busier. But, when you compare it to like two years ago it's nothingcompared to that. But it's not horrible.

Ken Hoexter - Merrill Lynch

Okay. Thanks for the time Bruce

Operator

Thank you very much, sir. (Operators Instructions). Our nextquestion comes from the line of Tom Whitecap of Value Holdings. Please proceed.

Tom Whitecap - ValueHoldings

Hi. Can you go over again to what your fourth quarter EPSand revenue forecasts were again?

Rodney Bell

Sure. It's a little bit confusing, so the overall companyrevenue will be between 10% and 15%. Now, of that 10% and 15% between 2% and 5%will come from the Forward Air Segment, which is the traditional Forward Air.Between 8% and 10% growth will come from our new operating segment Forward AirSolutions. From the EPS perspective, it will be between $0.35 and $0.39 pershare and all except for $0.01 per share will come from Forward Air, that $0.01will come from Forward Air Solutions.

Tom Whitecap - ValueHoldings

Okay. And then also your CapEx projection, what was that onemore time just for the fourth quarter now?

Rodney Bell

Q4 it will be somewhere between $2 million and $3 million.

Tom Whitecap - ValueHoldings

$2 million to $3 million. Okay. And then in terms of the USACarriers business can you talk a little bit about what if any effect thehousing market is having on that? Is this more of a business that is gearedtowards existing pools and is therefore not affected?

Rodney Bell

Yeah. It's almost 100% retail business, the customers withinthis business segment for us. Our people like to limit that to Gap, DSW andabsolutely nothing to do outside of the retail in to the world.

Tom Whitecap - ValueHoldings

Okay. Strictly retail. All right, that's good to know. Andthen just to clarify there should be a seasonal up tick in revenues nextquarter?

Bruce Campbell

The fourth quarter for this business segment is always thebest quarter.

Tom Whitecap - ValueHoldings

Okay, great. Excellent. Thank you.

Bruce Campbell

Thank you.

Operator

Thank you very much, sir. (Operator Instructions). At thistime, sir, we have no further questions in queue.

Bruce Campbell

Thank you.

Operator

Thank you very much, ladies and gentleman for yourparticipation in today's conference call. This concludes your presentation fortoday and you may now disconnect. Have a good day.

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Source: Forward Air Q3 2007 Earnings Call Transcript

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