Forward Air Corporation Q1 2008 Earnings Call Transcript

Apr.22.08 | About: Forward Air (FWRD)

Forward Air Corporation (NASDAQ:FWRD)

Q1 2008 Earnings Call Transcript

April 22, 2008 9:00 am ET

Executives

Bruce Campbell – President, CEO and Chairman

Rodney Bell – CFO, SVP and Treasurer

Analysts

Ed Wolfe – Bear Stearns

Alex Brand – Stephens

Matt Troy – Citigroup

Jon Langenfeld – Robert W. Baird

David Ross – Stifel Nicolaus

John Barnes – BB&T Capital Markets

Todd Fowler – KeyBanc Capital Markets

David Campbell – Thompson, Davis & Co.

Ken Hoexter – Merrill Lynch

Art Hatfield – Morgan Keegan

Mike Walk [ph] – MWR [ph]

Operator

Thank you for joining Forward Air Corporation's first quarter 2008 earnings release conference call. Before we begin, I would like to point out that both the press release and this call are accessible on the Investor Relations section of Forward Air's Web site at www.forwardair.com. With us this morning are Chairman, President and CEO, Bruce Campbell; and Senior Vice President and CFO, Rodney Bell.

By now, you should have received the press release announcing first quarter 2008 results, which were furnished to the SEC on Form 8-K and on the wire yesterday at the market close. Please be aware this conference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1975, including statements among others regarding the Company's expected future financial performance. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements, without limiting or foregoing words such as believe, anticipates, plans, expects, 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 other 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 forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

And now, I will turn the call over to Mr. Bruce Campbell, Chairman, President and CEO. Please proceed.

Bruce Campbell

Thank you operator and good morning. We are pleased to share with you what we feel are excellent results considering the hardest operating environment we have ever encountered. But, as we have shared with our team over the past month, Forward Air is uniquely positioned to take advantage of these tough times, not only to take advantage, but to grow and provide our shareholders even more value both now and to the future.

Our team, consisting of both great employees and great independent contractors, helped us achieve the following significant milestones during the first quarter. Overall revenue growth of 24%; a truly remarkable achievement. This effort was again led by our logistics group, primarily our TLX segment, also known as truckload brokerage, with revenues up over 50%. Our core airport-to-airport business continued to show good growth both organically and through acquisition, and remains the backbone for our company.

Our Completing the Model initiative continued to make significant strides in each area targeted and we are most pleased with their progress. Our solutions group, after some retrenchment during the early part of the quarter, has since enjoyed success both expanding their revenue base and realigning their operation structure to better position it for the future.

We made significant progress, both from an operating and a technology standpoint, in finalizing the Black Hawk integration made in late 2007, which will allow us even greater efficiencies as we move forward.

And finally, late in the quarter, we acquired Pinch Transport, our third acquisition in the last nine months. Pinch, headquartered in Houston, Texas and provides us with additional revenues for both our core airport-to-airport segment and our solutions business, primarily in the southwest. While we are pleased with these important accomplishments, we have much work left.

We continue to deal with overhang issues from our acquisitions, which we hope to have behind us by the end of this quarter. Overall, we like how we have positioned our company. We'll continue to look for ways to grow revenues, to increase operating efficiencies, and to bring more value to both our customers and shareholders.

And now, I would like to introduce Rodney Bell, our CFO.

Rodney Bell

Thank you, Bruce, and thank you all for joining us this morning. After my comments, we will open the lines for your questions. Total revenue for the first quarter increased 23.5%. Within the Forward Air operating segment, airport-to-airport revenue increased 2.6% to just over 82 million. The increase is attributable to an 8.9% increase in tonnage, as well as slight improvement in yield net of fuel.

The full quarter benefit of our Black Hawk acquisition and our late Q1 acquisition of Pinch were the primary drivers of the growth. Logistics had another outstanding quarter, growing revenues by approximately 50% to $12 million. We estimate that in excess of 80% of this growth was attained organically. Other revenue increased 17% to $5.8 million. This increase was due to additional service offerings and additional facilities gained through acquisition, as well as doing a better overall job cross-utilizing our existing facilities to generate more incremental revenue.

In our Forward Air Solutions operating segment, revenues were 7.8 million against a zero base in Q1 2007. As Bruce mentioned, Solutions revenues were slightly lighter than anticipated, but with our new customer gains and the benefit of a greater geographic footprint provided by our Pinch acquisition, we feel we are positioned well into the balance of the year.

Purchased transportation improved 320 basis points to 40.3% of revenue. For the fourth consecutive quarter, our purchased transportation group did a superior job managing cost. Logistics PT as a percentage of revenue was approximately 75%, which is essentially flat with Q1 '07.

Again this quarter, the relatively lower PT cost component in our Solutions segment had a slightly positive impact on PT, offset by the impact of company-owned vehicles and personnel that roll up in salaries, depreciation and fuel for that segment. Salaries, wages and benefits increased 270 basis points as a percentage of revenue from Q1 '07; increased share-based compensation was responsible for 70 basis points of that increase. The remaining increase was a result of increased headcount of mainly terminal personnel and company drivers associated with Black Hawk and Pinch, as well as the relatively higher salary component as a percentage of revenue of our Solutions segment. To address this, we are continuing the integration process, which should drive additional personnel cost reductions.

Operating leases were up slightly due to facility upgrades as well as new terminal locations that resulted from our acquisitions. Depreciation and amortization increased due to our USAC and Black Hawk acquisitions, third-quarter equipment purchases, and the depreciation of our new facilities in Atlanta and Chicago. Insurance and claims were up slightly, primarily as a result of higher insurance premiums on our growing owner/operator fleet.

Other operating expenses were up 200 basis points as a percentage of revenue, half of which was due to fuel costs associated with the increase in company-owned equipment. The remaining increase in our other operating expense line item was a combination of costs associated with our two most recent acquisitions, as well as the relatively higher cost as a percentage of revenue in our Solutions segment.

Income from operations as a percentage of revenue declined 270 basis points for Q1 '07 – versus Q1 '07. 170 basis points of that decline resulted from Forward Air Solutions. As previously discussed, given the retail nature of pool distribution, we knew the first quarter would be challenging for our Solutions segment, while our Forward Air segment operated by and large as anticipated.

Below the operating line item was a nearly $900,000 swing from interest income to interest expense, which resulted from using available cash and borrowings over the last 12 months to finance share repurchases, our facilities in Atlanta and Chicago, and our three acquisitions. Our tax rate increased from 37.8% to 39.4%, as tax rate interest income declined and disallowed deductions for share-based compensation increased.

Finally, net income declined $300,000 to $10 million for the quarter, while EPS increased $0.01 per share from Q1 '07 to $0.34. Other key information and metrics are as follows. Total assets grew $242 million to $265 million for the year. Cash flow from operations were up slightly to $10.8 million from $10.4 million versus Q1 '07. We ended the quarter with $3.7 million in cash and short-term investments, and $40 million outstanding on our line of credit, compared to $5.4 million and $30 million respectively at year-end.

No shares of the company's stock were repurchased in the quarter and approximately 1.8 million shares remain on our 2007 repurchase plan. Average weekly line haul tonnage was up 8.8%. Average shipment size increased 5.6% to 740 pounds per shipment. Shipment count was up just over 3%. Yield net of the benefit of fuel was up approximately 1% as the pricing environment has remained challenging. We ended the quarter with 83 airport-to-airport terminals, down two agent locations from year-end as we shut down two Texas points due to light volumes.

Guidance for the quarter – for the second quarter is as follows. We anticipate revenue coming in between 22% and 23%, while EPS is expected to be between $0.38 and $0.42 per share. That concludes our comments. Now, back to the operator for your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question is from the line of Ed Wolfe. Please proceed – Wolfe Research.

Ed Wolfe – Bear Stearns

Thank you. Hey, good morning guys. Hi Bruce, hi Rodney. You have the best tonnage that we've seen in two years, 8.8%. Obviously, a lot of that is from acquisitions and some at Kitty. But the OR still feels 270 basis points deteriorated. Bruce, you made some comments upfront that you are almost through the integration. If we look at this 270 basis points of year-over-year deterioration on not all that difficult comp, how should we think about what percentage of that is related to the integration, what percentage is maybe related to fuel, how do we think about that, because it feels like there is more tonnage in the network than what we're seeing from the OR right now?

Bruce Campbell

Before I touch on that, Ed, let me back up and tell you that we also have shorter haul traffic in there, which tends to – it's a bit more expensive to handle. It's still very good. It's very lucrative business. But, that's kind of pushing that number up too. But, there are a number of issues that Rodney touched on, our option expense, there's the cost of Forward Air Solutions that we went through in the quarter. If you looked at just Forward Air by itself, the airport-to-airport business actually improved their operating ratio. So, we were okay with that.

If you look at true operating cost, and so let me explain what I mean by that. I don't look at the option-based cost that we didn't have a year ago as being a true operating cost. And I don't mean to ignore it, but in the day-to-day operations, there's nothing our operating group can do to stop that. So, they made significant progress, as Rodney talked, on purchase transportation. Where we did not make significant progress, and was indeed mostly acquisition related, was on salary wages that type of an area, which we will clean up. It's going to take us at least this quarter to get behind us and some technology improvements that we'll need to bring total efficiencies there.

So, that's a long-winded answer that says we understand that we have gone backwards a bit there. We also understood that was going to happen when we made these moves and that it was going to take us time to get us where we are traditionally used to, if that's the right way to describe it. But, we're confident we can get there.

Ed Wolfe – Bear Stearns

And so, when we think about Forward's OR, I always think about 80 kind of – when things are really great, a little better than 80 – but 80 is kind of where you can get. With the model, with shorter haul freight and with some of the faster growing non-line haul stuff, is 80 a fair number to get to again as the economy improves?

Bruce Campbell

Ed, can we get there? I think we can. Will we get there this quarter? I don't think we will, but I think we can show improvement. While we have good numbers, and we've been able to post what we consider to be overall great revenue growth, a lot of that growth is coming in those areas not quite as lucrative, if you will. And there are minimal things we can do to improve that. Having said that, I can tell you that internally our goal is to get it back to 80. We think under normal circumstances, we can do that, but we've got work left to do.

Rodney Bell

And Ed, when we talk about getting back to an 80, and Bruce, correct me if I'm wrong, we're talking about the Forward Air operating segment, less Solutions. Solutions is going to drive that number higher, but the number can still be in the low 80s.

Ed Wolfe – Bear Stearns

So you think now, because of Solutions, that the total consolidated OR, we won't see sub-80s again?

Rodney Bell

It would be very difficult.

Bruce Campbell

I would never say that. I had this argument five years ago when they said we'd never operate in the 70s, and I'd say yes, we would.

Ed Wolfe – Bear Stearns

I remember it, Bruce.

Bruce Campbell

Yes, and I honestly think we can. But I also want to be very honest and say it's not going to happen this year probably. When we get positions [ph] positioned exactly where we want it, that's going to be a really nice business. Right now, we're kind of paying a price to develop it and get it geographically spread out where we need it and to bring on the customer base that we need to accomplish getting it down low enough where it won't pull up Forward Air into the low 80s. Again, a lot of work there left to be done, but it's a great opportunity.

Ed Wolfe – Bear Stearns

Why the shorter haul, length of haul, what's driving that?

Bruce Campbell

We actually went after that market. We have traditionally in the past kind of shied away from it. But, the best example I could give you is out of Chicago, we never really went after the short haul market, which would be defined by Chicago to Detroit, Indianapolis, St. Louis, that type of geography. And we just decided that, based off of our initiatives, both the airline business and the international forwarders, that was too good a business to back away from. And so, we have made an aggressive move to go after that business. While we like it, we think it adds value to our company and in turn our shareholders. It just simply is not as lucrative as the longer haul freight. In general though, it's a good step to make.

Ed Wolfe – Bear Stearns

Roughly what percent would you define of your line haul business as short haul at this point?

Bruce Campbell

This would be strictly a guess, I'm guessing somewhere around 10% to 15%. We can't give you that answer.

Ed Wolfe – Bear Stearns

Where do you think it's directionally going to head towards if we looked out five years from now, say?

Bruce Campbell

Oh my God, I'm not sure I'll be here in five years, so I'm not sure where that will go.

Ed Wolfe – Bear Stearns

I'm guessing it's going to be a bigger piece, though?

Bruce Campbell

No, I wouldn't necessarily say that, because typically, if you get back into a good economy, which you would assume we would in the next two, three years hopefully, then the long haul traffic becomes more plentiful, which would keep that percentage of the short haul traffic basically where it is.

Ed Wolfe – Bear Stearns

Sure, other operating expenses also look ballooned at 9.7% versus 7.7% a year ago. What's going on in there?

Bruce Campbell

You're seeing fuel there for company-owned equipment and that causes that number to look a little bit crazy. Now, we're having discussions to break that out, so that – because it is now becoming important enough that we need to isolate it and let you see it as opposed to being sort of a grouping. And then, candidly, there is some what I call acquisition slop in there, slop is a technical term, that we have to clean up. Now again, it's not unanticipated. We knew we would go through that. We knew we would have expenses associated with it. And with all the new accounting proclamations, none of that can be stuck aside, it has to be expensed immediately. So, again, we have work to do there, but we have a good group that can get that done.

Ed WolfeBear Stearns

Thanks. Last thing, I'll let someone have it. Can you give a little bit more clarity on what Pinch is, what you bought, how big it is, what you paid for it?

Bruce Campbell

Pinch was $35 million in revenue and located in Houston, Texas, or headquartered in Houston, Texas. Two primary locations, one Dallas, Texas and the other obviously Houston, and then spread throughout the state of Texas. $10 million – pardon me, $15 million of what we call airport-to-airport business, $15 million of Solutions business, which was a really nice pop for them, and then $5 million of intermodal business, which is an area that we have played with in the past, but we are now making a concentrated effort at seeing, is this really a good model and is this really a good revenue opportunity for Forward Air – back to your statement a little while ago – five years from now? We can't answer that today, but we think it will be. So, it brought to us a total of $35 million revenue. We paid $18 million for it, is that right, just a little bit more than $18 million for it and think as we get the integration process completed that it's going to bring a lot of positive values to us.

Ed Wolfe – Bear Stearns

Are there any assets that you bought, whether it's containers or trailers or anything else with that, or tractors, and is there any consolidation that you can do into your network? Is there any either heads to cut or facilities to cut?

Bruce Campbell

We'll go through the process facilities. As an example, after both Black Hawk and Pinch and Forward Air Solutions when we bought USA Carriers, we now have four facilities in Dallas. We will be able to be rid of most of those facilities when we finally get into our new one. So that's an example of facilities that can be made. We obviously trimmed back the back-office of Pinch, because we no longer need those services. We can perform those here. We did bring on some assets, primarily trailers, not a huge number of them. And then there were some power units, but most of that equipment was leased. That will take us throughout the year of 2008 to rid ourselves, if that's the right way to put it. But, the overall efficiencies and what it's brought to us in Texas, we think, will more than offset those additional expenses.

Ed Wolfe – Bear Stearns

Thanks a lot, Bruce. Thanks, Rodney, for the time.

Bruce Campbell

Good luck.

Ed Wolfe – Bear Stearns

Thank you. Appreciate it.

Operator

Your next question comes from the line of Alex Brand with Stephens. Please proceed.

Alex Brand – Stephens

Thanks, good morning guys. What do you think about the early Easter? Was there any noticeable impact and would that imply that April would look a little bit better?

Bruce Campbell

Obviously, that question has been asked by a number of people, Alex. And we were – a lot of our numbers are being skewed by the acquisition which occurred right then. So, overall, did it affect us? Yes. Easter always especially affects us in the Northeast more than anywhere else. But overall, we were happy with where we were in March. Our April numbers to date have been good and I don't know if that's because Easter was in March or not. How's that for a non-answer?

Alex Brand – Stephens

Excellent non-answer. Now, you were just talking to Ed about consolidating facilities in Dallas as an example of removing cost. What are some of the other integration issues that you are having to deal with? I assume you have some multiple IT platforms. Is there other stuff and how long do you think it will take to work through some of those issues?

Bruce Campbell

The IT for Pinch has not been as difficult as it was with Black Hawk, partially because it wasn't quite as complicated, and partially because we had already done Black Hawk, so we already had some of that behind us. So, IT continues to be an issue, but it is not the issue it was with Black Hawk. We continue to – whenever we do an acquisition, the macro way to view that is our number one goal is revenue retention. We do not want to lose business. And in order to do that, you tend to over-serve, you tend to – if anything you've got extra power, you've got extra people, you've got a lot of extras to make sure that we don't lose business because of an oversight. And you will see us now begin, actually we started it a few weeks ago, working on the efficiencies and rightsizing each of these operations.

We think we can bring efficiencies to the airport-to-airport operation that neither of the companies had before because of the increased volumes. We think we can improve our labor productivity. We think we can improve our back-office productivity. The labor productivity, primarily driver, that type, will be a little bit quicker. The back-office productivity will take a little bit longer simply because of the IT situation. But overall, the consolidation – we'll have to work through it. Our goal is to have most of it done by the end of May. We think that is doable, but it remains to be seen.

Alex Brand – Stephens

Okay. With respect to the yield improvement, it sounds like there's more shorter lengths of haul than we're accustomed to. And so, I'm wondering if the yield is still going up, is that just fuel surcharges or is there a mix issue there as well?

Rodney Bell

Really, it's a mix issue, Alex. There's some of what you said with the short haul of driving the yield down somewhat I want to say artificially, but it's being masked by the benefit of fuel the way the pricing to the customer versus the payments out to our owner/operators fell for the quarter.

Alex Brand – Stephens

Okay. And Rodney, in the guidance, in terms of top line, can you break down for us how much organic growth you're assuming in there versus – there's acquisitions, a number of acquisitions now that would help you in your year-over-year comps for the second quarter.

Rodney Bell

Bruce pointed out at the end of my comments that I misspoke and to clarify that the top-line guidance is 22% to 27%; it's not 22% to 22%, as that would be a pretty narrow range. We want to give us a little more leeway there. To answer your question now as best I can, the airport-to-airport organic is really tough. We peeled it back in a very – I mean there's more art than there is science here. We think airport-to-airport organic is up slightly, call it 1% or 2%. The gains that are being made in logistics, most of those are in fact organic. That entire amount for pool, obviously, is not, and pool accounts for 10% of the top-line guidance. If you back pool out and just look at the Forward Air segment, the guidance would be more like 12% to 17%. And I would tell you that of that 12% to 17%, probably a third of that is organic and the rest of it is acquisition.

Alex Brand – Stephens

Okay. That's helpful. Thanks a lot.

Operator

Your next question comes from the line of Matt Troy with Citigroup. Please proceed.

Matt Troy – Citigroup

Thanks. You referenced that first quarter was – I think I'm quoting here – the hardest operating environment you've ever encountered. I'd be interested to hear more of your thoughts on that. Specifically, could you put more specifics around tonnage trends during the quarter by month? Are there challenges more concentrated in any area by industry vertical or geographic lane? Just looking for a little bit of detail around that comment.

Bruce Campbell

Geographically, we continue to see the Southeast part of the US struggle. And from everybody we talk to, primarily our customers, that area has been very hard hit. The Northeast, also some struggles in that area. To counter that, we're having success in the other geographic areas. So, I don't know if you can extrapolate that to say that, "Gee, maybe that's where the country is the hardest hit." You would have to make that determination. We're looking at, on the cost side, obviously fuel is a huge issue. That's not going to go away. We're paying over $4 a gallon on national average and I don't see that, or none of us see that, mitigating anytime soon. That in turn causes hardships on our owner/operator fleet, although our owner/operator fleet is at the largest it's ever been and we're happy to be there. But without question, that causes them hardships. So, we worry about them and worry that we have to make sure that they are made whole because they're a critical part of our team. When we talk to our customer base, they talk about their domestic revenues being down, it depends on the customer, anywhere from zero to as much as 15%. On the other hand, they talk about their export business being up, almost a like amount. And interestingly enough, that means, because we handle both their export business and we handle their domestic business, that's probably why we're holding our own on our tonnage, and have been able to, because where they lose domestic business, they gain the export. From the Forward Air point of view, it makes no difference to us that that shipment is going overseas or staying in Philadelphia; it's still tonnage that moves within our system. So we've been very fortunate there. But without question, the customers do say their domestic volumes are down.

Matt Troy – Citigroup

On that front, you gave a tonnage number for the quarter. I was wondering if you could just directionally help January, February, March. Was there any big difference or disparity around the all-in number for the quarter in terms of tonnage growth?

Bruce Campbell

Nothing out of the ordinary. I mean January tends to be a little bit slower, obviously. February was a typical February. March was good. It could have been the Easter impact that Alex brought up or surprisingly good because we did have the Easter impact. But nothing dramatic there in terms of trends.

Matt Troy – Citigroup

In the past, you've been very candid in your assessment of pricing trends, at least competitively.

Bruce Campbell

That's a nice way to put it.

Matt Troy – Citigroup

Yes. I was wondering if you could talk about how pricing trends progressed through the quarter. Was there any escalation on the competitive front?

Bruce Campbell

We continue to see idiots do idiotic moves, and that's probably never going to change. As we talked about last quarter in the same call, we think we bring great value to our customers in terms of the products and the services that we offer them. We understand our cost basis, we think, as well as any transportation company in the industry. And as a result, we know how to price. And there are very few times when we're going to respond to an idiot. There's just no other way to put it. Do we see more of that going on? I wouldn't say so. I'd just say we see the same amount of it going on.

Matt Troy – Citigroup

You talked about some of your customers in your earlier answer, talking about their business domestically down 0% to 15%. Does that create a risky environment, in that some of these lower pricing initiatives by the competitor, idiotic or otherwise?

Bruce Campbell

It would if the business hadn't been replaced by their export business. Again, from the Forward Air and I would assume from these competitors' standpoint, you're basically seeing the same volumes, because the export business replaced the domestic. Now, that's not 100% true across the board, but I can tell you if the export business growth that our Forward Air customers, had they not experienced that, it might have been tougher right now.

Matt Troy – Citigroup

Last question, on your earlier comments on shorter length of haul being a compelling business, just curious if lower yielding or a lower margin business – certainly, you cited that in terms of lower OR. What makes it compelling? Is it because it's scalable within your network? What is it from a returns profile or perspective that says this is a business that you should be going after?

Bruce Campbell

Yes, that's a good question and my response would be, let's use Chicago again. We have the facility that we paid for. We have supervision which we paid for. We have all the infrastructure costs that are already paid for. And so, if we're able to complement our existing business base with this short-haul business, even though when it's measured by itself, it will not produce quite the margins that we're used to. And overall, the grand scheme if you will is a very nice product to have. And the other thing that it does for us, candidly, provides our customers more solutions than we were able to provide them six months ago. So that's very positive to us also.

Matt Troy – Citigroup

Thanks, Bruce and Rodney.

Bruce Campbell

Thank you.

Operator

Your next question comes from the line of Jon Langenfeld with Robert W. Baird. Please proceed.

Jon Langenfeld – Robert W. Baird

Good morning guys. Bruce, can you articulate – on the pool distribution side, can you articulate today where you feel that you are leveraging kind of your core expertise in the line haul business? I understand where you are going with it, I'm just wondering if you have specific examples today where you're actually leveraging the expertise that you have gained over the years.

Bruce Campbell

We do have one customer that really was our launch customer in helping us to do what you just said. And without going into specific names, out of two pool points, one on the East Coast, one on the West Coast, we in the Forward Air airport-to-airport operating system, we pick up their freight and we move that into the Forward Air pool network. And we've been able to provide them both better service by doing that, better accountability, because there aren't multiple carriers involved, and bottom line, a greater efficiency than they had in the past. We think as we go into the future that the traditional pool business gives us great opportunities to grow, as does the non-traditional pool business, where they're able to jump into the Forward Air network, move it to the pool point for further distribution, and simply become more efficient for the customer, and us be able to provide them a better value.

Jon Langenfeld – Robert W. Baird

And in that example you gave or in future examples, will the pool point ever be the facility you have to service your core airport-to-airport?

Bruce Campbell

Yes. Our primary push there has been smaller facilities, where both Forward Air airport-to-airport struggles and the pool business struggles because they simply can't afford both of them, the overhead cost structure that's imposed upon them. So, we have made a couple of moves in those smaller cities, and the end result of that is both operations become more efficient. We are able to shed ourselves of building costs, of the general overhead costs that we've touched on before and they become more efficient. Counter that with where we have very large airport-to-airport businesses and we have very large pool business, you will probably not see us put those together because they both demand so much product integration that we just simply won't do that. Now, having said that, six months from now, we may change our mind.

Jon Langenfeld – Robert W. Baird

Sure. Now, thinking through the margin side of it, obviously what you talk about improves the margin profile on both sides of the business. Is that something – from that particular avenue where you are actually leveraging your facilities, is that something that's kind of a secondary or tertiary-type opportunity or is that a big part of the story when you think about it in terms of leveraging the secondary and tertiary cities that have smaller facilities?

Bruce Campbell

It will eventually become a very important part, Jon. Right now, we simply aren't positioned to do that yet.

Jon Langenfeld – Robert W. Baird

Okay, makes sense.

Bruce Campbell

But your point is very well made.

Jon Langenfeld – Robert W. Baird

How many of the customers in the pool network today do you think have more than one pool site, is it a majority of them, just a few of them?

Bruce Campbell

All of them.

Jon Langenfeld – Robert W. Baird

All of them do. All of them have multiple pool sites in your network?

Bruce Campbell

Yes.

Jon Langenfeld – Robert W. Baird

Okay, alright. That's good to know. And then, on the growth side, can you talk about generically about new customer additions within the pool distribution area since you've taken the business on?

Bruce Campbell

Actually, they started the first quarter by losing a very large customer, which was really a 3PL [ph]. And candidly, it was a good move for us, although it's a bit painful. You get a bite on the fanny, it still hurts. But overall it's going to be – it's the way to go. I mean, we are going to be positioned perfectly. They have since that time, and we retrenched and really got their operating efficiencies going, they have done a really good job of bringing on new customers. And then, they were further complemented in that area by the acquisition of Pinch, which – believe it or not, between Pinch and Forward Air Solutions, they did not have one common customer. So, each customer that was brought on by Pinch is a brand-new customer to Forward Air Solutions, which we think in the future will bode very well for them. So, overall, even though we aren't jumping up and down about losing a little bit of money there, we are excited about what we think they can do in the future. We think we have got the tough times behind us. We bit the bullet and we moved on, and we are excited about what they're doing and what they're going to do.

Jon Langenfeld – Robert W. Baird

Okay, good. And then, how about in the line haul business, new customer opportunities there again, if you could just generically talk about that?

Bruce Campbell

The big new customer opportunities for us continues to be the international forwarders, where they've made great progress, but there's still opportunities, and on the airline side. And we have a very solid group there that continues to week after week bring new opportunities to the table, and they're doing a very, very good job. I don't want to go into names, because as soon as I do everybody will jump up and down, but they've just done a great job. So, our focus has been in those areas. On the domestic forwarder side, we do business with most of the domestic forwarders we know, so I don't think you're going to see any new name pop up unless it's a surprise to all of us.

Jon Langenfeld – Robert W. Baird

Got you. And then, the last question, Bruce, on the acquisition side, it doesn't sound like you want to let up the pace there if the right opportunities present themselves. But, how do you balance the attractive valuations versus the appetite for the Company to digest the acquisitions?

Bruce Campbell

Strategically, as we've discussed in the past, Jon, we have certain goals that we'd like to get accomplished. We talked even more about this in previous calls, where we think 2008 at best because of the macroeconomic climate is probably just not going to be a great year. And what is good about a year like that is it's a great opportunity to position the company. All of that having been said, when we started really pushing on the pool side and the other business, the airport-to-airport, we said from the beginning that on Solutions that we wanted to give them a good national geographic footprint.

We're about two-thirds of the way there, which means that we will continue to look at opportunities. But we also want to make sure that we've gone through the digestive process of both Pinch and Black Hawk, and get all of that behind us so that we have very solid infrastructure, and that we can take on the next acquisition and hopefully do it even more efficiently than we have the previous ones. All of that having been said, if the right opportunity is put in front of us, we would probably jump at it, but I would put special emphasis on that one word, right. As you know, we've made three acquisitions in the last month, we have probably looked at 100, so we are very, very picky. We are very, very strategically driven that it has to be the right acquisition.

Jon Langenfeld – Robert W. Baird

Thanks, Bruce.

Operator

Your next question comes from the line of David Ross with Stifel Nicolaus. Please proceed.

David RossStifel Nicolaus

Good morning, gentlemen.

Bruce Campbell

Hi, David.

David RossStifel Nicolaus

First question on the truck brokerage side; you said that was the fastest-growing part of the logistics segment. Can you talk a little bit about capacity in that segment, if you're getting any – you're seeing any shortages out there on the carrier side?

Bruce Campbell

I think that's a great question, but we are not at this point. We do have a concern as we go forward, because we hear every day, as I'm sure you do, that capacity is shrinking there. But, to this day, we have not had any adverse conditions there. We tend to align ourselves with smaller outside carriers who are dependent upon us to provide them the lift they need. We also have some of our own owner/operators running in that market, so we can – if we got desperate, we could provide our own capacity. We have a good operating agreement with Covenant that provides us capacity, so we're looking across the truckload market – by that, meaning looking at large companies, looking at small companies, and then looking internally to provide capacity to our truckload group. And the last part of that is, our TLX group does a great job of promoting relationships with these carriers. We don't host [ph] them on fuel surcharge, which 90% of the brokers do. We want to make sure that these people are going to be around next week and that if we need capacity, they're going to come to us. And so far that's worked well.

David RossStifel Nicolaus

Sounds good. On the airport-to-airport side, you said on the last conference call that you estimated – and I know it's only an estimate – that you were getting about $1 million a month of former Kitty Hawk revenue. Is that sticking? Is that still kind of what you're seeing out there?

Rodney Bell

It's really hard to tell. Intuitively, it's probably that or a slightly lower number. But, it's a blend of existing business in the same customer base.

David RossStifel Nicolaus

Okay. And then, you talked – you ran through a lot of numbers real quickly there, Rodney. You said average shipment size was up, I think, 5.6% to I want to say 745 pounds. Do I have those numbers correct?

Rodney Bell

5.6%; 740. That's correct.

David RossStifel Nicolaus

740?

Rodney Bell

Yes.

David RossStifel Nicolaus

Okay. And I guess last question is on the share buyback. You were absent this quarter from buying any shares. Is that just because you were focused more on acquisitions? Is there a certain stock price you're waiting for to get back down to?

Rodney Bell

The primary reason is keeping our powder dry for acquisitions. As Bruce alluded to earlier, the environment's good right now, the valuations are reasonable for a change. That's not going to always be that way. Everything runs in cycles. But, right now, the best way that we can use our available cash and borrowings is buying companies. So that said, if the share price dipped down significantly, we would probably take a look at that.

David RossStifel Nicolaus

Thank you very much.

Operator

Your next question comes from the line of John Barnes with BB&T Capital Markets. Please proceed.

John BarnesBB&T Capital Markets

Good morning, guys.

Bruce Campbell

Hi, John.

John BarnesBB&T Capital Markets

Bruce, typically, stupid things from your competitors, idiotic moves by your competitors result largely from desperation. We've already seen one major competitor exit the market. Do you have a feel for, in your core airport-to-airport business, obviously there's not going to be anybody of the similar size as Kitty Hawk that would exit, but do you feel like some of maybe the regional or local players are struggling, and that there could be a stair-step function and a reduction of competition in those markets?

Bruce Campbell

This would be strictly conjecture, John, because obviously we have no bonafide numbers. But, we hear troubled stories all over the place. And candidly, we don't wish that on anybody. But, when you're in a tough market, as you well know, those guys get hurt the worst. So, we're hearing that everywhere.

John BarnesBB&T Capital Markets

And of the hundred or so deals that you've taken a look at, I mean how many of those deals – what percentage of those deals would you classify as those troubled players that are looking to be bailed out? Is it the majority of them?

Bruce Campbell

Yes, I'm thinking probably. That's gone over the last six months, and my memory is really not that good. But I would say the majority of them are.

John BarnesBB&T Capital Markets

Okay, all right. From the pricing perspective, and I know you gave a little bit of color on this earlier, but and just trying to understand the various moving pieces here, obviously, some of your pricing is being influenced by the exit of an irrational player. Some pricing is being, yield per pound is being influenced by a mix shift on length of haul and that type of thing. Can you comment – was your pricing – how much of your pricing is being influenced by the acquisitions you've made and understanding that some of the acquisitions you've made have historically operated at a margin less than Forward Air's core business, is it similar on price that some of the business you've acquired has traditionally operated at lower pricing than what you've normally done at Forward Air?

Bruce Campbell

I would not throw it all into that bucket, John. I would throw most of it in the fact that the acquisitions we've made have been primarily short-haul, which automatically means a lower yield, obviously. So that's really the bigger issue.

John BarnesBB&T Capital Markets

Okay, all right. So more on the length of haul than just they've historically operated at lower rates?

Bruce Campbell

Correct.

John BarnesBB&T Capital Markets

Okay.

Bruce Campbell

Some of the business that we acquired, obviously we had to go back in and have a discussion because it was not sensible [ph] to us. But overall, we accepted their rates as given to us.

John BarnesBB&T Capital Markets

All right. I know these kind of issues are always sensitive, but when you talk about salaries and wages being up, is there a target headcount reduction that you have in mind right now? And if so, can you share what kind of magnitude of headcount reduction you're looking at out of the acquired businesses?

Bruce Campbell

You know, it's really all over the board, and let me explain that just a bit. We have areas in our company that have grown significantly. You will not see headcount reductions there. We have other areas that have not achieved the same type of growth. We're going to look at those very hard. We will not – we don't go through a process like this just – I'm always amazed when somebody, XYZ Company, announces they're going to lay off 10,000 people. Why didn't you layoff 9,999? I just don't understand how people come to those numbers. What we do is we go in and look at each facility and each cost center, and we make good decisions based on what's their revenue production, what's their cost efficiency, and we adjust accordingly. So what that final number is, we'll be able to tell you at the end of the second quarter. But right now, I can't tell you that.

John BarnesBB&T Capital Markets

On the integration cost and in that bucket, you call it kind of acquisition slop in the other expenses, do you feel like you're largely done with the integration cost and the acquisition-related things by the end of the second quarter? So back half of '08, maybe we start to see some margin improvement kind of – ex the economy, obviously, I'll give you some credit for that and fuel. But, just out of the integration type things, do those expenses kind of run their course?

Bruce Campbell

We're working very hard as we speak. But, as you know, some things you just can't get rid of immediately. IT has to come in and help and they've done a wonderful job. But, it simply takes time. We have building costs that we will not have ongoing as we go forward. Just things like that, as you well know, that will take us time. Our goal, as we stated earlier, is to have all that cleaned up by the end of June, with some obligations that we simply can't clean up. But, if you use the term, my technical term, slop, that needs to be behind us, and that needs to be behind us quickly because we have an operating discipline that is second to none in the industry and we're not going to waste time on that.

John BarnesBB&T Capital Markets

All right. I'm going to try to work slop into my call notes. That's a new one for me. And then lastly, Bruce, I know you guys have been really – in times of fluctuating freight volumes, you guys have been very disciplined in terms of taking down equipment on an as-needed basis, taking down lanes or adjusting the number of owner/operators serving a particular lane. Given the acquisitions that you've done, given that your businesses is still a growth business, there's still opportunity out there in the airport-to-airport market, can you just walk us through your thought process on how you right-size the network given this kind of environment, given the acquisitions that you're doing, seeing the moving pieces from a competitive standpoint, with competitors exiting the market, and making sure that Forward Air is well enough staffed to grow into that business?

Bruce Campbell

We simply go – we have a group of people who are called RVPs, regional vice presidents. They handle both the sales side and the operations side. And we simply go to them, and I don't mean to oversimplify this, because this is work. And then they turn around and work with their terminal managers and it becomes very apparent very quickly through their leadership efforts, this terminal is really doing well, they have all kinds of opportunities, and we need to continue to allocate to them the proper resources, whatever those resources may be. On the other hand, you may have a facility or a geographical area that simply is getting the hell beat out of it, that's another technical term you can use, and it's nobody's fault. It just simply is not a good area because of the economy.

Those people have the same commitment on the other side. They have to downsize. They have to right-size their operation and they have to make it efficient regardless that they are dealing with a difficult economic environment. So it's across the board, but it's driven by good leadership, and we have good leaders who can make that happen and have made that happen. So again, our focus now is to get those people back on that track, and getting each of those – once we're through all the acquisitions and dealing with that, and getting them focused on how they make money personally through their incentive programs, and how they make sure that the Company makes money in total.

John BarnesBB&T Capital Markets

Okay, very good. Bruce, nice quarter. Thanks for your time.

Operator

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

Todd FowlerKeyBanc Capital Markets

Hey, good morning guys.

Bruce Campbell

Hi, Todd.

Todd FowlerKeyBanc Capital Markets

Rodney, did you say out of the tonnage growth in the quarter, the 8.8% or the 8.9%, how much of that was organic?

Rodney Bell

I did not, Todd. That's a very difficult question as it's a pretty common customer base, both organically and as Kitty Hawk rolled in, as someone asked earlier, and as Black Hawk rolled in, and as the Pinch components of airport-to-airport rolled in. So it's really difficult. But, I think it's – we intuitively think that it's somewhere between 1% and 2%.

Todd FowlerKeyBanc Capital Markets

Okay. That's fair enough. And then, with the Pinch acquisition of the 35 million of acquired revenue, what sort of retention rate should we expect for them? I think on Black Hawk, you guys were looking for about 90% retention. Is Pinch similar? Or because some of the businesses are a little bit different, you wouldn't expect to keep all of that?

Rodney Bell

We think it will be north of 80.

Bruce Campbell

We actually modeled it less than that. The Black Hawk business, we were very comfortable with and in turn, the people we acquired from Black Hawk, their sales and management group, did a wonderful job. The Pinch, there was some business in there that simply was not attractive to us. Nobody's fault, it just wasn't attractive to the Forward Air model. So we modeled a lower retention rate there. Our group in Texas has also done a wonderful job and we're maintaining our targeted retention rate. So we're happy.

Todd FowlerKeyBanc Capital Markets

Okay. And then is it – with the business that wasn't attractive, Bruce, I mean was it airport-to-airport or was it pool distribution or kind of across the board?

Bruce Campbell

That was primarily airport-to-airport.

Todd FowlerKeyBanc Capital Markets

And was pricing the primary issue with that or --?

Bruce Campbell

It's a little bit of pricing, a little bit of operating characteristics, in terms of what you have to do and those type of things. Just typical. Pinch, obviously with the smaller customers, they did things differently. That's well and good when you're Pinch. But when it folds into Forward Air, there are certain things that we just don't find feasible to do. And as a result, you walk away and hopefully you walk away friends.

Todd FowlerKeyBanc Capital Markets

Okay, fair enough. And then just one last one, with the salaries expense line item here in the quarter, as we get into the second quarter, I'm assuming that goes up sequentially because we'll have a full quarter of Pinch in there. Any thought on how we should think about that either from an absolute dollar number or as a percent of revenue going forward, maybe for the next couple of quarters as we get our arms around some of the personnel costs, the additional headcount coming from the acquisitions, and then kind of rightsizing the business?

Rodney Bell

I think you'll see a spike up slightly as a percentage of revenue and I mean slightly. And then, as a percentage of revenue in the third and fourth quarters, that number should taper off. Pretty vague?

Todd FowlerKeyBanc Capital Markets

I'm sorry; it should taper off pretty significantly in the third and fourth quarter, Rodney?

Rodney Bell

It will taper off.

Todd FowlerKeyBanc Capital Markets

Okay, all right. Fair enough. Thanks a lot.

Operator

And your next question is from the line of David Campbell with Thompson, Davis & Co. Please proceed.

David CampbellThompson, Davis & Co.

Good morning. Bruce and Rodney, will the share-based compensation be more than last year's 3.7 million for the '08?

Bruce Campbell

Yes, it will.

David CampbellThompson, Davis & Co.

It will exceed last year's?

Bruce Campbell

Approximately 6 million for the year.

David CampbellThompson, Davis & Co.

Okay, great. And the intermodal revenues on the profit and loss statement, where will they be? And will they be reported as gross or net?

Rodney Bell

Ask that again, David; I'm sorry.

Bruce Campbell

The revenues will be reported as gross?

David CampbellThompson, Davis & Co.

Gross revenues, where on the profit and loss statement?

Rodney Bell

Under logistics.

David CampbellThompson, Davis & Co.

Under logistics, okay. And I see, I had one more question. The number of company tractors, up substantially from the previous quarter. I guess that was Pinch?

Rodney Bell

Correct.

David CampbellThompson, Davis & Co.

Will they be eventually moved into owner/operator fleet?

Rodney Bell

We'll look at that. In some cases, that's applicable to the situation. In some cases, it is what it is and will have to be company equipment. But the good news is, from a utilization standpoint, it's typically in situations where they can slip seat those units and really get good utilization out of them.

David CampbellThompson, Davis & Co.

Okay. But it does increase the capital intensiveness of your business.

Bruce Campbell

But not significantly. Again remember, this is primarily short-haul, very dedicated equipment. So, you will not see us grow that fleet any more than it is today. Actually, with a little bit of luck, we hope to reduce it but that's not going to happen in the next nine months because of equipment commitments.

David CampbellThompson, Davis & Co.

Okay. Thank you very much.

Bruce Campbell

Welcome.

Operator

Your next question is from the line of Ken Hoexter with Merrill Lynch. Please proceed.

Ken HoexterMerrill Lynch

Hi, good morning or afternoon now. On the question Dave was just asking on the tractor count, looks like your agent terminals also fell to 16. So, was Pinch one of your major agents?

Bruce Campbell

That's exactly right.

Ken HoexterMerrill Lynch

Would you look to buy – there was a lot of discussion about acquisitions before and you said you've looked at – I think you said you looked at over a hundred to get to these three. Have you had discussions with other agents and how many make up the – kind of those 16 terminals, or the number of tractors? How do you want to look at that?

Bruce Campbell

Typically, we would not have discussions with an agent. What Pinch did, which is different than any other agent we use, was they handled lower Texas for us, from Laredo, all across that area. That's very unusual. There is no other situation like that in the US. And in addition to that, they handled other business that we were interested in, so it was a very unique situation. I don't know of another situation; that's not to say there isn't; I just simply don't know of another situation like that in the US. I doubt if we would do a similar. A typical agent, we would not be interested.

Ken HoexterMerrill Lynch

How many of your agents make up those 16 terminals? Is it one per or – (inaudible)?

Bruce Campbell

Yes, it's one per.

Ken HoexterMerrill Lynch

It's one per, okay, so they're regional entities?

Bruce Campbell

Yes.

Ken HoexterMerrill Lynch

Can you give the employee count now, post the acquisitions?

Bruce Campbell

I don't have that in front of me. We will be happy to send that to you.

Ken HoexterMerrill Lynch

Okay, that would be great. And then logistics, I think Rodney said earlier about 80% was organic growth. I presume that means it wasn't USA Carriers, or Black Hawk, or Pinch. What's driving that growth right now?

Bruce Campbell

We're having a lot of success in the customer base of Forward Air airport-to-airport. By that I mean, they're getting truckload opportunities that they didn't have in the past because we simply couldn't fulfill them from our existing customer base. And that could be a forwarder, a domestic forwarder, an international forwarder; it could be an airline; it could be any of those three. We have just recently – I shouldn't say just recently – over the past year, have really worked hard to be able to meet their requirements on the truckload side and to do that. In addition to that, we have a couple of people out selling very hard in that area to all of the wholesale market to give us additional opportunities that simply in the past we did not take advantage of. So it's been a combination of efforts. Our terminal people have done a really good job of identifying opportunities. So, it's been not only a few individuals, but a group effort to acquire more and more opportunities in this business.

Ken HoexterMerrill Lynch

So it's mostly brokerage, then?

Bruce Campbell

It's almost all brokerage.

Ken HoexterMerrill Lynch

Almost all trucking brokerage. I think you said that intermodal is in there, or is going to be in there when you get it?

Rodney Bell

It will be in there. That was coming from the Pinch acquisition, so it was about two weeks at the end of March worth of intermodal, and then the full quarter of that in the second quarter.

Ken HoexterMerrill Lynch

But that was obviously very small, so it's all truck brokerage up until you start adding intermodal in the future?

Bruce Campbell

Correct.

Ken HoexterMerrill Lynch

Okay, great. Thanks for the time, guys.

Bruce Campbell

Thank you.

Operator

Your next question is from the line of Art Hatfield with Morgan Keegan. Please proceed.

Art HatfieldMorgan Keegan

I bet you hope I'm your last one.

Bruce Campbell

You are.

Art HatfieldMorgan Keegan

Hey, Bruce. Just a quick question, you had mentioned the shorter length of haul as being negative on yield. Didn't, obviously, the increasing shipment size have a negative impact too?

Bruce Campbell

It can. I think you can say that in general, but that's not always the case, so that's why I'm kind of giving you that hesitancy there as I say it. Without question, obviously, when you go to shorter haul, the yield's lower, and that's okay.

Art HatfieldMorgan Keegan

Right, and that's fair. But, was the increasing shipment size negative on your yield in the quarter?

Bruce Campbell

No.

Art HatfieldMorgan Keegan

No, okay. Historically, when we've seen increasing shipment sizes, that's typically been positive for the economy or a sign that the economy is improving. Would we be misreading that in this case? And if so, can you tell us what was going on with the shipment size?

Bruce Campbell

That's a great point. I think we would be misreading that if we jumped to that conclusion this particular and unique time, Art, because we have made these acquisitions and because we have jumped into the shorter-haul market and because we have jumped into the airline business, all of those tend to have larger shipments and larger shipments that are driving up average weight per shipment. If we look at a longer-haul lane in our waybill statistics, we don't see that shipment size growing. So I think it's a false read to – I think it's just we've changed the operating characteristics of Forward Air and it's not the indicator that you would like for it to be, or I would like for it to be.

Art HatfieldMorgan Keegan

Your explanation is very, very helpful. Just one last thing. You've talked a lot about the pricing environment, but are you seeing any of your – any nontraditional competitors coming in and causing pressure on pricing?

Bruce Campbell

We have always had and we've talked about this previously on other calls, where when the truckload market gets kind of depleted, if that's the right word, then they will start trying to jump in and grab 6000, 7000, 8000 pound shipments. We're used to that. That's normal. And that is going on. So it's fairly normal.

Art HatfieldMorgan Keegan

Are you seeing anything unusual from like LTL carriers?

Bruce Campbell

The LTL carriers will do the same thing. When times get tough, they'll look for other sources of revenue. Again, you get into that struggle of customer back-selling and all of that. And typically, most LTL carriers do not have the operational efficiencies to provide the levels of service that our customers are looking for.

Art HatfieldMorgan Keegan

Okay. Thank you very much.

Operator

And your final question in queue comes from the line of Mike Walk with MWR [ph]. Please proceed.

Mike WalkMWR

Hi, good morning guys. I just had a quick question for you about CapEx, the CapEx line item. Is that kind of the replacement rate that we can look at going forward?

Rodney Bell

Help me with that, Mike.

Mike WalkMWR

You got 2.6 million for purchase of property and equipment, is that – can we expect that for the rest of this year and is that kind of your baseline level of CapEx, or is it elevated?

Rodney Bell

Let me back up. Our budgeted CapEx for the year is $26 million. You peel back $13 million of that, which is sort of extraordinary. We're building our facility in Dallas; that leaves us with $13 million for the year. That's kind of on the high-end of our CapEx typically because there's some replacement equipment for acquisitions that we typically don't count on. So, the number is between $10 million and $12 million for the year.

Mike WalkMWR

$10 million and $12 million for the year?

Rodney Bell

Yes.

Mike WalkMWR

Okay. Just another thing, I don't know, looking out 12 to 24 months, as these acquisitions kind of begin to cycle through, what are you looking at as kind of for the companywide, the core organic growth rate going forward?

Bruce Campbell

I would be hesitant to tell you anything beyond the next quarter considering the conditions we're operating under, everybody is, not just us. We always want our core business to produce low single-digits, even in bad times. That could be wishful thinking, I mean again, depending on the economic circumstances. But that's our goal. It has been. It will continue to be.

Mike WalkMWR

Okay. And then directionally though, as you move forward with – I think the term you used was slop or something related to the acquisitions, that operating ratio though should begin to improve.

Bruce Campbell

We hope so, yes.

Mike WalkMWR

Great. Thank you very much for taking the questions.

Bruce Campbell

Thank you.

Operator

There are no other questions in queue at this time. Thank you for joining us today for Forward Air Corporation's first quarter 2008 earnings conference call. Please remember, the webcast will be available shortly after the call on the IR section of Forward Air's web site, at www.ForwardAir.com. You may now disconnect and have a great day.

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