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Forward Air Corporation (NASDAQ:FWRD)

Q2 2008 Earnings Call Transcript

July 22, 2008 9:00 am ET

Executives

Bruce Campbell - Chairman, President, and CEO

Rodney Bell - Senior Vice-President and CFO

Analysts

Alex Brand – Stephens, Inc.

Jon Langenfeld - Robert W. Baird & Co.

David Ross – Stifel Nicolaus

Todd Fowler - KeyBanc Capital Markets

Edward Wolf [ph] – Wolf Research [ph]

John Barnes – BB&T Capital Markets

Andrew Boord – Fenimore Asset Management

Ken Hoexter – Merrill Lynch

Matthew Troy – Citi Investment Research

Operator

Thank you for joining Forward Air Corporation's second quarter 2008 earnings release conference call. Before we begin, I'd like to point out that both the press release and this call are accessible on the Investor Relations section of Forward Air's website at www.forwardair.com.

With us this morning, our Chairman, President, and CEO, Bruce Campbell; and Senior Vice-President and CFO, Rodney Bell. By now, you should have received the press release announcing second quarter 2008 results which are furnished to the SEC on Form 8-K and on the wire yesterday after market close.

Please be aware, this conference may contain forward-looking statements within the meaning of the Private Securities Litigation Reformed Act of 1995 including statements among others regarding the companies 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 the forgoing word such as "believe", "anticipate", "claims", "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 our filings with the Securities and Exchange Commission and in the press release issued yesterday and, consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information due to events or otherwise. And now, I'll turn the call over to Bruce Campbell, Chairman, President and CEO.

Bruce Campbell

Thank you and good morning. Thanks for joining our second quarter earnings call. We are pleased to share with you strong second quarter results in spite of a very challenging environment. I would like to touch on some of the highlights – record revenue of $121.6 million, a 30.5% increase over Q2 of '07; record income from operations of $20.3 million, a 10% increase over Q2 of '07; and, finally, record diluted earnings per share of $0.42, also a 10.5% increase over Q2 of '07.

Driving these results were – our core operating segment to "Airport to Airport" group continued to grow and produce outstanding results highlighted by an operating ratio for the month of June in the high 70s; our completing the model strategic initiatives continue to perform very well highlighted by significant growth in both our TLX, also known as Truckload Brokerage Group, and our Forward Air complete product line. Simply, a great job by both of these operating groups.

Forward Air Solutions continued making progress with their most important strategic initiative, growing revenue and expanding their geographic footprints. With the late Q1f acquisition of Pinch Transport, we were able to open in Houston and significantly expand our presence in Dallas. Additionally, we opened our first de novo terminal in San Antonio, giving us a significant presence in the state of Texas. We now look forward to positive contributions from our Solutions Group for the balance of the year.

One other highlight for the quarter that I would be remiss in not mentioning, our dedicated group of over 800 professional independent contractors operated millions of miles during the quarter at the highest levels of safety in the history of our company. A truly, remarkable achievement. Congratulations and thanks to them and our safety team. And now for the financial results, 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.

As Bruce mentioned, total revenue for the first quarter increased 30.5% to a record 121.6 million. Over 50% of that overall growth came from the Forward Air Inc. operating segment which includes our airport-to-airport business which grew 15.5%. The growth we enjoyed in our core airport-to-airport business is attributed to nearly 14 – nearly 14% increase in tonnage which primarily resulted from Black Hawk and Pinch acquisitions as well as good organic growth driven by Forward Air Complete. Both acquisitions, as well as increased airline business, resulted in more short-haul traffic. Original traffic, which had a negative impact on our yield, however, yield net of fuel surcharge was slightly positive for the quarter.

Our logistics group, which is primarily TLX truckload brokerage, had another outstanding quarter growing revenues by 45% to over 15.5 million. The 18% growth in other revenue was due to additional service offerings and additional facilities gained through acquisition as well as a better overall job cross-utilizing our existing facilities in order to generate more incremental revenue.

In our Forward Air Solutions operating statement, revenues were 11.4 million against the zero base in Q2 2007. Sequentially, solutions grew 46% from Q1 '08 due to the Pinch acquisition, securing new business, and organic growth driven by seasonality.

Overall purchase transportation improved 290 basis points to 39.4% revenue. Against the increasingly difficult comps, our team provided improved PT in our core airport-to-airport network by 100 basis points. Logistics PT as a percentage of revenue was approximately 72.9% or 340 basis point improvement versus Q2 '07. This improvement primarily resulted from success recruiting unlaw [ph] operators to exclusively haul TLX load, allowing us to replace more costly third party miles.

Again, this quarter is relatively low. PT cost component in our solutions segment had a slightly positive impact on overall PT. Keeping in mind the impact of company owned vehicles and drivers, impact others line items such as salaries depreciation and fuel.

Salaries, wages, and benefits increased 280 basis points from Q2 '07. This increase was partially due to increased share based compensation and increased performance based incentives. The remaining increase was a result of increased take count of mainly terminal personnel and company drivers associated with Black and Pinch – Black Hawk and Pinch acquisitions, as well as relatively higher salaries, as a percent of revenues in our Solutions Segment.

Operating leases were up 60 basis points due to leased equipment from our latest acquisition, as well as new and upgraded facilities. During the quarter, we worked to right-size our Solutions fleet by turning in excess leased equipment.

Depreciation amortization increased 60 basis points due to our three acquisitions, third quarter 2007 equipment purchases, and depreciation of our new company-owned facility in Atlanta. Insurance and claims decline 70 basis points as a result of an actuarial adjustment as well as good times [ph] experienced in the quarter.

Fuel was up 240 basis points as a result of additional company trucks necessary to service our coal distribution business, as well as local pick-up and delivery needs brought on by our recent acquisitions. Obviously, the higher year-over-year cost of diesel also contributed to this increase. Other operating expenses were up 20 basis points. This was due to integration costs associated with Pinch as well as higher repair and maintenance on more company-owned equipment.

Income from operations was 20.3 million, compared to 18.3 million, an increase of 10.6%. Operating income as a percent of revenue declined 300 basis points. Below the operating income line, there was nearly a $700,000 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 facility in Atlanta, and three acquisitions.

Our tax rate increased from 38.8 to 39.5% as free – as tax-free interest income declined and this allowed deductions per share based compensation increased.

Net income increased $627,000 to $12.1 million from the – for the quarter, which is an increase of 5.5%, while EPS increased $0.04 per share, or 10.5%,to $0.42 per share. Year-to-date revenues were up 27%, reflecting the benefit of our three acquisitions as well as nice growth from TLX truckload brokerage and Forward Air Complete. Were essentially the same reasons cited for the quarter. We operated 280 basis points, worst for the first six months of 2008 as compared to 2007. However, operating income exceeded 8 point – exceeded last year by 8.1% and EPS was up 5.6%.

Other key information and metrics for the second quarter are as follows – total assets has grew 241 million to 274 million for the year. Cash flows from operations were down $8.1 million to $17.2 million from $25.2 million in Q1 '07 resulting from timing and negative trends and accounts receivable which we are in a process of addressing now.

We note the quarter was 1.6 million of cash and short-term investments and 35 million outstanding on our line of credit compared to $5.4 and $30 million respectively for – at year-end. No shares of the Company stock were repurchased in the quarter and approximately 1.8 million shares remain on the 2007 repurchase plan.

Average weekly line – our tonnage increased 13.4%; average shipment size for Q2, driven in part by an increase in heavier airline shipments, was up 11.4% to 771 pounds per shipment; shipment count was up approximately 2%; yield net at the benefit of fuel was up 1.9%; and we ended the quarter with 83 airport-to-airport terminals and 14 Forward Air Solutions terminals. Guidance for the third quarter is as follows – we anticipate revenue coming in between 22 and 27%; our EPS is expected to be between $0.40 and $0.44 per share. That concludes our comments, now back to the operator for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) The first question comes from the line of Alex Brand with Stephens. Please proceed.

Alex Brand – Stephens, Inc.

Thanks. Good morning, guys.

Bruce Campbell

Good morning.

Rodney Bell

Hi, Alex.

Alex Brand – Stephens, Inc.

Rodney, let me just start where you finished up on the yield because you said 1.9% positive yield net of fuel?

Rodney Bell

Correct.

Alex Brand – Stephens, Inc.

Okay. Which surprises me, if you took that much additional airline business and your length of haul is shrinking that you wouldn't have had a negative yield when I netted out the fuel. Does that make sense or I'm missing something there?

Rodney Bell

Essentially how the fuel trended over the course of the quarter and how we reimbursed our own operators in rising times, it's – we get more benefit than when fuel's declining. Does that make sense?

Alex Brand – Stephens, Inc.

Yes. So, should I expect some compression though as that business, your shorter haul business, grows? Sounds like its growing the fastest of anything.

Rodney Bell

You should.

Alex Brand – Stephens, Inc.

Okay.

Rodney Bell

The way the fuel worked out for the quarter just more than offset the compression that came with the short haul regional business from the two acquisitions as well as the airlines.

Alex Brand – Stephens, Inc.

Okay. And, I don't know if I missed this, but did you say in your – in your 30.5% revenue growth, if I ex out fuel, what that – how much that accounted for in the top line?

Rodney Bell

I'm sorry – just got to know that you – I want to clarify that the 1.9% includes the impact of fuel, right?

Bruce Campbell

Let's start over.

Rodney Bell

Okay.

Bruce Campbell

You asked one point – roughly 1.9%, that includes fuel. Our actual yield decline, on an overall basis, net of fuel, between 5% and 6%.

Alex Brand – Stephens, Inc.

Okay. That makes more sense. That's where I was confused.

Bruce Campbell

That was driven by two factors that – and both of them you've mentioned – one is, we're more heavily involved in the regional short haul type of traffic. A lot of that driven by our Chicago hub opening back in the early part of the year. The second thing that drives that is, while we like to have larger shipments and larger shipments can then indicate maybe the economy is getting a little bit better, larger shipments also drive down your yield, and what we saw was, as Rodney touched on, larger shipments – and we also found a little bit of spike in very large shipments and we're assuming that was driven by lack of truckload capacity especially during the month of June in certain areas, not across the board, but in certain areas. That will drive yield down also.

Overall, we're not concerned with our yield. I think we've touched on this before. If we know that yield is being driven down, our net yield is being driven back down by a shorter length of haul and by larger shipments, that's okay. We get concerned with yield going down when we move a shipment from Boston to Los Angeles for $0.22 last week and $0.22 last week and $0.20 this week, that's a problem. So where we sit today was anticipated and we're okay with it.

Alex Brand – Stephens, Inc

Okay. Bruce, let me just segue to your comment there on tighter capacity. Can you just talk about combination of what you're seeing in the market in terms of available capacity, which is obviously shrinking. I guess I have two questions – number one, how is that impacting your truck brokerage business; and number two, are you maybe differently positioned in this cycle to take advantage of tighter truck capacity where maybe in previous cycles that would not have been as much a benefit for you?

Bruce Campbell

To answer your first question, we think we – that the TLX group has positioned itself very well from the stand point of they have establish relationship with outside carriers. We do not go to an outside carrier and beat the dickens out of them to get a lower price. We would rather establish a longer term relationship with them and, in some cases, if that means a bit higher cost, we're okay with paying that as long as they continue to provide us the capacity that we want. That is in fact what happened in the second quarter.

We did see sporadic shortage of capacity, primarily in certain geographical areas, and we have seen that less now as you might imagine when we enter into July. We have done one additional step to help ensure the Company that we always have capacity on that side, and that is the Forward Air model has traditionally attracted owner-operators, and very good owner-operators. We began – at the begin – during January this year, after a little test program in the fourth quarter of last year, to put our own owner-operators into this area of business. Rodney touched on it a bit. That does two things – one, it guarantees us capacity because they are our owner-operator; and two, if their utilized properly, and that's the challenge that our group has is to utilize them properly, then in fact that cost is much less than using any outside carrier. So, that's how we have positioned TLX. We think they are in a strong position today and will continue to be in a strong position as we go forward.

Alex Brand – Stephens, Inc

Alright. One last question for me and I'll let it go. Rodney, your comments, you mentioned the timing of receivables, but, I'm not accustomed that you guys taken a cash flow hit from working capital like that. Can you just comment on that a little bit more, what happened there and how confident are you guys that that's been addressed?

Rodney Bell

First, there are several things driving that, Alex. One was some legacy systems from the two most recent acquisitions which we think we got a handle on that now with our IT group. Also, we added horse power in our credit collections department. We were caught a little flat footed and understaffed and had some difficulty getting the right people. We have the right people now and it's – it is an oddity to see a cash flow hit from AR here and we're getting that fixed very quickly.

Alex Brand – Stephens, Inc

Okay, great. Thanks a lot guys.

Operator

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

Jon Langenfeld - Robert W. Baird & Co.

Good morning, guys.

Rodney Bell

Hi.

Jon Langenfeld - Robert W. Baird & Co.

Hey, Bruce, when you think about the acquisitions and, primarily with Pinch, maybe that'll help us understand kind of the challenges you're facing. If you look backwards and you say what would you do differently thus far anyways, what would be your answer to that?

Bruce Campbell

When we purchased Pinch, it was an unusual purchase from the standpoint, John of – they participated in all our product lines and by that I mean, they moved airport-to-airport business throughout the state of Texas, similar to what our group does, and then they also had the pool distribution product line and basically what we had to do was go in – and this was primarily centered around Houston more so than the other operations, although there were some issues in other city where we had to go in and – nobody's fault, we simply had to break it apart and focus on the pool business on one side and on another side the airport-to-airport. Get airport-to-airport merged into our existing network and to start the efficiencies of the pool distribution side on Houston.

If we had to do it all over again, we probably would be have been a bit more aggressive in splitting that apart. I'm trying to be kind here. And then, getting people focus very quickly on – you no longer have three product lines to worry about, you have one, and we want that one operating. We want it operating with the Forward Air cost discipline. Now, we didn't do that. I'm starting to get hot thinking about it and, as a result, we paid the price. We have put some very, very good people in-charge down there. We have the product lines completely separated for the time being, and they are standing on their own, and we think good things are going to come out of that. But again, your question was what would we do differently? That's what we would do differently, and I can assure you, we won't go to that again.

Jon Langenfeld – Robert we. Baird & Co.

Yes. And it's not that big of a hit relative to the big scheme thing. I was just curious.

Bruce Campbell

No, you're exactly right. But in the other side of that equation of that comment that you just made, it's just kind of disappointing we didn't – I'm disappointed in myself, so.

Jon Langenfeld – Robert we. Baird & Co.

But if you think about the future – I know, you guys have said, look we're still looking for acquisitions and evaluating them. Does it change you selection criteria at all|?

Bruce Campbell

No, really not. I mean Pinch was and is a good acquisition. It set our airport-to-airport. It gave us a really good solid presence in the State of Texas. They brought on new customers that we did not have before within our solutions group. So, all that's very positive. We just – you look at things strategically and then you have to do that thing called execute. And in this particular case, we didn't execute, and at Forward Air we're known for being able to execute, so that was disappointing. That certainly has no impact on future looks at cust – or opportunities to expand this product line.

Jon Langenfeld – Robert we. Baird & Co.

And as it were, you wanted to be – I mean (inaudible) you always want it better but I mean, is it where you think it should be today?

Bruce Campbell

Yes. They've made significant progress. Rodney touched one. We've turned in a lot of leased equipment that, when you put the two operations together, became excessive equipment. That's a normal part of an acquisition. We're okay with that. Just getting it done, going through the process is sometimes more detailed than you would like to have. But overall, they're – we think we have them positioned well and good things are going to happen next.

Jon Langenfeld – Robert we. Baird & Co.

And the profitability run rate and solutions – and those positive in June, but is it – it is up to the kind of your expectations in the third quarter?

Bruce Campbell

Well, we hope it will be a – Now that seem [ph] their revenues grow which is a critical driver for them. The've got their pause [ph] side of the equation in much better shape than it was. They have a lot of positive customer opportunities going on right now. If all of those things come together and it doesn't rain on Thursday, we think we're in really good shape.

Jon Langenfeld – Robert we. Baird & Co.

And any speculation in the quarter how – in collectively, how much does the three acquisitions added to the earnings run?

Bruce Campbell

for the third quarter?

Jon Langenfeld – Robert we. Baird & Co.

Second quarter.

Bruce Campbell

Second. Meaning Black Hawk, Pinch, and USA?

Jon Langenfeld – Robert we. Baird & Co.

Yeah.

Bruce Campbell

That would be hard. You're jumping across product lines and some of it is almost impossible to delineate.

Jon Langenfeld – Robert we. Baird & Co.

Okay. Fair enough.

Bruce Campbell

But we're very happy. We have no regrets with any of the acquisition.

Jon Langenfeld – Robert we. Baird & Co.

Maybe asked differently. Would you think your earnings would be growing if you didn't do these acquisitions?

Bruce Campbell

Not to the degree that they are today. But I would go back and tell you also, we're jumping from Pinch to Pinch here, and let me explain that. Our core business, the airport-to-airport, was helped by Black Hawk in particular. But they've also done a really, really good job. So, in one hand, we want to say, "Gee, the acquisition have really helped us and have helped our earnings and we know that's the case." On the other hand, I don't want to overlook what has really been a terrific oppor – or job by our existing business owners, if you will. They've really done a nice job in some very difficult situation. So, we're most pleased on both counts.

Jon Langenfeld – Robert we. Baird & Co.

Okay. That's a good answer. And then, on the actuarial adjustment, Rodney, could you talk magnitude and, assuming that's just your normal year, your true up.

Rodney Bell

It was 300,000, John, Call it a half penny.

Jon Langenfeld – Robert we. Baird & Co.

Okay. And that was in Solutions, I'm assuming..

Rodney Bell

No. that was in Forward Air property.

Jon A. Langenfeld - Robert W. Baird & Co.

So whyin solutions is your insurance and claims zero?

Rodney Bell

We're trueing up there too –

Jon A. Langenfeld - Robert W. Baird & Co.

How much was that?

Rodney Bell

It was less than $100,000.

Jon A. Langenfeld - Robert W. Baird & Co.

Okay. Alright, and then, the expense lines on the solutions where the costs would show up would be what? I'm assuming some of that's in the leases and some of it's in other?

Rodney Bell

Probably, just about across the boards –

Jon A. Langenfeld - Robert W. Baird & Co.

Oh, would be? Okay. And now that's going to bounce around a little bit here, so okay. And then, the fuel side of the equation, I know, you know, roughly neutral to Forward Air in general, but when fuel goes up, is that more neutral than when it goes down, let's put it that way, in terms of how everything shakes out with the surcharges?

Rodney Bell

When fuel goes up, it's more negative to us, although not as bad as it has been in the past because we now adjust on a weekly basis. When fuel goes down, it's more positive to us, although not as positive as in the past for the same reason.

Jon A. Langenfeld - Robert W. Baird & Co.

And when did you make the change on the –

Rodney Bell

(inaudible) May. The first week of May.

Jon A. Langenfeld - Robert W. Baird & Co.

That's previously, it was monthly?

Rodney Bell

Correct.

Jon A. Langenfeld - Robert W. Baird & Co.

In general? Okay, and then last question. On the owner-operators, there's a sequential improvement on owner-operators, and you mentioned this in your comments, but did most of those go to the TLX side or line-haul or how do you look at that?

Bruce Campbell

A little bit above.

Jon A. Langenfeld - Robert W. Baird & Co.

Okay.

Bruce Campbell

We've actually been recruiting more teams to the airport-to-airport segment and more single drivers to the TLX segment. In general, that's the true statement.

Jon A. Langenfeld - Robert W. Baird & Co.

Okay. Good. Nice quarter. Thanks.

Bruce Campbell

Thank you very much.

Operator

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

David Ross – Stifel Nicolaus

Good morning, gentlemen.

Bruce Campbell

Good.

David Ross – Stifel Nicolaus

Question first about the airport-to-airport operations. On last quarter's conference call, you gave guidance of 1% to 2% organic growth in that business, and I just wanted to see where that actually fell out in the quarter. Was that roughly in line with which you were expecting, or a little bit better?

Bruce Campbell

You know Dave, that was somewhat of a gas [ph] and we continued because of the blending of the acquisition business with the organic business but we – using our spang [ph] method of extrapolating we think that that's slightly higher, probably 2 to 3.

David Ross – Stifel Nicolaus

Okay. And with the higher fuel prices recently, there's been a lot of talk, especially at the bigger players, about trade down in services from air to ground, and as large to sort [ph] airfreight carrier, I assume you guys are benefiting from that, but I also wanted to know on the forwarder side, are the airfreight carriers giving discounted rates because they have excess capacity these days? And how's affecting the competitive environment for deferred airfreight?

Bruce Campbell

I think the answer to the first portion of your question is, that's been going, the trade down, as you termed it, has been going on for a number of years, perhaps exacerbated by the fuel but – we don't see anything unusual in that area. It's almost the norm anymore. And one of the things we say to people all the time is if a company has product and they have a good logistics supply chain software system, they're not going to put it in the air to begin with because they just can't justify the cost and they have the ability to plan beyond that. So, we haven't seen a whole lot of change there. As far as the airline's offering discounted rates, we see that on occasion, primarily on the weekends but the – most of that has gone away because there are no wide bodies left on the domestic routes. There are very few wide bodies. So you don't see – when we talk to airlines, in general, what they sell is international freight, not Boston to Cincinnati. There are exceptions to that, obviously, but their goal in life is to improve their international. So, you just don't see a whole lot of activity in the domestic market from the airlines. Although there is some and especially, again as I said earlier, on the weekends.

David Ross - Stifel Nicolaus

Okay. And then on the pool distribution side, I believe you're about two-thirds of the way towards your national footprint, which is the goal.

Bruce Campbell

Right.

David Ross - Stifel Nicolaus

You'd said that you wanted to digest fully the Pinch and Black Hawk acquisition before you really look to complete that footprint. Are the Black Hawk and Pinch acquisitions fully digested right now? Is the overhang from those gone and – ?

Bruce Campbell

Yes. We think so. We will be in meetings for the balance of the week to make sure that we're comfortable there. But, again we think, we've got them where we want them and operating were as good as you'd like to be but operating better than we have been and we're ready to move on. We just need to be sure, not only from an operating standpoint but from the standpoint of all the back office functions, that we are where we need to be there. I would love to see our software a little bit further along the line but we'll deal with that as we go along.

David Ross - Stifel Nicolaus

Okay. And then, last question. It's just about your regionally in the U.S. where you're seeing pockets of strength. You said, it was a little bit sporadic and some areas were better than others. Can you give a little more color on that?

Bruce Campbell

What we saw in June was – it was interesting. Of all places, the Southeast really became very tied on on our ability to find outside power. We had some issues in Texas, which is also somewhat unusual. And, we saw the normal issues that you – we've experienced in the past in both the Chicago area and the West Coast, certain pockets on the West Coast. Overall, we were obviously able to get through it. But, its just – it's something we hadn't experienced for awhile.

David Ross - Stifel Nicolaus

Okay. Thank you very much.

Bruce Campbell

Thank you.

Operator

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

Todd Fowler - KeyBanc Capital Markets

Good morning, Bruce, good morning, Rodney.

Bruce Campbell

Hi Tod.

Todd Fowler - KeyBanc Capital Markets

Bruce, I guess getting back to the Solutions side, with the operating expenses here coming in around 9 million for the quarter, about 7.5 point excluding fuel. Is there any thought of where that should trend once you kind of clean up some of the issues related to the acquisition or maybe how much is in the operating expenses during the quarter related to integration cost and as you get rid of some of these operating leases basically where that should go?

Bruce Campbell

The quick answer is that should go down.

Todd Fowler - KeyBanc Capital Markets

That's a good answer.

Bruce Campbell

Thank you.

Todd Fowler - KeyBanc Capital Markets

Magnitude of how far it should go down?

Bruce Campbell

Now, that's from my latest economics class. You will see us make progress in what we call other category because that's where a lot of acquisition expense went into. You will also see our leases. We – as Rodney touched on earlier, we have turned in equipment, we will continue to turn in additional equipment and then, we will bring on some of our own owned equipment which will continue to push them at lease cost. And then, its a matter of, what we call Forward Air discipline and the ability to get the efficiencies out that will show up primarily on the labor side. They have made really solid strides there, we just need to make further ones. So, it will concentrate in those categories but the way you make a company operate really, really good is you improve all categories and that's what we're after.

Todd Fowler - KeyBanc Capital Markets

So, do you think it's – I mean, a couple hundred thousand dollars of additional cost that are in there right now or is it something larger than that?

Bruce Campbell

You know, I can tell you specifically, San Antonio cost was about $75,000 to open during the month, which we anticipated, and it was a good move and was a good – we think it will be a good short-term and, obviously, a great long-term move. But whenever you start up you're going to incur those expenses. So, we have 75 there. We probably got somewhere around 250 of additional cost that we hope to see disappear.

Todd Fowler - KeyBanc Capital Markets

Okay, good. That's great. I guess, looking at the purchase transportation cost in the quarter, looks like some favorable trends. Can you talk a little bit about what you're seeing on the airport-to-airport side and it would – the run rate that you're seeing with purchase transportation cost in airport-to-airport. How sustainable is that going forward to get a sense if that's going to tighten as we get in the third and fourth quarter or can we see depends on the positive contribution here in the second quarter be sustained to the balance of the year?

Bruce Campbell

Our goal is to sustain it. We don't think we can improve it that much more. Although, I didn't think they could get it to where it is today, so, you know, hats off here our group, our logistics group. We think we're in really good position and what drives that is, number one, our load average. Chris and his team does a good job of making sure we had good load averages out of our – each of our terminals during the quarter. The second thing that drives that is our ability to balance it. By that, meaning, if we have a load out of Chicago, do we have a load going back in? When we have that situation that allows us to run it with our power, our own owner-operators which is at a significant cost reduction. We measure that on a weekly basis when we're looking at how many miles they ran, and we want to keep at least 90% of the miles in the owner-operator fleet that we have. When that number starts to grow, me – I didn't say that right, when that number shrink, and the outside power number goes up, then we start running in to higher cost situations.

So as we go forward in the year, we're pushing very hard to make sure that, number one, we stay – we keep our load averages up; number two, we stay in balance as much as possible, and in those situations where we are out of balance, can we balance it through our TLX group by sticking a truckload in there and still keeping it on Forward Air power. So those are the three objectives that they're running with, and we think that it can, at least, maintain where they are today. Now that's a big challenge to them because those numbers are outstanding.

Todd Fowler - KeyBanc Capital Markets

Yes, I know. That was a nice surprise here. And it doesn't sound easy either, so. I guess next on fuel, I was hoping maybe for a little bit more color. It seems like fuel is a little bit of larger headwind in the solutions business. Bruce, can you talk a little bit about why fuel is more of a headwind there, and then how the surcharge would work in this solutions business, and do you need to recapture more of your fuel costs and is it that you need to go back to some customers and talk more about pricing or fuel surcharges given the increase in fuel?

Bruce Campbell

Well, the fuel surcharge on the solution side, and I'm not being evasive, but it is literally all over the board. In some cases, we charge on a per carton and most of it driven by our shippers, so that each have their own unique way of looking at fuel surcharge. As opposed to our airport-to-airport business, where there's a number put out every month or every week now, and that's the number on a percentage basis of the total revenue that the freight bill generates.

On solutions, it could be that simple. It could be, we got a thousand pounds shipment going from A to B and you put additional revenue on it like we would the airport-to-airport to cover the fuel surcharge. And then you have carton programs where you put fuel surcharge based on the carton. And then we have what we call DSD, which is Direct Store Delivery, which we have a rate per mile fuel surcharge.

So, and there are little variation off of that. So, it's literally all over the board. And our people do a very good job of managing that and what we try to do – or what we do, on a weekly basis, is we look at how much money we spent on fuel and then we look at what our fuel spend was, pardon me, what our fuel surcharge revenue was and we look at our recovery rate. And so far, we've been able to recover, in most cases, that fuel amount. But, I can tell you it's a struggle because the retailers are feeling pressure and we're just in there battling trying to make sure we stay right – we don't want to make money on it, we just don't want to lose money on it.

Todd Fowler - KeyBanc Capital Markets

Okay. Now, that's helpful. And then lastly, Bruce, can you talk a little bit about the environment right now. I mean, I know that you, if I read the press release and your commentary, it certainly is still challenging. Is your sense that it's maybe a little bit less challenging than what it was a year ago at this point? Is it still just as challenging. and I know there's obviously some moving parts with the acquisitions so when Kitty Hawk [ph], but just you, your sense from what you are feeling and certainly throughout the second quarter and maybe in June or July as well?

Bruce Campbell

My quick answer to that is we don't know. I can tell what we are anticipating and what we are planning for is – we have certain areas of the country that are doing pretty well and we have other areas of the country that, you know, they are having more battles and probably the – its across the board in those areas where its not an issue of competitive pressures or anything else, there's just simply not as much business as there was in the past. Now, what we have found in the history of Forward Air is when that occurs, those areas will recover very quickly. The issue is when will that be? So our goal going into the third and fourth quarter is, we anticipate based off of the historical runs continued growth in the airport-to-airport segment, but each area has its own growth rate and we have the ability to adjust our model if necessary to whatever the economic conditions are. But in all candor, we are very hesitant to say it's going to be great or it's going to be bad, and I continue to go back to what we've said all along is, we think business is okay. It's not great, it's not what it was three years ago, but it's okay.

Todd Fowler - KeyBanc Capital Markets

Okay. Thanks for this nice quarter.

Bruce Campbell

Thank you.

Operator

Your next question comes from the line of Edward Wolf [ph] with Wolf Research [ph]. Please proceed.

Edward Wolf – Wolf Research

Hey, Bruce and Rod. Tim Denoya [ph] in for Ed.

Bruce Campbell

How's it going?

Tim Denoya – Wolf Research

First, I just wanted to check, you said that the organic growth, none of the acquisitions was 2% to 3% in the second quarter? How was that trending so far in July?

Bruce Campbell

About the same.

Tim Denoya – Wolf Research

About the same? Are you still seeing, you mentioned that some tightness in capacity in the South East, Texas, California Chicago, I think, in June. Are you seeing that loosen up in July? Is the tightness or looseness in capacity in July normal for this –

Bruce Campbell

The answer – the other day, when we got into July, and it is also very normal for July to be more of a slow month and, as a result, we tend to find capacity easier than we do other months.

Tim Denoya – Wolf Research

And to ask the – you're sorting out the acquisitions question a little different way. Can you try to quantify the amount of the 300 basis points of a wire deterioration that was attributable to this acquisitions for the lower margins?

Bruce Campbell

We have not done this specifically. We can do that for you if you would like it but not as we speak.

Tim Denoya – Wolf Research

Okay. That would be interesting to see it. How do you think about acquisitions going forward given that you've made three in the last year now relative to share repurchases. Do you think you'd be more reluctant to go back to share repurchase as you work out some of these integration issues?

Bruce Campbell

Most of the integration issues, as we touched on earlier, Tim, are behind us. We're ready to go again for the right situation. If we are in – we did most of our stock repurchases when we had over a hundred million dollars on the balance sheet and we also had a bunch of private equity firms out there running around paying 10 to 14 times earnings for companies that most of them are now bankrupt or in some type of serious trouble.

Tim Denoya – Wolf Research

Yeah.

Bruce Campbell

That's hard to imagine. So, we really had no choice but to go back and buy stock. And that's a good investment of our money. But a better investment of our money is to grow our company. And when we find the right acquisition, that's exactly what we're going to do with it. You know, a year from now, all of that may change and the idiots may come back to the acquisition market, so we would be out of it again. So, we want to make sure that we take advantage of this time.

Tim Denoya – Wolf Research

Are we seeing pretty decent multiples out there (inaudible)?

Bruce Campbell

We are.

Tim Denoya – Wolf Research

What was the fuel expense that was broken out? I thought it was about 2% – 2.7% of revenue. Was that – can you explain what that was and why it's up the way it was year-over-year?

Bruce Campbell

Well, Tim, that's the first quarter that we broken out fuel because it's become a significant line item. Historically, that's been buried in other expense. And, the reason that it's broken out is because of the Company-owned tractors and trucks that we have acquired through the last three acquisitions.That rolls up below the line as opposed to the fuel that we paid – fuel surcharge that we pay back to our owner-operators. That's real fuel, not fuel surcharge.

Tim Denoya – Wolf Research

Okay. And then, the higher tax rate, you mentioned what it was (inaudible) earlier, is that – can you say it again and will that continue?

Bruce Campbell

The two reasons for – it will continue and two reasons are – we had investments – tax re-investments on our balance sheet this time last year. Those were all gone. And, we're in a net debt position, so we're not – we will not be getting that tax re-intereset. And also, the tax fragment [ph] for our share-based comp, you don't get the benefit of that. So, that's impacted our tax rate as well and it will continue as is.

Tim Denoya – Wolf Research

Do you think about 39% - 40% going forward? And, the low insurance expense, did you say was that an annual actuarial review?

Bruce Campbell

We do that two times a year.

Tim Denoya – Wolf Research

Twice a year? Okay. Great. Actually, one more – what's your outlook for CapEx at this point for the rest of the year? Given the acquisition, is there much more constructions spending?

Bruce Campbell

There is. We're – we don't think CapEx will change from the guidance that we gave earlier this year, which was a total of $26 million. We are evaluating Dallas with the increased business from acquisition of Pinch to see if we need – (inaudible) for billing the building, to see if we need to expand that to meet ongoing needs, but 2008 guidance has not changed.

Tim Denoya – Wolf Research

Okay. Thank you very much.

Operator

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

John Barnes – BB&T Capital Markets

Hi. Good morning guys. Bruce, as you all have worked with your customers on the fuel surcharge, have you seen any impact on your ability to get pure price? Has that become more competitive, more difficult, and given more fuel prices or today, are you willing to give up a little bit on pure price in order to recoup the higher fuel cost?

Bruce Campbell

We really try to keep the two totally separate, John. We have cost miles that show what our cost are to move freight from point A to point B, and then we have our fuel model whichshows us what the surcharge should be. When we get into these arguments about where – we just don't give on fuel unless it's something nothing really extraordinary, and there are a few occasions where you get in to some unique situations that in fact the model doesn't work properly on fuel, and we will give on that only because we're wrong, and we should give on it. But otherwise, we just don't give a lot there.

John Barnes – BB&T Capital Markets

And, are you – is any of your business, contractual business, are you capped at all on fuel?

Bruce Campbell

(inaudible) or not, we do have, on the truckload side, every six months negotiations or whatever. But that's not a very large piece.

John Barne – BB&T Capital Market

Okay. Can you give us an idea of – since you got back into doing more business with the airlines, can you talk – just walk us through the trend line as to – I believe you were growing that pretty much off as zero at one point. So, can you talk to us about – as a percentage of revenue, how much your exposure to the airline business has increased over the last several quarters?

Bruce Campbell

We went basically from having British Airways and then some smaller airlines to today doing a probably between 2% to 3% of our Forward Air revenue associated with airlines.

John Barnes – BB&T Capital Markets

And what are you comfortable with in terms of letting that grow? Do you think we're past the issues, the core [ph] issues to really see [ph] to pull out of that business and therefore your comfortable letting it be a larger, easier growth going forward or are you getting to – or you maybe getting to the point where you kind of comfortable with where the, you know, it is on a go-forward basis?

Bruce Campbell

Well, it's strictly on a customer-by-customer basis. Specially some of the international airlines are in wonderful financial shape. We're not concerned with them. Some of the domestics, it's the same story that you know, I mean, we're watching very closely. We do establish credit lines with them. We do expect them to pay us on time. And when that doesn't happen, we do get excited. So, we want to be hardworking, fair partners with them and we want them to equally pay us on time. And we will make credit judgments by air – airline by airline, basically.

John Barnes – BB&T Capital Markets

Same thing on, kind of the same discussion on your length of haul. Since it's peak, can you give us an idea of where your length of haul is has fallen to and where do you think that begins to kind of stabilize and where, you don't see the 5% to 6% reduction in yield on a mix change basis where you begin to see maybe that flatten out a little bit or even begin to increase a little bit.

Bruce Campbell

You know, I think we're there now.

John Barnes – BB&T Capital Markets

Okay.

Bruce Campbell

Most of the regional traffic that we put in place has occurred. I'm sure, I hope, there will be some growth there in the future but that growth will be matched up with regular growth, if you will, of the longer haul business. So, we think it's stabilize now.

John Barnes – BB&T Capital Markets

Okay. And lastly, I saw a blurb the other day that I think, another one of the big heavy – the aircraft owning airfreight companies, just let me spit that out, sorry, has filed for bankruptcy again. I mean, you know, there's been so much capacity exiting the traditional airfreight market – domestic airfreight market. Do you think you're just about at the end of, you know, kind of the competitors exiting the marketplace and some of the irrational behavior that we've seen from time to time? Or if the economy begins to pick up a little bit of momentum that you're down to a core group of a service providers that this is kind of a necessary capacity that's sort of what's out there or do you think that there's another stairs sub-function [ph] in capacity to exit this particular market. The airport-to-airport market?

Bruce Campbell

Wow! Through our almost nineteen years now, it seems like, John, we go every – we go through two to three years cycles where there's a new Forward Air and there's this new whatever and they last a year, a year-and-a-half or whatever and then they go bankrupt. I mean, it's just an endless cycle so, I don't see anything changing that there are a lot of this airfreight geniuses out there that can, you know, they can just start up a truck line like Forward Air and just overnight, they can be Forward Air. So, I think that will go on as long as there are idiots in the world, and there are idiots in the world.

John Barnes – BB&T Capital Markets

And my family favorite saying is, "You can't cure stupid". So, Bruce, nice quarter. Thanks for your time.

Bruce Campbell

Thank you very much.

Operator

Your next question comes from the line of Andrew Boord with Fenimore Asset Management. Please proceed.

Andrew Boord – Fenimore Asset Management

Hey, good morning guys!

Rodney Bell

Hey, Andrew.

Bruce Campbell

Good morning.

Andrew Boord – Fenimore Asset Management

I wanted to ask is [ph], with all the acquisitions it looks like you have intangibles that are re-amortized and I don't see that broke out in expense and just you want to get a feel for how big that might be and what not?

Bruce Campbell

Can we get that to you? We have it, we just don't have it in front of us.

Andrew Boord – Fenimore Asset Management

That would be fine. Thank you.

Bruce Campbell

Sure.

Operator

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

Ken Hoexter – Merrill Lynch

Great. Good morning. Just want to talk to you about the – a couple of things on the solutions side. You got asked a bunch of questions about potential for further acquisitions, if you're ready or not. Are there other solutions providers that kind of fit within the geographic area that you are – that you don't have coverage in yet?

Bruce Campbell

Yes.

Ken Hoexter – Merrill Lynch

Are there many options or are there few providers in those regions?

Bruce Campbell

That really depends on the exact geographical areas, Ken. In some areas, there are two or three and in others there are just one.

Ken Hoexter – Merrill Lynch

So, the opportunities to do things in scale as opposed to doing it at piecemeal.

Bruce Campbell

Right.

Ken Hoexter – Merrill Lynch

I take it you don't want to give specific names. There was a great increase in owner-operators in the, I'm sorry, in the percentage of traffic carried by the owner-operators. Do you expect that trend to continue?

Bruce Campbell

We hope it does.

Ken Hoexter – Merrill Lynch

And move away from brokerage?

Bruce Campbell

Yes. Again, we want to minimize our use of brokerage as much as we possibly can because it does drive a big number to the bottom.

Ken Hoexter – Merrill Lynch

And to see you are into the what? The upper 80s? As far as a percent move by the owner-operators?

Bruce Campbell

If you take our – we look every Monday morning at the miles that we run in our system. Their goal is to keep the brokerage or the outside carrier miles to 10% or less, meaning that our owner-operators are running at least 90% of the miles. And, we know that if we do that, and actually can drive it even lower, that our profitability continues to improve. So, thats been our goal and they've done a really good job at that.

Ken Hoexter – Merrill Lynch

Alright. Let me come back to Solutions for a quick second. Purchased transportation was up about 18%, and I know last quarter you had said that it was a seasonal business and that retailers were obviously, I guess I think you said first quarter was the worst for the retailers. So, you expected that to be the worst. I'm just wondering now that we've had four full quarters of USA carriers and the results, can you walk through maybe your view on the seasonality on the Solutions side and why would PT as a percent of expense be higher in the second quarter relative to what you thought in the first. Is it strictly fuel or is there more seasonality to the expense side there as well?

Bruce Campbell

At first, PT and Solutions is concerned. That's because we're running some of the line haul for our tool customer. So we have – instead of just doing the distribution portion of the movement we're actually doing from the distribution center to our facility, and so that drives up revenue, drives up the PT. Overall that's a good thing not a bad thing.

Ken Hoexter – Merrill Lynch

Is that something you were not doing before?

Bruce Campbell

We were doing very limited amounts of it. Mainly because we were new to the business.

Ken Hoexter – Merrill Lynch

So you say the business itself is changing as you've acquired it, you're doing more of the delivery or the in-line haul?

Bruce Campbell

We're trying to. Yes.

Ken Hoexter – Merrill Lynch

How much have you changed? How much further is there to go? I mean, shall we continue to see PT go up as you continue transition for the next few quarters?

Bruce Campbell

It really depends on our success with the customers and our success in giving the right – I want to make this sound – I don't want to make this sound arrogant. There is some of that business we do not want because we do not have a need for it. There are other parts of that business that we really do want and the reason that we wanted is typically geographically it's located in a area of the country that we want to move the freight back, and help reposition our equipment. So there is both good and there is less good traffic there, so we will hopefully see that business grow but it's not going to grow significantly. Our real push there is to build the distribution business side of it.

Ken Hoexter – Merrill Lynch

Makes sense. Can you say how much of it do you kind of converted over that you want to convert?

Bruce Campbell

Right now what you're seeing are two things. One is the movement between the terminals. An example is we have the ability for customer A to service all of Texas but they can only move their line haul into Dallas. So what happens is, they move their line haul into Dallas. We break it. We put it on Forward Air, airport to airport, and then move it to Houston and San Antonio. That shows up as PT. And then there's the additional cost to get it to the store. That is business that we really want and we want to build on. But if somebody has truckloads where they'd been able to negotiate really, really good rates, just pick an area, let's say, out of Chicago. They can go from Chicago to Miami for about a $1.20, we're not going to touch that. We're not interested in handling that.

Ken Hoexter – Merrill Lynch

Okay. Great. Thank you very much for the time.

Bruce Campbell

Thank you.

Operator

And your next question is from the line of Matthew Troy with Citi Investment Research. Please proceed.

Matthew Troy – Citi Investment Research

Yes. Thank you. I was wondering, did you guys have – (inaudible) I apologize, if this has been answered. Did you see any benefit or detriment to your service revenue in the quarter result of the flooding in the Midwest?

Bruce Campbell

Our Malina [ph] thermal and our Iowa Thermal Cedar Rapid from Burlington. They were affected. For the most part, they were able to operate. I wouldn't call it normal. But they were able to get through it. The bigger impact that you see on it, and it's not a huge impact to us, because that region is not a huge part of our revenue picture, was the shut down of various businesses in the area that you had no need for transportation because they weren't open and operating. We now see them operating normally.

Matthew Troy – Citi Investment Research

Okay. In terms of customer behavior, just wondering obviously that the trade down from air to ground is a multi [ph] you try, I think, you alluded to in your comments earlier but, are you seeing any change in behavior from customers taking a harder look at their supply chain in the current economic downturn and asking you to do more either with the services that you provide or the assets that you provide to them. Any change of custom behavior that is having implications for how you either, A, manage in that worker, B, think about extending and expanding your service offering over next year or two.

Bruce Campbell

I think the big thing, and we had anticipated is there continues to be growth on the short haul side. People moving to the short of haul type of traffic more and more. We think that will expand. We think that area has bigger growth opportunities than the longer haul type of traffic.

Matthew Troy – Citi Investment Research

Okay. I think you may have mentioned that on the last call. In terms of that growth opportunity, what kind of capital or what kind of investment needs to be made the capturing or the line of share, you know, if you could reign in with your existing infrastructure.

Bruce Campbell

Exactly, the last part of your statement is correct. We can reign it in.

Matthew Troy – Citi Investment Research

Excellent. Alright. Thank you.

Operator

Thank you for joining us today for Forward Air Corporation's second quarter 2008 earnings conference call. And please remember the webcast will be available shortly after this call on the RR section of Forward Air's website. You may now disconnect and have a great day.

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