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Edited Transcript of FWRD earnings conference call or presentation 7-Feb-20 2:00pm GMT

Q4 2019 Forward Air Corp Earnings Call

GREENEVILLE Feb 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Forward Air Corp earnings conference call or presentation Friday, February 7, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Joseph Morris

Forward Air Corporation - CFO, Senior VP & Treasurer

* Thomas Schmitt

Forward Air Corporation - Chairman, President & CEO

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Conference Call Participants

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* Benjamin John Hartford

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD & Analyst

* Todd Clark Fowler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

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Presentation

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Operator [1]

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Thank you for joining Forward Air Corporation's Fourth Quarter of 2019 Earnings Release Conference. Before we begin, I'd like to point out that both the press release and the webcast presentation for this call are accessible on the Investor Relations section of Forward Air's website at www.forwardaircorp.com.

With us this morning are CEO, Tom Schmitt; and CFO, Mike Morris. By now, you should have received a press releasing announcing our fourth quarter of 2019 results, which was furnished to the SEC on Form 8-K on the wire yesterday after the market closed.

Please be aware that during this conference call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the company's outlook for the first quarter and fiscal year of 2020, the expected impact of growth and strategic initiatives, the expected impact of organizational restructuring, the expected impact of the FSA, O.S.T. and Linn Star acquisitions and those forward-looking statements identified in the presentation.

These statements are based on current information and our current expectations. As such, they are subject to risks and other factors that may cause actual operations and results to differ materially from the results discussed in the forward-looking statements.

For additional information concerning these risks and factors, please refer to our filings with the Securities and Exchange Commission and the press release and webcast presentation relating to this earnings call. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

And now I'll turn the call over to Tom Schmitt, CEO of Forward Air.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [2]

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Thank you, Justin, and good morning to all of you on the call. We are in a tough stretch on a very robust and clear journey. We've seen both a choppy environment, and also we have made very conscious moves in the fourth quarter and throughout the year, on-boarding new business as we were just approaching peak, also integrating 3 acquisitions. So with those moves and the environment together, the result for the full year is a 7 and an 8. 7% growth, 8% margin. Not quite the medium-term double-double yet.

With precision execution, I'm pretty confident, I'm actually very confident we are working towards getting there though, and we will not confuse efforts with results.

What gives me that confidence? Well, let me look back, 2019 was my very first full year with my Forward Air teammates. We did set up a clear strategy, which we unveiled on the Investor Day in New York in June. When it's bigger than a box and it matters, think forward, we wanted to make sure that we drive this strategy both organically and also inorganically with a very, very clear, precise commercial and operations lineup. And our precision execution processes in everything we do behind it, resulting in that medium-term double-double destination with double-digit revenue growth and double-digit margins.

Then what we did throughout the year was executing the heck out of our strategy. Inorganically, with 3 acquisitions in our growth businesses, truly first-class companies in my eyes and, most importantly, in the eyes of our customers. One acquisition in Intermodal, O.S.T. in Baltimore, great team, I got to see; and 2 acquisitions in Final Mile, FSA Logistix and Linn Star, many of the teammates there I have met also.

In Final Mile, we went from 8 markets to over 80 markets in 2019 with a business that now has a run rate of $200 million. So if you remember, I did say several times that nowhere it's written that you shall do more than 2 acquisitions a year. So we are accelerating inorganically.

Organically, we also show growth, strong double-digit growth in pool, our Solutions business, where also our profit year-over-year improved. And in fact, we could have driven that number higher, and we made a very, very conscious decision to onboard new business, open up new locations as we were approaching peak in pool, which did hurt a lot in the short term, and it's setting us up very, very well for the long term.

We are stretching pool. We have the same high expectations in that business as we have in all other businesses. We also showed strong organic growth in Final Mile after the acquisition of FSA. And our grow-forward initiative within our core LTL business is starting to bear fruit, showing incremental business in new verticals, notably 3PLs, in addition to our core Airport-to-Airport customers, which will always be a remarkably important core to us.

And then finally, we did line up for maximum synergy, and that's happening most visibly with the creation of our Expedited Freight segment. Over the road, Truckload and LTL are collaborating much more tightly, commercially and operationally. We are selling Truckload outbound to LTL on the backhaul or the other way around. And locally, we are also starting to drive synergies between the LTL pickup and delivery piece and the final-mile routing.

So the way we hold product, the way we route product between those 2 will be very, very much in sync. And it's key for us in that Expedite Freight business to nail those synergies with rigor as that's exactly what drives the potential of a double-digit margin in that new segment.

As I said, we are in a tough stretch of a very, very clear robust journey. And that clarity of that game plan and our rigorous position execution gives me tons of confidence that we are, in fact, on a very, very robust journey towards our double-double.

So having said this, I'm going to turn it over to our CFO, Mike Morris, to paint out that colorful picture a bit more, especially also with a double-click on our new segment, Expedited Freight. Mike?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [3]

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Thanks, Tom. Before we go to Q&A, I would like to comment on our new reporting segment called Expedited Freight. During our third quarter earnings call on October 25, we mentioned that we were exploring a deeper synergy between our LTL and Truckload operations, which Tom described in his opening remarks.

As the quarter progressed, we continued this analysis and concluded that it makes the most sense to run LTL and Truckload as one combined fleet. To best implement this decision, we put new sales and operational leadership in place and effectively merged these business units.

This strategy will help drive organic growth, build linehaul density and lower purchase transportation cost within our LTL network. It will also complement our plan to further integrate Final Mile into our LTL operations, which will enhance pickup and delivery and terminal density.

Overall, the continued integrations of both Truckload and Final Mile will help lower unit costs at LTL, where we have the greatest opportunity for operating leverage. As a result of these changes, we have decided to report these operations as 1 segment since this is how we are running the business.

To help the financial statement user, we have provided 2 enhanced disclosures for expedited freight. First, we are showing greater revenue detail since this is now a $1 billion segment following the acquisition of Linn Star. Second, we're providing a new metric called network gross margin. The Truckload and Final Mile integrations will improve LTL operating leverage over time, but will also create a different gross margin and operating margin profile for this new segment.

Network gross margin intends to preserve visibility into our core LTL operating leverage by showing the leverage we are getting on purchased transportation, which, as an asset-light provider, is our biggest leverage opportunity.

As you can see on Page 5 of our earnings release, our LTL operations generated this leverage in the fourth quarter and improved network gross margin by 110 basis points. The reduction in the Expedited Freight segment gross margin and in our consolidated gross margin was driven by the acquisition of FSA, which is not in the prior period.

Finally, the historical information we customarily provide on our Investor Relations website has been modified to reflect this new segment reporting and will be maintained in this manner going forward.

With that, Justin, let's open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Todd Fowler of KeyBanc Capital Markets.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [2]

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Tom, I guess maybe just to start, when you think about the expectation for double-digit revenue growth and double-digit profit growth, obviously as you mentioned in the prepared remarks, kind of in a soft patch right now. Do you think that that's something that's attainable as you move through the back half of the year? Or does that get pushed out more into 2021? Just trying to think about the timing of how long you kind of see this -- the softness persisting? And when you think you can kind of get back to or start approaching what you've laid out as kind of the interim targets?

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [3]

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Yes. Todd, a couple of things. One is just a clarification. When we talked about the double-double in New York, it is a double-digit annual growth, and it's double-digit margins. So that's what we were referring to. We also -- we always talked about the medium term. I think right now is actually a perfect time to kind of illustrate why we call it the medium term. It's hard to predict whether it's the freight market, whether it's disruptions like the one we are experiencing right now as in economy, as a global, actually, economy, not just the U.S. economy with the coronavirus. It's hard to predict kind of how fast precision execution will translate into the results that we know we're going to be having because you can have tailwind or headwind. Right now, we have a headwind coming our way.

So it's hard for me to look into that crystal ball and say -- Todd, and say, it's going to be second half of 2020, or it's going to be 2021. What I am very, very confident in, if I look at the quality of the organic growth, when I look at the quality of the businesses that we are acquiring in our growth segments, Final Mile and Intermodal drayage, precision execution with the way we are looking at what we do is happening, that I know. So -- and this is where I can just say, I'm confident based on the track record that we're starting to establish that those actions will result in what we believe is possible. And that's what we articulated on the Investor Day. The timing is really hard to calibrate because, again, headwinds and tailwinds and even the source of those, you and I can both guess it, probably, about equally well.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [4]

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Okay. Yes. No, that makes sense. And that's helpful context in thinking about kind of the near term. And then, as you said, the medium term, so I appreciate that. Maybe for Mike, with the new segments, we've had some good historical information or historical data on the margin profiles for the individual pieces that are now kind of rolled up into Expedited Freight. But as you think about that segment and the reporting for that segment going forward and some of the new mix that's in there, what's kind of realistic for -- in OR assumption for that business? Maybe, not so much here in the short term, but how do you think about the margin profile of all the pieces that -- now that you've combined those together? What's the right OR for Expedited Freight?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [5]

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Well, I think if you think about the second double in double-double -- and this is reflecting back on what we said a bit during IR day -- deep inside, we would be striving for the LTL operations to be moving in the direction of an 85% OR. But when you lay in Truckload, when you lay in Final Mile, including Final Mile acquisitions because this is going to be, I think Tom called it Godfather: Part 2, the CST trade redone in the Final Mile space, that will probably put that pressure of that to the zone of 10%. And then we'll just have to see how much operational goodness we can generate from the integrations that might lift that up.

Similar to the CST, the Intermodal segment, as we've talked about historically, inside, you have a margin profile that's greater than 10%. But when you layer on acquisitions, acquisitions, they tend to be dilutive until they're integrated, but when you do another acquisition, another acquisition for growth, it can kind of push that margin into the 10% range. I would -- the short -- that's the long answer to your question. The short answer is 10% or a 90% OR.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [6]

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Okay. No, that -- all of that makes sense. That's helpful. And then, I guess, maybe just for a couple of shorter-term questions. If I've got kind of the comparisons right, it looks like revenue per 100 weight was still positive in the fourth quarter, but it was against a difficult comp. Can you talk a little bit about what you're seeing in the yield environment? And is that really where you're seeing kind of most of the pressure? I know that tonnages remain challenged, but if you could just kind of talk about expectations for pricing, what you saw in the fourth quarter and then as you get into the first part of '20, that could be helpful.

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [7]

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So why don't I go first just on -- Tom, on some of the math, and then if you just want to talk about the philosophy? Todd, actually, what's starting to happen, I think, you had given me some counsel on to be very clear about, which is, as we grow organically in 3PL and pursue heavier, denser shipments in more industrial-type markets, we'll necessarily have lower yields on that because the market yield is going to appreciate the density.

We have had a lot of growth in 3PL organically and a lot of initial success. And that is having an effect on our yield. So if our system yield, ex-fuel, was up 1.3%, door-to-door was actually up, call it, 2% to 2.5%, but the growth in -- I'm sorry, Airport-to-Airport was up 2%, 2.5%, but the growth in door-to-door from a mix perspective, kind of pushed it back down to the numbers you see on the release. So it's in -- that's kind of the math that's going on, the core Airport-to-Airport was higher. There's no real actions to reduce price, just a bit of a mix shift as we grow organically in door-to-door in what for the past quarter was relatively soft in an Airport-to-Airport environment.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [8]

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So just to add, perhaps, a little bit more color around the philosophy for pricing, I feel extremely vocal about great companies are very disciplined when it comes to pricing. So are we. Now having said that, we have gotten -- this is where precision execution comes in, we've gotten much more intelligent about what's good business for us and our customers and what's not. So when customers that we work with very closely -- including the domestic forwards who have been our core for a long, long time -- when we identify with them or, for that matter, our growth segment, 3PLs, lanes and volumes that are good for them, where we are low on damages, high on time, fastest lanes, we are telling them, you can earn more discount with more volume because that's good volume for you and for us. So we are extremely disciplined. We are also extremely surgical. So you can earn more as you spend more as a customer with us, but it is for specific business that we know to be good news for them and for us.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [9]

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That's great color. And like I'm not used to having people listen to my advice. So I appreciate you listened through all of that one. Just my last one, and then I'll turn it over. But -- on the first quarter guidance, obviously, you're getting the revenue lift from the acquisition. It doesn't feel like a lot of flow-through. Can you, Mike, maybe walk through a little bit of kind of the cost -- any specific cost pressures in 1Q, either that wouldn't be recurring, that kind of depress the earnings or kind of how you're thinking about costs in the first quarter that might be -- that might start to balance out as you move through the year? And then I'll turn it over.

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [10]

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Sure. So optically, in the first quarter, we are lapping the FSA acquisition, which closed in April of last year. And we have nearly a full quarter of Linn Star because it closed in mid-January of this year. So the revenue growth is being driven by acquisitive growth in Final Mile. We're doing a good job integrating FSA and starting to integrate with Linn Star, but we took an opportunity to grab some additional organic growth over the course of last year with FSA. Our kind of more hardcore integration is going to kick in this year. But we've got some transaction closing and some, call it, general distraction around the Linn Star acquisition. So we're not anticipating a lot of drop rate off of this Final Mile revenue growth, but we're very excited that in less than the span of a year, we went from a $40 million run rate to a $200-plus million run rate player in Final Mile.

We are anticipating some pressure in the freight markets. Frankly, we overestimated peak last quarter, and we're being a little more cautious in terms of our outlook. It does feel like there's more headwinds than tailwinds, particularly in the overall Truckload market, in the Intermodal market. So that pressure we expect is going to continue. To the earlier comment, I wish I had a crystal ball. Everyone's kind of pointing to the second half. Whenever it occurs, we're going to be pretty well positioned with the actions we've taken to grow the portfolio.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [11]

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If you -- Todd,, if you look at it, and this is again where being surgical -- and again, I use the term precision execution consciously a lot -- help. We do know fairly well, when we have an acquisition, whether it was FSA in early 2019, O.S.T. in summer or now Linn Star, in the first few months, the initial revenue benefits do get eaten up and sometimes even more by the integration costs. So that is something that, Mike, as you said, that we're going to be experiencing in a good way in the first quarter. I mean the short-term payments for long-term gains. So that -- we will see that a lot in the first quarter. And then we did, in the pool business, add on a lot of new business as we were approaching peak. That suppressed the profitability in the fourth quarter against a typical fourth quarter for pool, and now you see the typical softness in the first quarter.

So again, this is when I go back to my remarks at the opening of the call, we are executing exactly what we set up to do, but that strategy to structure organic, inorganic, you -- right now have a little bit of a compounding effect of onboarding new business in pool in the fourth quarter, integrating our latest acquisition in Final Mile and then some of the headwinds that, Mike, that you talked about. And that's in totality adding up to us being somewhat, whatever you want to call it, less than inspiring or so in terms of our guidance for the first quarter, but we just want to be realistic because we do know surgically well, the effects of the actions that we are taking in the very short term.

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Operator [12]

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And next in queue, we have the line of Jack Atkins with Stephens.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [13]

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Jack?

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [14]

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So let me start here with Mike, is there a way to kind of think about what the -- when you kind of consolidate all the moving pieces together, what the kind of the current run rate margin is within your expedited transportation business? I mean I'm kind of coming up with about 10% currently, pro forma for the acquisition. I'm just trying to get a feel for what the current base is when you combine TL, LTL and adjust for these recent last mile acquisitions. Can you help us with that?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [15]

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Yes, sure. I just want to make sure I understand the question. So are you saying if you peer into core LTL, what's it doing? Is that the question?

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [16]

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No, no. I mean my question is, you're now reporting 1 expedited segment, right? And you've got -- and there's just -- we only have one quarter of historicals and you made a couple of large acquisitions. So what I'm trying to understand is, what is the current sort of margin run rate on the business that you kind of have on a go-forward basis for expedited transportation? Is it about a 10% margin? Is it less than that? I mean because your goal is 10%, so I'm just trying to understand like where are we now? And like how much upside is there over the long-term as we try to move to 10%?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [17]

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Yes. I think it'll follow up because LTL's still a big part of that margin. It'll probably largely follow the seasonality of the LTL margin that you've seen historically, just knocked down a couple of points for the introduction of a large amount of Truckload and Final Mile revenue. That's kind of a near-term comment. And then as the integrations kick in, it'll lift it up.

So obviously, you're in peak here. And so, 10% feels pretty good. You might see some softness over the next couple of quarters seasonally, and then you start to walk your way back up. If that gives you some additional clarity.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [18]

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Well, maybe, let me ask it this way. What is the acquired revenue from Linn Star that you're expecting to get out of that transaction?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [19]

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What we've said in our announcement is we expect Linn Star to run at about a $90 million run rate. And it has some seasonality to it as well. This is a softer quarter for the Final Mile, and then it kind of builds through the course of the year.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [20]

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Okay, got you. That helps me get there. So let me kind of ask a similar question. When you think about the integration of Expedited LTL and Expedited TL, can you help us think about the synergy benefit there? I know there's opportunities on the purchased transportation side, but is there -- are there any sort of opportunities just in terms of back office synergies, sales force synergies? And how long will it take for those to really be realized? Is it immediate or would you expect it to take about 12 months?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [21]

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I think we're already -- so let me take it in pieces. I think we're already seeing benefits on the Truckload side. I'm going to start operationally, Jack. There's not a lot of back office here. Our back office is largely centralized in our shared service center in Tennessee. But on the Truckload side, the benefits became very obvious very quickly, where you have these increased revenue opportunities, like Tom described, that are driving better linehaul density; lower cost per mile; better usage of assets like trailers; better recruitment, lower your recruitment costs, you're just recruiting to 1 fleet; better retention as you offer more diversity to the driver in terms of what they're -- what routes they're running; larger overall fleet; the LTL sales force just to gain the Truckload sales force. So that was a pretty big lift. And what I really like about the way that our team is doing it -- Jack, do you remember when Con-way bought CFI?

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [22]

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Sure.

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [23]

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And the Freight business kind of didn't treat the Truckload business too nicely after that acquisition? The opposite is happening here. We are pursuing Truckload revenue opportunities with the same vigor, we're pursuing LTL revenue opportunities. And there's an operational drive to it, where we're creating lanes we couldn't run before because both sides were afraid of coming back empty. And those lanes are being opened up, and that's creating these revenue synergies that I think are going to be very powerful while they simultaneously lower the cost per mile.

The integration of Truckload is clearly going to generate the most fruit sooner. Final Mile is going to take a little more time. That's -- out there is largely a dedicated model, but we're starting to push into integrated applications. And as we've talked about in prior calls, we're also able to offer the driver a synergy with respect to doing pickup and delivery for LTL freight, and pickup and delivery in the install with respect to Final Mile freight. That helps us recruit, that helps us get the best in the market, and that's kind of the secret sauce of being good at this. That will take a little longer, and we'll also probably be slowed down as we continue acquisitions in that space. But I can tell you, Tom, Chris, others on the leadership team, like literally have objectives of their scorecards for how much integration we've achieved. So we really think it's going to come together, Truckload sooner, Final Mile a little later. Tom, any --?

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [24]

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Yes, just briefly on the scorecard. So -- and this gives you a little bit more flavor, Jack, behind the timing. So the number of lanes that we co-operate between LTL moves one way and TL moves the other way, in the last 6 months have gone 5x. So there's significant co-operating going on today already. So that's a current benefit that's ramping up. When you go kind of behind in terms of the core processes to support the business, recruiting, Mike as you mentioned, is also real-time happening. So we're recruiting for 1 -- with 1 team for 1 fleet. It just happened to be at 1 fleet now serves 2 segments, Truckload and LTL.

So operations already up, recruiting already coordinated and integrated, that's happening. And in terms of selling with the implementation of salesforce.com as our CRM, we actually also have increased opportunities to do more of an enterprise sale and systemically support that. So in essence, did, as -- Mike as you said, 10x the sales force that actually is looking for TL moves. So all of that's happening right now. And then on the Final Mile piece, yes, it's in all of our support leadership team NBOs to get some of that integration, both from a terminal building and then from a routing perspective between pickup and delivery, LTL and Final Mile happening somewhere in our network this year. So this is not a long term, multiple years out. It's going to be happening somewhere in our network this year.

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [25]

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In addition to what we have. I think we're in 3 markets today where we're already starting to do that in addition to that.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [26]

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Got you. That all makes a lot of sense. I think the integration of TL into LTL, there's just this huge opportunity there. So very happy to see that happening. I guess just a couple of other quick housekeeping questions. Mike, is there a way to kind of quantify the integration expenses that are baked into the first quarter guidance? And can you give us some sort of sense for how January tonnage has been trending?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [27]

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Yes, I wouldn't think of the integration expense -- I mean, there's some closing costs for the transaction and things of that nature. I would think of the integration drag as more of a distraction, if you will as the 2 companies come together and that there is some effect of that on profit. There aren't a lot of like serious integration expenses. We're going to slowly stitch together a platform over the next couple of quarters between Forward Air and FSA and Linn Star. But I would characterize it as just more of 2 companies coming together and maybe being a little more focused on that, then there is some type of big check we have to write. First quarter tonnage per day has been down roughly 3.5%.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [28]

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Okay, got you. That's helpful. And then last question, and I'll turn it over, would be on insurance expenses. Those took a step-up pretty meaningfully. Did you guys have any unusual sort of items in the fourth quarter. Could you kind of comment on that? And then could you also talk about how you're expecting your insurance rates to trend in 2020?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [29]

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Sure. So in the fourth quarter, there is inflation in the insurance and claims line. Let me give you the big pieces. The biggest piece, frankly, is just premiums that we have to pay to outside providers. We've done a significant increase in our self-insured retention, as you know, going from $1 million to $7.5 million. But even with that, we need coverage above that level, and that coverage is up 40-plus percent year-on-year. That's a function of the troubled insurance markets that all the transports are dealing with.

The next bucket is in the claims side, and I'll break that in 2. One is we did have a couple of hundred thousand dollar-type incidents in the fourth quarter. But the other is there's some optics related to FSA. FSA was not in the prior period, its revenue wasn't nor was its claims. And so when you put them in the current period, you bring in their usual claims expense, and that's creating some optics of inflation as well.

With respect to the first quarter, I mean, this -- you know better than I do, this is a problem for trucking companies. And we are expecting continued inflation from carriers regarding the premiums on the towers that we have above our SIR. And with the growth in the business, we are predicting some headwinds as we bring on self-insured reserves. Linn Star, similar effect: as it comes in, it's not in the prior period, and so that will show up in our first quarter results.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [30]

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So is that, call it, $12-ish million a quarter, is that kind of the right ballpark to kind of think about? Obviously, there are some things that can impact that and swing that around quarter-to-quarter. But is that sort of the new kind of run rate quarterly going forward to think about?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [31]

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Yes, that feels fair.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [32]

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Maybe, higher with Linn Star even? Or -- I just want to make sure we've got that calibrated correctly in our model.

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [33]

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Yes, I think that's a fair starting point. We're doing a lot in terms of our safety initiatives, in terms of our operational initiatives. It is a slower quarter, so we would expect to have less claims expense. But that's a fair starting point. And we just don't see any relief kind of coming in the markets where we do have to buy coverage above our SIR.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [34]

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Jack, the one thing -- let me just add 1 piece here, because that's obviously a reality that we and everybody in the industry is coping with and needs to manage with. But the one thing I do want to emphasize, we're not audience sitting in movie theater seats, watching a movie play out, keeping our fingers crossed and hoping there's a happy ending. We are directors of our own movie, right? So when we see these things happening on the insurance cost, that's when we need to kick in synergies that we just talked about between TL and LTL, between pickup and delivery LTL and Final Mile, so that we actually take these hits and compensate them elsewhere, right? Even last year, in a very, very challenging 2019, if you take the reserve that we had to take, if you take some of the excess labor costs in the fourth quarter because we added on additional locations and business in peak, we -- if you look at these things, and we still came EBIT-wise close to 2018.

So we need to make up for these things. They are real. They hurt and then that's where you operationally and commercially have to look for synergies and make them a reality so that we actually compensate for those. So that's -- I want to emphasize, we're not the victim here. We're actually the director of our movie.

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Operator [35]

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And next in queue, we have the line of Ben Hartford of Baird.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [36]

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Tom, maybe just from a high level, I think, we understand what's going on in terms of volumes in January, you provided that number, Mike. But the lead-in to the start of Chinese or Lunar New Year, in January, it sounded like it was a little soft to begin with from a kind of a broader airfreight perspective. And then obviously we're in the heart of the Lunar New Year shutdown at the moment. And then we've got this coronavirus situation that's developing. So from a broader macro, maybe a specific airfreight perspective, Tom, could you provide a little bit of context about what's going on from a core legacy, kind of, Airport-to-Airport volume perspective? And any sort of commentary that you could provide about how quickly the factory output can come back up at this point in time? Because it sounds like that's obviously being kicked out. So any perspective there would be helpful.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [37]

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Yes. Ben, a couple of big things. One is, I mean, our Chief Commercial Officer, Matt Jewell, and I, we just -- literally just talked before this call. The things that you and I are both reading in the papers, they are obviously real. I mean there's a lot of the airlines that have stopped operating flights between China, and not only Mainland China, also Hong Kong in most cases and North America. And that's starting this week, more so than perhaps January, that's noticeable. So I would expect some of the traditional traffic that's coming via airfreight, we see a slowdown as we sit here and as we speak. I would expect something similar happening on the ocean side because obviously it's just a time delay, but the same impact over the next several weeks.

So less of an issue in January, very real as we stand and sit here. And then the last piece is the one that I just have to have some form of confidence in kind of people working extremely hard, figuring things out, including -- I mean, this is the first and foremost obviously obligation, making sure that everything is possible being done to help people get better and healthy as quickly as possible. So whether we're talking weeks and months, it's hard to say.

The one thing from a positive perspective, Ben, and that's also an opportunity we need to look at is, as and when we graduate past this virus, there will be opportunities that we need to tackle and we need to take advantage of, of catch-up. Because obviously there's slowing down or even halt of airfreight. There's slowing down or even halt of ocean vessel shipments. At some point, there will be catch-up. Now when you talk about who should be going after opportunities for catch-up, it's people like us who are in the fast, expedited business. So painful today, may take weeks, perhaps even, hopefully, not months, but this is where I hope that the concerted efforts of all the different agencies, industries, medicine, all start kicking in. And then it's up to us to work with our customers very, very closely to look for ways to catch up the best possible way.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [38]

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And I guess in that vein, as you think about potentially volumes coming back into the network at some point in time from an expedite perspective, how do you think the network sits today from a service point of view? And maybe can you talk a little bit about the initiatives that you had underway with regard to owner-operator recruitment? There's been a bit of a wrinkle toward the end of the year with AB 5. That sounds like it's obviously stayed at the moment, but you've got that overhang, you've got the insurance issue that I think is pretty straightforward. But just from protecting the network and making sure that service continues to improve and you are positioned before that, can you talk a little bit about some preparation there?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [39]

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Ben, it's Mike. Why don't I give you a data point, then I'll turn it over to Tom? The owner-operator fleet is in outstanding condition. The network is operating very, very well. To put that in perspective, and then I'll turn it over to Tom, broker power. So the outside miles, if you were, last quarter was 8.2% of miles versus 25.9% in the prior period. So a very significant improvement in the quality of the fleet. And I think we're pretty well ready to handle that expedited demand. But Tom?

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [40]

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Yes. And just -- I mean those -- when you have your ICs, your independent contractors, that actually know to work with us, and you have them predominantly and less purchased transportation, it obviously does have a double whammy positively. It actually lowers our cost. And secondly, and most importantly, it's people who know how to operate on our behalf and our customers, and that shows in service.

We just had 2 of our larger conferences a week or 2 ago, AirCargo Conference and SCM, with many, many of our domestic forwards, international forwards, airline customers, 3PLs. Now this is probably anecdotally, but once you have 20 or 30 observation points from your largest customers, all pointing to the same message, that message being we love the service that we're getting from you; on our scorecards, your on-time shows at record levels, that's telling me that what you, Mike, just talked about in terms of these being ICs that know how to work on our behalf and our customers and the resulting service, they're in sync.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [41]

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Okay, good. That's helpful. Mike, I guess, some of the incremental data on the LTL side's helpful. But if I look closely at this, with pounds per day down year-over-year, shipments down greater, but weight per shipment up yields probably pressured on that. To me, that kind of weight per shipment being up is a little bit of a tail in terms of progress on the expansion of the TAM. So can you talk, maybe, Tom, about some of the incremental sales? You talked about the integration of the sales force, but some sales efforts, some opportunities during the year as you move through the year, and how we should interpret this data as indicative of traction in terms of the efforts to expand that broader 3PL customer set through the year?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [42]

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Ben, just real quick, so just to give you a little more clarity on the folks on the call, our 3PL daily tonnage was up like over 100%, weight per shipment was up 50%, daily shipments were up 60%. Tremendous amount of progress being made in this initiative.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [43]

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Yes. And this is an and, not an or, so I do want to emphasize very, very clearly, the traditional Airport-to-Airport business, the core customers that we have with predominantly domestic forwarders, we are going above and beyond to be on their support team, and frankly, almost on their pursuit team as they are going for more business. So we're putting more tools in their toolkit. That's not going away. That's a core, we need to keep.

And now getting Ben to your point, we've done tremendous strides. And you and I have talked about 3PLs and how they would be a logical vertical for us, especially as we focus on fast claims, especially as we focus on record low damage ratios and make sure we get that type of business through 3PLs. And that's what's happening more and more. Our fastest-growing customer segment is 3PLs, our fastest-growing customer is a 3PL customer. So what we talked about 1 year, 1.5-year ago is happening.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [44]

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That's good. And then last one, in terms of the planning time frame of a GRI, have you -- do you have any thoughts on that for 2020?

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [45]

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It's the same as always, which is this year and last year and next year, there will be Christmas and Easter in the GRI, and they all happen to roughly be on the same schedule. So we're doing same thing. We want to provide maximum predictability for ourselves, and most importantly, for our customers, so they can plan and budget. So the GRIs, it's slightly different by mode. But they are -- if they're not contract-specific on a per customer basis, they tend to be in the first half of the year, slightly different weeks or, in some cases, even months. But we're going to get into the same cadence every single year, so that we can plan together with our customers.

And Ben, back to the previous points we made with Jack and Todd: Because we increasingly understand what's good business for our customers and for us, there are ways that you can kind of save more as you spend more. So GRI applies. At the same time, customers and we can surgically work on volume discounts as we go into supporting them with business that's good for them and for us. But the timing is the same as last year, between February and May in all business units.

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Operator [46]

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And with no further questions here in queue, that does conclude Forward Air's Fourth Quarter of 2019 Earnings Conference Call. Please remember that this webcast will be available on the Investor Relations section of Forward Air's website at www.forwardaircorp.com shortly after this call. You may now disconnect.