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Edited Transcript of FWRD earnings conference call or presentation 27-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Forward Air Corp Earnings Call

GREENEVILLE Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Forward Air Corp earnings conference call or presentation Thursday, April 27, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce A. Campbell

Forward Air Corporation - Executive Chairman, CEO and President

* Matthew J. Jewell

Forward Air Corporation - President of Logistics Services

* Michael Joseph Morris

Forward Air Corporation - CFO, SVP and Treasurer

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Conference Call Participants

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* David Griffith Ross

Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation 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 First Quarter 2017 Earnings Release Conference Call. 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 Chairman, President and CEO, Bruce Campbell; Senior Vice President and CFO, Mike Morris; and Logistics Services' President, Matt Jewell. By now, you should have received the press release announcing our first quarter 2017 results, which were furnished to the SEC on Form 8-K and on the wire yesterday after market close. 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 second quarter and fiscal year of 2017. 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.

Today's presentation will include non-GAAP financial measures, including adjusted income from the operations, adjusted income before taxes, adjusted income taxes, adjusted net income and adjusted diluted earnings per share. These non-GAAP financial measures exclude those items that we believe affect comparably. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our first quarter 2017 earnings press release.

And now, I'll turn the conference call over to Mike Morris, Senior Vice President and CFO of Forward Air.

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Michael Joseph Morris, Forward Air Corporation - CFO, SVP and Treasurer [2]

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Thank you, Julia, and good morning to everyone on the call. Before we move to Q&A, we would like to make a few remarks about our recently announced acquisition of Atlantic. As Julia mentioned, we're joined on the call today by Matt Jewell, who oversees our Intermodal and Truckload businesses. Matt, let me turn it over to you to provide an overview of the transaction.

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Matthew J. Jewell, Forward Air Corporation - President of Logistics Services [3]

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Thanks, Mike. On April 10, we announced that our wholly owned subsidiary CST had entered into a definitive agreement to acquire substantially all of the assets of Atlantic Trucking Company. This transaction has been a few years in the making. Since acquiring CST in 2014, we've been actively looking for an intermodal company with the right mix of customers, locations, driver fleet and management expertise to serve our -- as our Southeast beachhead and we found that in Atlantic. Atlantic is headquartered in Charleston, South Carolina, with 8 other locations, Savannah, Atlanta, Charlotte, Norfolk, Nashville, Jacksonville, Memphis and Houston. It has 416 drivers, 83 company and 333 independent contractors. It has a legacy leadership team that has all agreed to stay on, and has a great blend of liner, freight forwarder and BCO customers. To acquire Atlantic, Forward Air will pay $22.5 million, with the potential for a $1 million earn out. Assuming the earn out is achieved, the $23.5 million purchase price represents a 4.6x Atlantic's 2016 EBITDA. We expect the transaction to close on or before May 15, and we're very excited to welcome Atlantic to the Forward Air family and I want to personally thank the entire CST team and Atlantic's owners, Kevin Gregg and Julie O'Donnell, for all of their hard work and helping us put this transaction together.

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Michael Joseph Morris, Forward Air Corporation - CFO, SVP and Treasurer [4]

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Thanks, Matt. Matt will remain on the call this morning to address any questions about Atlantic or our Intermodal and Truckload businesses in general.

Before we move to Q&A, I will mention that we expect Atlantic to be $0.02 to $0.03 accretive and provide roughly $2.5 million of EBITDA in 2017.

So with that, Julia, 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) And our first question will come 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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I know we want to highlight the Atlantic deal but, Bruce, I want to say congratulations on the Pool Distribution results. I think we've been waiting for our first quarter like this for some time.

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Bruce A. Campbell, Forward Air Corporation - Executive Chairman, CEO and President [3]

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The emphasis is we.

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

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Maybe to that point just starting there. Can you talk a little bit about what you saw during Pool? I think that the results are a little bit surprising given some of the commentary in the retail market. And so maybe just to start there with what you saw here in the quarter and expectations for the full year at this point on for that segment.

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Bruce A. Campbell, Forward Air Corporation - Executive Chairman, CEO and President [5]

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I -- the quick answer is, Pool, even though they are suffering from a tough market today. The good side of that is their competitors are going out of business left and right. So we've been able to do a number of things that we haven't been able to do in the past. So for instance, we've been able to get through reasonable rate increases, we've been able to establish a really stable management team that is really doing a top-notch job led by Roger Gellis. So a lot of really positive things and the bottom line that's interesting to me because what everybody reads, that business is not doing that bad in terms of year-over-year business. So kind of the interesting year woe and everything is awful, but in reality it's okay.

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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, it sounds good and that does make sense about what's happening in the marketplace. I guess you're shifting over to the Airport-to-Airport business. Can you talk a little bit about what you saw on the tonnage side here during the quarter? We've heard a lot of commentary about some softness in February. Looks like your results were relatively consistent. And I'm just curious what your experience was and then if you've got some color, Mike, maybe about what you've got factored into the second quarter on the tonnage side.

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Michael Joseph Morris, Forward Air Corporation - CFO, SVP and Treasurer [7]

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Yes, sure, Todd. I'll start on the response to the 1Q tonnage and let Bruce chime in. We were really tracking our forecast through the first 2.5 months in the quarter and we were surprisingly spot on. And then as we got into the back end of March, things accelerated and the LTL team did a great job taking advantage, driving the opportunity and then taking advantage of it from an operations perspective to bring the profit in to the bottom line. So it was really a second half of March acceleration. Looking to the second quarter, we've returned to normal April trends, so the acceleration in the second half of March is decelerated. And what we've got baked in for the full quarter is essentially flattish, flat tonnage on a year-over-year basis for the second quarter. Because right now given the trends and the overall sluggishness in the environment, we don't see a catalyst at this stage for Q2 to have a pickup in tonnage year-on-year.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [8]

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Do you have any thoughts around why the second half of March was strong? I mean, was that just a normal quarter and pickup was -- or was there anything specific that you think happened in March to give you that strength?

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Bruce A. Campbell, Forward Air Corporation - Executive Chairman, CEO and President [9]

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I'm not sure there was a specific, Todd, but it seemed like almost an old March, old meaning like 5, 6, 7 years ago. So it was great. It was wonderful to see. We're hopeful that it continues. We, however, stay on the sidelines in terms of, gee, it's going to be a boomer the rest of the year.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [10]

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Okay, understood. And then just, Bruce, your thoughts around ELT. I mean, they continue to be pretty steady. Do you have any expectations for GRIs this year? And then it actually looks like the contribution from Complete moved up a little bit here in the first quarter. So I'm not sure if there is something unusual that helps with that contribution more, if that's -- maybe a little bit of color what's going on with the yields and what drove the step up and Complete here this quarter?

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Bruce A. Campbell, Forward Air Corporation - Executive Chairman, CEO and President [11]

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Yield jumping all over the place or being driven all over the place. As opposed in the past were the criteria for yield was fairly stable, today it's not. So having said that, we're seeing a length of haul that's shortening. We're seeing shipment size that's getting just a little bit smaller. And then you have the Complete being thrown on top of it. So a lot of mixture going on there that we haven't had in the past. All that having been said, we're very happy with where yield is. We will, as we always do on an annual basis, come summer time we'll be looking at, do we need to do a GRI or not. We have a lot of work to do before we get there and we'll comment on that next quarter probably.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [12]

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Okay. And then just a couple of last quick ones. So the second quarter guidance doesn't have anything in there for Atlantic and I'm not sure if that's an EPS comment and it's just going to be breakeven and there is something in the revenue side. And I think that there was some color that Atlantic was going to be $0.02 to $0.03 accretive. I'm assuming that's a second half of 2017. But maybe if you could just clarify what's in the second quarter and how you're thinking about the timing of Atlantic from a contribution standpoint.

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Michael Joseph Morris, Forward Air Corporation - CFO, SVP and Treasurer [13]

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Sure. Sure, I'll take that, Todd. We didn't put Atlantic in because the transaction has yet to close. If we had put it in, it wouldn't have had a noticeable effect in all likelihood. Assuming a May 15 close, but we're in a short stub period, if it slips a week or whatever, you don't have a lot of opportunity for incremental contribution. So we decided to just leave it out for those reasons. If you do assume a mid-May close, then we would see it adding, as I mentioned, $0.02 to $0.03 for the balance so May 15 to December 31, for the balance of 2017, and again assuming a mid-May close of about $2.5 million of EBITDA for the balance of '17.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [14]

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Okay. And then just my last one maybe for Matt. So I know that this has been the objective in acquiring CST is having it as a platform. Can you just help us think about now how the Intermodal segment is positioned with the Atlantic acquisition? Maybe from a high level, I mean, the capabilities that they provide you and how we think about either the organic growth opportunity or the other acquisition opportunities still within Intermodal and maybe some of the benefits that Atlantic brings to the existing platform, either from a synergy standpoint or how those new businesses work together.

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Matthew J. Jewell, Forward Air Corporation - President of Logistics Services [15]

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Yes, sure. So we have very little exposure to the Southeast ports which have been the fastest growing in the last few years. So we're really needed, as I've described it a beachhead in the Southeast, to really generate access to those ports and those revenues. And frankly, we were a Midwest-based company with small presences in Savannah and Charleston and Houston. But this gives us access to all the Norfolk port which is growing very fast, Savannah which is growing extremely fast. They just announced an alliance between those 2 ports, Virginia and Georgia announced an alliance there to deal with the supersized ships that are coming in. Houston is growing. This gives us a bigger presence in Houston. And frankly, a lot of our Midwest customers have always asked, do we have a presence here, can we handle their business in these other induction points, and we couldn't. So not only is this going to position us for some really good organic growth in new markets, but it's also going to allow us to have a platform in which to bolt on other acquisitions in these new markets. So it's both an organic and an inorganic play and it just -- it takes us up to 19 locations now which is when we -- essentially, Atlantic is the same size as what CST was when we acquired it. So we've really done a, in terms of expanding on the footprint, expanding our opportunities both organically and inorganically, this is a huge play for us.

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Operator [16]

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And our next question comes from the line of Mr. David Ross of Stifel.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [17]

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International airfreight was pretty strong in the first quarter. I know that most of your business is domestic, but you do have some international airline customers and international freight forwarders. Do you see any of that international airfreight strength in terms of the domestic portion of the international journey flow through?

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Bruce A. Campbell, Forward Air Corporation - Executive Chairman, CEO and President [18]

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The answer is yes. I think we have to keep in mind the perspective and the perspective is, Q1 was up over Q1 of a year ago, which was terrible. So it's nice to see. We're happy the business came on. We obviously got to participate in it. We're certainly not selling our company based on that.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [19]

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And then just to follow up on a couple of previous questions. Complete picking up as a percentage of total. Was that due to any specific initiatives? Is that still on its way up to 25%, 30% because you've kind of been in this low 20s range for a while. I didn't know if there is anything one-time in the quarter, or traction being gained again?

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Bruce A. Campbell, Forward Air Corporation - Executive Chairman, CEO and President [20]

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That's traction. We have a number of initiatives going on today in our air expedite group. The big one is our 3PL push. So we have entered that market, actually entered it a year ago. Had to do a lot of, what I call, back office work to get ready for it, to handle it properly. They have done a terrific job, and especially, as we have started 2017, they've really done a great job of penetrating that market. We look for a lot more to come. And all of that business for the most part, is related to Complete. So not only does it help our Linehaul product, but it also helps our Complete product.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [21]

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And then kind of following up on the Complete. When I look at the yields and Complete being a much bigger contributor to total Expedited LTL yield and the Linehaul yield coming down a little bit. Is there -- is the Linehaul coming down related to the increase in Complete? For example, if a customer gets it all, do they get an effective discount on Linehaul?

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Bruce A. Campbell, Forward Air Corporation - Executive Chairman, CEO and President [22]

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It depends on the situation. In most cases, you're right. But it's not -- to us, it's not meaningful because we look at that as incremental. We look at the Linehaul that it provides us purely incremental to our model.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [23]

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Okay, because you're looking at a total Expedited yield anyway, not necessarily the components.

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Bruce A. Campbell, Forward Air Corporation - Executive Chairman, CEO and President [24]

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That we're actually looking at all of it.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [25]

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And then to TLX. You mentioned that in the written comments that there is higher worker utilization as you're recruiting owner operators. Have you been able to recruit the additional owner operators to bring that back more in line. Are you seeing any pay pressure in trying to get those guys onboard?

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Bruce A. Campbell, Forward Air Corporation - Executive Chairman, CEO and President [26]

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Yes, no pay pressure at the moment. We have been able to recruit. The TLX side of the world is a tough one to keep drivers happy. As opposed to the Air Expedite where they're running on their dedicated run. So we have a little bit more turnover there. But we have ramped up our efforts to make sure we have the right ratio. There is a good ratio there when you do have the opportunity to outsource. But you also want to make sure you can move, let's say, the majority of the freight on our trucks.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [27]

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And then just to summarize the totality of your comments earlier. The economy is okay, probably growing a little bit. You don't expected it to accelerate too much, but don't see it getting any weaker. Is that fair?

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Bruce A. Campbell, Forward Air Corporation - Executive Chairman, CEO and President [28]

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I think that's very fair.

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Operator [29]

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And at this time there are no further questions coming from the phone line.

All right, that concludes Forward Air's first quarter 2017 earnings conference call. Please remember the Webcast will be available on the Investor Relations section of Forward Air's website at www.forwardaircorp.com shortly after this call.