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Forward Air Corp (NASDAQ:FWRD)
Q3 2019 Earnings Call
Oct 25, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for joining Forward Air Corporation's Third Quarter 2019 Earnings Release Conference Call. Before we begin, I'd like to point out that both the press release and 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 the press release announcing our third quarter 2019 results which was furnished to the SEC on Form 8-K and on the wire yesterday after the market close. Please be aware that during this conference call we will we 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 fourth quarter in fiscal year of 2019 the expected impact of growth and strategic initiatives the expected impact of organizational restructuring the expected impact of the FSA and OST 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 result 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 me for 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.

Thomas Schmitt -- Chairman, President and Chief Executive Officer

Thank you, John, and good morning to all of you on the call. If you remember in July during our last earnings call we just came fresh of our Investor Day in New York and in New York we committed to our what I call double-double a double-digit annual revenue growth rate and double-digit margins in the medium term. With a strategy behind it that's basically around when it's bigger than a box think forward and driven by organic growth in LTL and targeted M&A in Intermodal and final mile. With Truckload and Pool being strong stretches Truckload being a complementary service to our LTL service and Pool going deeper into retail and also additional verticals. Structurally we have supported this whole thing with a very, very clean approach commercially and operationally one consistent set of rules one rigorous set of guidelines and KPIs and most importantly with the right team and the right leaders at the table. So in September I had another milestone here at Forward Air perhaps less so. But I personally definitely so I had one year here with Forward Air I'm still close to a rookie year. And with a strategy a structure and a team in place and a year behind me it's probably a time where whatever honeymoon there was it's over it's showtime it's time to execute and we are executing.

In my mind precision execution for our customers and internally is happening. If you look at the third quarter of the release that john does refer to 9% year over year revenue growth. 10% excluding the reserve operating income growth, and we are just getting going with opposition execution machine so let me show you a few proof points, how we got to these types of numbers and how this machine keeps warming up and keeps going. In our core LKL business. We are stretching our muscle beyond airports, and it works. So now we have 40% of our network revenue in door-to-door. The average length of haul is almost a 1000 miles and the rate per shipment is around GBP 775 and going up. Our grow-forward initiative works also. We are actually getting back more fully engaged with our core customer base our domestic Forwarders. We're putting more tools and the best service in the industry into their toolkit and are working very, very closely with them, so getting back into growth mode with that core customer base that's so important to us. In addition we are also growing other segments. The one that stands out perhaps first and foremost is the 3PL where we are up 75% year-over-year with rate per shipment up by 60%. Secondly Intermodal our ninth tuck-in acquisitions in the last five years OST in Baltimore which we just closed three months ago performs. I was there in Baltimore with the team at OST just last Friday the passion the competence is the exact same that we see in our Forward Air family across-the-board. So this is a great addition to our family. That formula we got going with the platform CST and then the tuck-in acquisitions keeps working.

Final mile, I mentioned last time FSA shortly after closing earlier this year we actually added $10 million in the run rate of new business and a pipeline for final mile keeps growing. It actually does help when the most challenging companies on earth which are the customer base in the Intermodal and sorry in final mile and FSA for us and did tell us on their own scorecards that we are the best in the business supporting them. If you look at Intermodal and final mile between the two of them I did commit to more acquisitions in those spaces as long as the targets maintained the same high standards that we have in our financial results. And so far this year we have one acquisition in Intermodal. We have one acquisition in final mile. All I can say the year is not over yet. Truckload we are deeply exploring synergies between Truckload and the LTL in essence looking at one fleet serving two business lines where we recruit jointly we actually also are looking at more and more lanes where we use Truckload outbound LTL back which leads to less outside carriers better on-time service fewer dead hat moves which our drivers love because it gives them better utilization which also is a big part of us having a record number of 400 plus teams in our fleet for the first time in the history of Forward Air.

And so we will keep evaluating these potential synergies in the fourth quarter and full peak. But I'm excited about how it's working so far. Pool we massively and if you look at our third quarter numbers in the release it shows that we are massively on-boarding new business and we are doing it very effectively for our customers. One of our competitors struggled and our customers and their customers have choices at that point and many of them choose to go to the best in the industry which is our Pool business within Forward Air. So that's what led to the massive new on-boarding of business. We also are continuing going into additional verticals hospitality and parts emerging as industries. So let me just step back beyond the strategy structure and the team and beyond quick proof points that in each of the Forward business lines behind it we are getting better and better surgically in decision support making sure we get the right business online. And if you just look at and Mike may be talk into that later the incremental margins in our LTL business in the third quarter that's a great proof point of us being very surgical about selecting the right type of business. Last and then certainly not the least we also as a Forward Air team are making our presence across the U.S. and Canada account.

We joined recently I mentioned that last time on the call Truckers Against Trafficking making sure that we keep our eyes open and we act when we see something that's not right. We also just recently joined a team that's called Hope For The Warriors. In essence tag-teaming and support for our military veterans. We have hundreds of veterans on our own Forward Air team and then beyond that every single one of us is deeply grateful for what these military veterans have done in support of us protecting and serving us. So it's a great cause for us to get behind. We're going to get as a team behind with our own sweat equity making our presence count across all of the terminals across the country initially with floating drives and probably beyond that by just making sure that our hearts and minds are in support of those who actually serve and protect us. So our Precision Execution machine it's just getting going it's warming up quite nicely. We will take it to another level in Q4 and then beyond 2019. We're far from done. So having said that, a few more specifics over to our CFO Mike Morris.

Michael J. Morris -- Chief Financial Officer and Treasurer

Thanks Tom. During our Investor Day last June we provide commentary around the role of final mile in our medium-term growth strategy for LTL. Specifically we described final mile evolving over time into more of an integrated model that builds pickup and delivery and terminal density within our LTL network. We also discussed the near-term impact this could have on LTL's margins as our final mile growth will likely involve acquisitions which could dilute the underlying margins from our LTL operations. During the third quarter we saw this effect. As disclosed in our release purchased transportation was 45.5% of LTL revenue last quarter. FSA our recent final mile acquisition is a still being integrated and diluted this margin by 160 basis points. Excluding this FSA impact purchased transportation would've been 43.9% of LTL revenue reflecting the significant leverage we generated on our owner-operator fleet. As Tom mentioned over the past few months we have been exploring a deeper synergy between our LTL and Truckload operations which could help drive organic growth build line-haul density and lower purchased transportation cost within our LTL network. We're still evaluating this potential opportunity but if we determine that it makes sense to run as one combined fleet we may also determine that we should consolidate Truckload into our LTL segment if that best reflects how we operate the business.

Like final mile consolidating Truckload could dilute margins from our LTL operations until it becomes more fully integrated. But also like final mile Truckload could drive medium-term benefits by enabling organic growth enhancing density and lowering unit cost. We will continue to evaluate this potential synergy as part of our ongoing strategic review for Truckload and we'll keep you apprised of our progress.

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

Questions and Answers:

Operator

[Operator Instructions] And first go to the line of Scott Group with Wolfe Research. Please go ahead. Your line is open.

Scott Group -- Wolfe Research -- Analyst

Hey thanks morning guys Can you guys just start with maybe just some of the monthly tonnage trends and on LTL? And then just a view of the pieces of fourth quarter revenue guidance?

Michael J. Morris -- Chief Financial Officer and Treasurer

Okay. So I'll take you, the tonnage per day for the third quarter was down 5.1% over the quarter. In July it was down 8.4%. In August it was down 2.1% and in September it was down 5.1%. But Scott, I will point out that this particular quarter both third quarter 2019 and third quarter 2018 were pretty heavily impacted by some GAAP adjustments that were required to make to our reported tonnage it gets down to the day of the close of the quarter and the comparable period in the current period and with some Saturday and Sunday calendar timing it led to some larger-than-usual ship to deliver adjustments. Our tonnage was still down but just to give you another mark for the quarter on our daily system reports which don't have these GAAP adjustments made our third quarter tonnage was down 3.4% as compared to the 5.1% we have in our release. Just to give you a little more color there.

Scott Group -- Wolfe Research -- Analyst

Okay. That's helpful and then your review on October?

Michael J. Morris -- Chief Financial Officer and Treasurer

Yes hang on a second. Through October our tonnage per day is down 1.9%.

Thomas Schmitt -- Chairman, President and Chief Executive Officer

Let me just Scott add little bit of color to that if you look at left to right the numbers that we just mentioned the best in the industry especially also keeping pricing discipline. We saw some of what we just told you about in terms of numbers over this quarter. Our initiatives winning business back that makes senses for us and going after under-penetrated segments are starting to actually make the numbers work the way we intend for them to work. So those deltas that we just talked about I expect them to get smaller not larger versus previous year as we go into fourth quarter and beyond. So the trend is definitely going in the right direction where we use our surgical intelligence to win a larger slice of the pie and we are going after the most tasty slice of the pie.

Scott Group -- Wolfe Research -- Analyst

Okay. The accident costs that you talked about in the release is that in one of the segments? Or is that just the show up in the sort of corporate line?

Thomas Schmitt -- Chairman, President and Chief Executive Officer

Yes.

Michael J. Morris -- Chief Financial Officer and Treasurer

Well yes. I was just going to pause for a sec. So we took a modification to reserve our preexisting claim and we filed an 8-K on that claim on the 21st of June before we ended our IR day. If you need more color and I'll answer your question but we did provide a lot of commentary on the last earnings call about where it hits. And I'm referencing that so that I can be very clear. The business unit had $1 million self-insured retention which it has already exhausted. And so the effect of that $1 million SIR was felt in the LTL business when the reserve was put up at the end of the second quarter. The overage is in other because that's where we have our internal insurance company providing coverage to the business units. And so therefore with the extra $2.5 million that is in corporate/other because that's the body that has to take this incremental reserve. We have brought our reserve as a company up to the full extent of the self-insured retention that we have with our outside insurance carriers.

Scott Group -- Wolfe Research -- Analyst

Okay. So the initial impact in second quarter in LTL the second impact in the third quarter in corporate?

Michael J. Morris -- Chief Financial Officer and Treasurer

Initial impact in the second quarter $1 million to LTL $4 million to corporate. Then in the third quarter the next $2.5 million is sitting in corporate.

Scott Group -- Wolfe Research -- Analyst

Okay. Everything you guys are talking about with Truckload and LTL sort of together and opportunities I guess where we are going to see that? Is that going to show up in Truckload results or in LTL results? And then when do you think we are going to start to see that? And what's the opportunity?

Thomas Schmitt -- Chairman, President and Chief Executive Officer

Yes. So the answer is actually you will see it in both and it's hard to predict where you see the most. So let me just tell you this a positive effect from doing business kind of more together that hits both. For instance when you recruit and you interview people and you basically appeal to both LTL-focused drivers and Truckload-focused drivers in one conversation just makes those conversations actually pure and more efficient and effective from the outcome perspective. So you have processes that actually lend themselves to synergies including recruiting people. But when it comes to the actual business success that's where it becomes a bit harder. So let me give you an example we added 10 more lanes going from mostly the Midwest and the Northeast to California. And we were able to do that because suddenly between Truckload out and the LTL back lanes made sense.

When we looked at both businesses together that didn't make sense individually before because before it would've been a Truckload out and perhaps an empty dead haul back it flat or it would've been an LTL move from California to the Northeast. But then no backhaul as a consequence after that move was completed. Now we have the in and out. Now the pricing we have obviously, we'll surgically adjust so that we attract both sets of moves but in some cases the Truckload pricing might be tremendously helpful to the LTL profitability and not so much to the Truckload profitability. But the overall move is tremendously positive for us it wouldn't have happened without us looking at both sets of moves together. Some are long way of saying obviously we are pricing for profitability that's appropriate at the same time we are looking at some of the moves combined. And in some cases LTL may benefit a bit more and in some cases Truckload that's also why Mike said we are deeply exploring the potential impact of those synergies going forward.

So we are doing it more and more and obviously we are going to come to a conclusion at some point what that means for the segments. But what we saw so far is tremendously commercially appealing and frankly also from a process perspective appealing. The reason that we have a record number of team drivers which is the single best resource to have in this business definitely is not coincidental and it is somewhat linked to our ability to recruit those driver forces together.

Michael J. Morris -- Chief Financial Officer and Treasurer

So Scott, just kind of walking down, the P&L. I mean you have increased revenue opportunities by taking loads you might not otherwise take. So you should see an improvement in revenue over time. You have improved the line haul density and a lower cost per mile if you can avoid using brokers and get your trailers more fully packed. So you'd see PT. And then we believe that if we can keep making this work we'll actually use less trailers. And so you might see them an improvement flow through on the depreciation and amortization line. We're still exploring it Tim Parker and his team have done a wonderful job this past quarter and really showing the leverage potential of the model and as part of looking holistically strategically across the portfolio we are hopeful that we can come to the conclusion that this is something that can enhance the leverage potential of the model.

Scott Group -- Wolfe Research -- Analyst

Right. And I guess the question I guess is when right? Because if we take a look at the fourth quarter guidance right? We've got good revenue growth but sort of flattish pre-tax income I think so implies some margin contraction. When do you think we start to see consolidated margin improvement?

Michael J. Morris -- Chief Financial Officer and Treasurer

Well we are going to have, as we talked about in our call we are going to have some improvement in the underlying platform margins a little bit dragged by acquisitive growth. We wont lap FSA until next April we have got OST to lap inside of Intermodal and it takes a couple of quarters to grind those margins up. If we haven't made any decisions on Truckload that was something that would also take couple of quarters to implement if we conclude that we need to do it. But we very much believe that we are on the trajectory toward the things that we discussed and it was unfortunate we took a vehicular reserve last quarter. But if you strip that out our results were actually a lot better than the earnings release would have suggested and we were very close to double-digit revenue growth and double-digit margin.

Scott Group -- Wolfe Research -- Analyst

All right, thank you for the time guys appreciate thanks guys

Operator

Our next question's from Ben Hartford with Baird. Please go ahead.

Ben Hartford -- Baird -- Analyst

Hey good morning guys.

Michael J. Morris -- Chief Financial Officer and Treasurer

Morning Ben.

Ben Hartford -- Baird -- Analyst

Maybe just coming back to Mike I think the granularity you provided in Expedited LTLs PT was helpful. I know you've had some initiatives there to rebuild at owner-operator fleet. Is there any way to splice out that leverage that you have had that you have experienced ex-FSA on a year-over-year basis. How much of that is just due to natural operating leverage that develops as spot pricing does soften versus some of those internal initiatives to rebuild that owner-operator fleet? And to the latter point what do you have in store for 2020 to help continue some of those initiatives?

Michael J. Morris -- Chief Financial Officer and Treasurer

Well I think that the operational excellence had a lot to do then with the leverage. And I think, if you look year-over-year and you strip out FSA with the comments they made I mean I think we are looking at 300 something, this basis points of improvement. In that operating leverage and our owner-operator fleet is the best I've ever seen it and from the people who've been around here for a long time it's starting to sound like it might be the best we have ever had. Recruiting has definitely stepped up its game Kyle and Bryan have done a wonderful job with their teams there. As I mentioned Tim Parker and the line haul group reporting on to Chris Ruble have really taken advantage of that fleet and has put a tremendous amount of leverage potential in the model. We're going to just keep hammering away at it. As we can of the fourth quarter and as we get into the beginning of next year our teams are at near-record highs and are approaching where we are really like to see them as a percent of the overall fleet. So we'll just keep working it. But I think a lot of it was execution than versus the evolution of spot prices.

Ben Hartford -- Baird -- Analyst

And then Tom may be for you specifically on the Expedited LTL's it seems like the model is kind of walking that fine line of some still macro headwinds and pressures to core customers against the initiatives the broader TAM expansion market initiatives that you've been talking about. But when you think that this unit can that this segment can consistently get to positive tonnage growth and may be as an addendum to that I mean you're a year into the tenure if you could provide a little bit of perspective on what you're you were able to accomplish over the past 12 months? What you want to accomplish next year specifically for the Expedited LTL segments and some of those growth initiatives that you have under way?

Michael J. Morris -- Chief Financial Officer and Treasurer

Yes. Ben there's three things going on at the same time. The first thing is like I mentioned Ben which is the macro. So there's probably some level of headwinds and again whether you talk anticipation of a minor recession or at some point possibly the presence of a minor recession. So that's going to be a growth of a few percentage points the wrong direction versus the last few years a few percentage points in the right direction. So that's one piece. The second piece that's much more important that's what we can control. And that's obviously as winning back some business and going after additional business and we are doing that using this intelligence of being much more conscious and aware of the profitability of specific customers in the specific lanes and segments. That knowledge we actually are putting into work. And I talked about this go-forward initiative of being extremely surgically intelligent. We just reviewed it with our Board of Directors on Monday and Tuesday and I think there was a lot of just confident enthusiasm in the room about us being able to go after that makes tons of sense pun intended for us.

So in terms of timing my sense has been that we will we presently shocked by how us putting these pieces in place between identifying the customer set certainly core customer base domestic Forwarders and the initial segments that I talked about 3PLs International Forwarders airlines knowing who they are engaging heavily with them making sure they understand the value propositions better that takes a few months. And so to your point Ben the last year we put a lot of emphasis on getting closer to these customers and prospective customers getting the surgical intelligence of the tools in place and now the last few months we started actually deploying them within this go-forward program very, very, very surgically and very, very aggressively. I often times use the word or the term "I'm constructively impatient" but sometimes you do have to kind of give it the time to start moving. Now we are seeing it starting to move so I expect more of that in the fourth quarter. Also back to Scott's question like we are not talking about multiple years we are talking getting better quarter-by-quarter seeing the traction seeing the results that you and I both looking at very closely. And I expect 2020 to be a very, very strong leverage year that benefits from some of the efficiencies operationally that Mike just talked about with the tremendous work that's been happening under the recruiting and the operations' teams.

And then I expect the commercial teams with the one Forward Air a respective I mean -- and consistent acquisition to do their part equally spectacularly well. So I'm bullish about Q4. I'm really bullish about 2020. So this is a -- yes it's this is a marathon not a sprint. At the same time I think you're going to love the race and the pace of the race in the first kind of few hundred yards and the few -- first few miles also. I'm bullish about the fourth quarter and I'm bullish about 2020.

Ben Hartford -- Baird -- Analyst

Great. Mike just to hone in on revenue per 100-weight within the Expedited and LTL with industry rate pressure perhaps as we look into 2020's bid season with some of the mix headwinds that some of the new business might bring offset by some opportunities perhaps with the legacy business how do you think about revenue per 100-weight directionally during 2020. Can it remain positive given some of the industry pressures and some of the likely mix headwinds?

Michael J. Morris -- Chief Financial Officer and Treasurer

I think it can remain positive. There is a -- just still a size differential between magnitude of the legacy business if you will and the magnitude of the unaddressed market that we are entering. So if we have to compromise some yield to get a heavier-weight freight in our new markets that would be a pull on yield but it's still a small relative number compared to the legacy as Tom has indicated in several of our prior calls our pricing philosophy. So I think that kind of tug that you've seen in the past quarter I think it will we be the same kind of tug talk as we get into 2020 where if you have some macros slowing the legacy it's still mathematically bigger. And then if you have to give any yield on some of the growth stuff it's not big enough yet to where it moves the needle on yield. That'd be my handicapping of how 2020 evolves.

Ben Hartford -- Baird -- Analyst

Thank you for taking my question.

Michael J. Morris -- Chief Financial Officer and Treasurer

Thank you, Ben.

Operator

[Operator Instructions] We'll go to Todd Fowler with KeyBanc Please go ahead.

Zachary Haggerty -- KeyBanc Capital -- Analyst

Hey guys this is Zach on for Todd. Just kind of wanted to shift to Pool I know that you guys added a couple of terminals during the third quarter and Tom I know you mentioned in your prepared remarks just referencing some on-boarding of new business and some struggling competitors just wanted if you guys could give me some color on that and how we should think about that going into 2020?

Thomas Schmitt -- Chairman, President and Chief Executive Officer

Zach first of all good to have you on the call. On Pool the one thing that we consistently have been saying is this value proposition of hitting very tight time windows and what I call precision execution for something that's bigger than a small box applies to Pool the same way as it applies to the rest of our business. So this business fits our narrative extremely well and our DNA extremely well. What we obviously also said this we also need to make this business perform from a profitability perspective in the range of where we aspire to be as Forward Air and that goes back to the double-double commitment medium-term from New York. So we have been stretching and obviously it's very clear that profitable revenue and growth is what drives the Pool business profitability. So the revenue line has been going up and we have been tremendously Mike he talked about the pricing discipline we have been tremendously clear with our customer base there that we are providing the best service in the business to them. We're investing into our Pool business and into the drivers and into the operations. And we need to be compensated fully for that. And the rates are reflecting that.

So what you should be seeing Zach is continued growth of the Pool business continued pricing discipline and both of the that and the operational execution that Roger Gellis and his team have been just marvelous with they're also getting more and more of that to the bottom line. So I have a very, very strong financial outcome expectations in all our businesses. And again we are stretching them to the max possible and so that they stand up to the Forwarder Air kind of expectation which is to be excellent in all we do and the results reflecting that. So I would expect that business to go further north.

Zachary Haggerty -- KeyBanc Capital -- Analyst

Great. That's helpful. Then I guess just shifting to I know it's probably still a little early on but 2020 capex expectations I guess directionally how are you guys thinking about? I know Mike you mentioned there's been some technology spent during the year but I guess just what are your thoughts on 2020?

Michael J. Morris -- Chief Financial Officer and Treasurer

Yes Zach we are still doing our plan but, and I think we have a decent picture give or take a couple of million bucks where it's going. In terms of capex if I could just take a step back we have become a lot more efficient in our utilization of our assets particularly our trailers. And the operations teams have done a really nice job at learning to do the same and more volume on a lower trailer base. We had some incremental investments over the past couple of quarters -- I'm sorry past couple of years in trailers to work through some old vintages in the fleet. Those investments are over. We have a really great trailing fleet and we are using it very well. That's been the driver in the reduction in our capex which has been an important part of us putting up record free cash flow. But don't think that we are not investing in things. We're actually investing in everything that like we can handle. It's just we don't need to make the investments in trailers as much as we do. So it's $30 million $35 million in today's dollars is the type of number that I think you'll see on a net basis that you'll see next year.

Somewhat similar but what we are doing is shifting a lot of the investment into technology and information technology. Whereas in the past technology might have been 15% of our capex it's now probably 25% of our capex. A lot of what we need to do to accomplish the strategic objectives we have laid out is to just keep the pedal to the metal on tech spending. Enhancing our customer facing and user-facing experiences and giving us better decision support and a better understanding of our own data to drive better actions. So you're going to see probably a similar net capex-type number give or take $5 million next year. But what you will see is a shift to a lot more IT capex.

Zachary Haggerty -- KeyBanc Capital -- Analyst

Got it thanks for the time

Operator

And with that we have no further questions in queue.

Thomas Schmitt -- Chairman, President and Chief Executive Officer

Thank you.

Michael J. Morris -- Chief Financial Officer and Treasurer

Thanks John.

Operator

You're welcome. Ladies and gentleman that concludes Forward Air's Third Quarter 2019 Earnings Conference Call. Please remember that this webcast will we available on the Investor Relations section of Forward Air's website at www.forwardaircorp.com shortly after this call. You may now disconnect.

Duration: 37 minutes

Call participants:

Thomas Schmitt -- Chairman, President and Chief Executive Officer

Michael J. Morris -- Chief Financial Officer and Treasurer

Scott Group -- Wolfe Research -- Analyst

Ben Hartford -- Baird -- Analyst

Zachary Haggerty -- KeyBanc Capital -- Analyst

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