Bruce Campbell - President, CEO and Chairman Rodney Bell - CFO, SVP and Treasurer.

Jack Atkins - Stephens Inc. Alexander Vecchio - Morgan Stanley Todd Fowler - KeyBanc Capital Markets Inc. Jason Seidl - Cowen and Company Bruce Chen - Stifel Nicolaus Shawn Collins - Bank of America Merrill Lynch Scott Group - Wolfe Research Robert Helf - Fiduciary Management Pete Watson - Raymond James & Associates, Inc..

Ladies and gentlemen, thank you for joining Forward Air Corporation’s Third Quarter 2014 Earnings Release Conference Call. Before we begin, I’d like to point out that both the press release and this call are accessible on the Investor Relations section of Forward Air’s Web site at www.forwardair.com.

With us this morning are Chairman, President and CEO, Bruce Campbell; and Senior Vice President and CFO, Rodney Bell. By now you should have received the press release announcing the third quarter 2014 results, which were furnished to the SEC on Form 8-K, and on the wire yesterday after market close.

Please be aware this conference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the Company’s expected future financial performance.

For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing words such as believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements.

You’re hereby cautioned that these statements may be affected by the important factors among others set forth in our filings with the Securities and Exchange Commission and in the press release issued yesterday, and consequently actual operations and results may differ materially from the results discussed in the forward-looking statements.

The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. And now, I’ll turn the call over to Rodney Bell, Senior Vice President and CFO..

July was up 2.4%, August 3.9% and September 8.3%. Thus far to Q3, volumes have remained positive as compared to last year and tonnages are up in the mid single-digits thus far into October. The majority of our yield increase was from linehaul processing which was up 3.3% as a result of our March general rate increase.

Increased fuel surcharges contributed 0.4% with a positive impact of Forward Air Complete accounting for 1.2% of the increase. Yield has also remained constant moving into the fourth quarter. Complete revenues were up 13.9% as a result of greater demand for our services within our core business.

Since the February acquisition of Central States Trucking, it has rolled up within our FAI segment. For the third quarter of 2014, CST revenues were $22.1 million, operating income was $2.5 million and the contribution to EPS was $0.05. Included in the CST results was the impact of the early September acquisition of Cleveland based RGL Trucking.

In 2013 RGL had revenues of approximately $4 million and EBITDA of about $0.5 million. The purchase process is approximately $1.3 million. Albeit small, RGL represents the first of what we think will be several tuck-in acquisitions meant to leverage the CST platform.

Revenue in our solutions operating segment grew 2.7% as we hit the anniversary of two large business wins from the year-ago. TQI revenues were down 3.2%. This was due to the change in our accounting for TQI fuel surcharges in order to be consistent with our other business units.

Without regards to that change, revenues were up 12% on an apples-to-apples basis from Q3 2013. Moving on to the expenses. Purchased transportation in total was up $10.7 million or 14.2%, but down 160 basis points as a percentage of revenue.

The 80 basis point increase in airport-to-airport PT as a percentage of revenue was primarily due to the high reliance on more costly third-party miles to service our network.

To offset this cost and to provide better service through higher quality capacity to our customer -- for our customer base, we’re in the process of enhancing our owner-operator pay -- team pay package. The effective date of this change will be January 1, 2015.

Initially it will be cost neutral as the contractor pay increase will be offset by the reduction in more -- or costly third-party miles. Over the next several weeks, we will be evaluating pros within lanes that require team service or potential rate realignment.

Salaries, wages and benefits increased $6.6 million and 16.6% as a percentage of revenue being up 30 basis points. $4.9 million of the increase in dollars is the result of CST.

$1.7 million from higher wages primarily due to the increased handling costs from increased volumes with the balance coming from higher employee incentives as well as higher healthcare costs. Operating leases were up $1.5 million due to additional facility leases and equipment rentals resulting primarily from CST.

Depreciation and amortization was up $1.9 million and 30 basis points, again resulting from the acquisition of CST and higher CapEx spending this year versus last year. Insurance and claims expenses increased not hardly $0.5 million, also as a result of the purchase of CST.

The fuel was up $1.1 million as a result of additional company-owned equipment resulting from the purchase of both TQI and CST.

Other expenses were up $5.3 million and 150 basis points; $2.8 million of this increase is attributable to CST, approximately $750,000 is attributable to due diligence costs within the quarter and the balance coming from various other volume-driven expenses. Our tax rate was 37.2% compared to 37.6% in Q3, 2013.

We expect our Q4, 2014 tax rate to be approximately 38%. Net CapEx for the quarter was $2.5 million and we’ve essentially completed our CapEx spending related to our 2014 CapEx budgets. During the quarter, we spent approximately $20 million repurchasing approximately 435,000 shares of our stock at an average price of $45.95.

We’ve approximately 1.1 million shares left on our $2 million share repurchase authorization. We ended the quarter with $25 million in cash, essentially no debt and $140.3 million available on our $150 million line of credit. Lastly, we anticipate that fourth quarter revenue will be in the range of 18% to 22%.

Income per diluted share is expected to be between $0.60 and $0.66, and that’s compared to $0.50 last year in Q4. And that concludes our comments. Now back to the operator for your questions..

Thank you. Ladies and gentlemen, we’ll open the floor now for questions and comments. (Operator Instructions) First in queue, we’ll go to Jack Atkins with Stephens. Please go ahead..

Good morning, guys. Thanks for the time..

Hi, Jack..

So I guess just to kind of start out, Rodney, we can kind of go through the guidance for a moment for the fourth quarter.

As far as the revenue guidance, can you maybe help us understand what you’re assuming in there in terms of airport-to-airport volume trends with the quarter? Is it that mid single-digit rate that you saw or that you’ve been seeing so far, is that the right way to think about that?.

That’s correct, Jack. And approximately -- essentially stays consistent with what we saw on Q3..

Okay, got you.

And then in terms of what you’re assuming in your guidance as far as improved PT expense, are you making any assumptions that that gets better as you move through the fourth quarter or is that something that you expect to sort of stay roughly the same as you move throughout this calendar year?.

Jack, we’re being conservative there. We’ve already seen some positive impact and feedback from our -- especially our fleet owners within our owner-operator base. So we know that they’re poised to bring on equipment, but within the guidance we’re being conservative and we don’t -- we are not expecting any positive impact before Q1..

Okay, got you. And then, as far as the capacity issue, it seems like that’s been a challenge for most of the year, there was an initiative to bring on owner-operators and now we’re looking at raising I guess targeted rate increases.

Could you maybe kind of walk us through, how many additional owner-operators you expect us to bring on early next year? And then, what portion of your miles are currently being driven by outside capacity?.

In Q3, 23% of our miles Jack were provided by outside capacity. That number needs to be 10%, 12%. So that gives you kind of an idea of magnitude of it. So we hope to bring on 50 or 60 teams through this package, in pretty short order..

Got you. Got you. And then, the 23% of outside miles, how does that compare to the ….

It is about 35% more expensive than an owner-operator mile..

Okay, got you. Got you.

And then, as far as on just the rate side of things, you mentioned targeted rate increases in certain of these team driver lanes, but we’re seeing LTL’s begin to announce GRIs for early next year and just given the demand trends in the marketplace and the cost pressures, do you feel like you’ve got the cover to put through a GRI early next year?.

Hey, Jack, it’s Bruce. So let’s be real clear on this. We’ve not made a decision to increase rates yet….

Okay..

…because there would be a 1,000 orders on the phone after this call..

Got you..

We are looking as we always do at the end of the year, towards the end of the year, the fourth quarter, at what we’re going to do in terms of rate increases going in to the New Year. And that’s exactly what we’re doing.

A lot of that will depend on our success or what will determine that amount will depend on our success to recruiting our owner-operator fleet to the highest level it’s ever been since we’ve had the Company. So we need to see how that works and if it works as we anticipate, then we will come back and address the revenue side..

Okay. Thank you, Bruce. Last question from me is on the M&A pipeline. And Rodney, you mentioned this in your prepared remarks that you see some tuck-in acquisitions on the drayage side.

Could you maybe comment about the M&A opportunities that are out there? Is it just in drayage that you’re looking and could you maybe quantify some of the size some of these targets that you’re potentially looking to get across the finish lines before you…?.

Let me jump in again Rodney. We do have a few active candidates on the CST side. And outside of that we don’t want to make any acquisition comment..

Okay. Okay. That’s very helpful. Thanks guys and appreciate your time..

The next question is from Bill Greene with Morgan Stanley. Please go ahead..

Hi, there, good morning. It’s Alex Vecchio in for Bill. Hey, I just wanted to ask about the Forward Air operating margins. It looks like they pulled back a little bit year-over-year. I know some of that’s attributable to the mix from CST and that being a little bit lower margin business as well as the higher purchase transportation costs.

But if we sort of look at historic -- historical margins, I think they’ve sort of peaked in the low 20s.

Is that still kind of a realistic ultimate goal for the segment in terms of margins down the road or the CST kind of preclude that and should be sort of rebase our expectations for where margins can ultimately go for the Forward Air segment?.

If you look just at the Forward Air airport-to-airport segment, we can return to those numbers. But when as you noted so well, if you bring in the CST, then that’s going to pull that operating margin a little bit, although giving us great income. So the margins will not be in total as good as they were at one time..

Okay. That makes sense. And then, just on the sort of some risk standpoint, the owner-operators versus sort of employee contract has sort of come up -- the issue has come up with other carriers out there in terms of just reclassification in California.

Is that -- do you guys have a lot of exposure there? Is that a risk that you guys see there in terms of just potentially having to reclassify owner-operators as employees as a peer has done?.

Now it’s a fair question and it’s something we look at continually. But we abide by the rules beyond belief. So we think if somebody were -- was to come and challenge how we operate our owner-operators in the environment that we operate them in, that we’d be successful in defending the fact that they’re an owner-operator.

It’s also important to note that our owner-operators like being owner-operators..

Yes, yes. That makes sense. Okay. And then, lastly, I just want to jump to the FASI segment real quick.

The top line growth looks like it -- sort of decelerated a bit here is, is that just a function of slow -- lower volumes on the as you guys get a little bit more firm on pricing and how should we think about the top line growth rate sort of, for the rest of I guess ’14 and maybe longer term?.

If you recall what Rodney said, we have the anniversary date of two large customers from a year-ago. So that muted their efforts. They continue to be successful, but now we’re into the fourth quarter which is their peak. So we will not see growth. We don’t want to bring on new customers in the peak season, because it’s too chaotic.

So fourth quarter will be a fairly large revenue increase, because of peak and then you will see us come back in the first quarter and start adding business to it again..

Okay, perfect. Very helpful. Okay, thanks for the time gentlemen. Take care..

The next question is from Todd Fowler with KeyBanc Capital Markets. Please go ahead..

Great, thanks. Good morning, everyone.

Just back again on the airport-to-airport operating ratio, is most of the year-over-year increase, I mean, is that pretty much related to the third-party capacity costs in the quarter?.

Yes, if you look at our results, people tend to overlook that we grew income 18% and other really nice things have been there consensus. And it’s a single problem and that single problem is we have to increase our owner-operator fleet count. We have initiated a number of programs, Todd.

Our whole focus, our operating group, our recruiting group is to get the needed or necessary owner-operators onboard, so that we can get that one single number, which is an extremely important number. We can get that down to where we’d call acceptable..

Yes and it makes sense Bruce. Now I wasn’t trying to detract from the good quarter, I’m just trying to understand….

I totally agree. And it’s kind of a shame because it’s one cost area and one function that we’ve just been fighting when all the other areas, for the most part, are doing really well..

Well and that’s the follow-up question that I had, I mean, so within the quarter are there any other things that weren’t working in your favor. I know there were some comments about handling costs and employee incentives.

I mean is labor availability on the dockside and the employee productivity where you would like to be, given the growth that you’re seeing with the volumes?.

Yes, it’s exactly where it needs to be. They’ve done a really good job Chris and Tim and their teams to keep that under control and to make it a very efficient operation. It just keeps getting back to PT..

Okay. That helps. And then just as a follow-up on the growth in some of the other segments. First, starting with CST, is the strategy there that it is going to be small tuck-in acquisitions or is there an ability to grow that organically? I guess, I’ll just ask it that way..

Yes, they actually did both. They have done really a nice job of growing organically not only in terms of volume but also in terms of getting rate increases from existing customers. As you know that’s an area today that, if you can't get a rate increase then you probably will never have a better environment.

And then we also want to do the smaller tuck-ins, but that does not preclude us from doing a larger tuck-in for them..

So what would be the organic growth? What's the expected growth rate for that business both organically and inorganically?.

I think organically they’re running low side 8% and high side between 10% and 12%, and then depending on the right acquisitions we could grow it quite a bit quicker..

Okay. And then same sort of thing with total quality, I mean, you’ve had that in your mix for a little bit more than a year at this point. And it sounds like that there is some reporting issues that maybe match kind of what's going on with the top line.

But at what point would we expect to see that business start to grow and how should we think about that over the intermediate term from a growth rate standpoint? Thanks..

Yes, you’re welcome. The actual growth rate prior to the change for the accounting of the fuel surcharge was 12.2% which at their size today is pretty good. They have, this is a very long sales cycle. It’s the best way to put it. But that really has some great opportunities in front of them.

They have a great team assembled now, and they have a great operating package. So, I think you can look for a bit more to come from them in the coming quarters..

Okay. All right. Thanks for all the help today..

Thank you..

And next we’ll go to Jason Seidl with Cowen and Company. Please go ahead..

Hi, guys good morning. Thanks for taking my call. Just one quick question on pricing. I know in the past you had a problem with one of your competitors being irrational at times. It seems like the market is pretty good for pricing based on the tightness of capacity and we just saw one of the LTL carriers take another GRI today.

Could you talk a little bit about the retention of your own general rate increase and sort of the market on what contractual business is looking like?.

Historically we had done rate increases between 3% and 5%. We historically do them effective in the first quarter typically March 1. We’ll follow that pathway as far as today is concerned. In terms of our retention we normally can retain different from the LTL carriers 90%. In most cases we do not have to deal with contracts. It’s just a simple increase.

So, if we announce an increase we tend to get lets say between 75% and 80% of it..

And then the last one you had was on the linehaul was 3.3%. So that was towards the lower end of your historical range then.

Looking forward given the market, is it too much of a stretch to assume that, that could potentially go higher?.

No, it’s not too much of a stretch. And I think you’ll see this and let’s go back to Rodney’s opening comments. You’ll see us not only look at a general rate increase, but you’ll see us target those lanes where the costs due to the owner-operator and the teams. It’s all about teams in our world. You will see us target those lanes for the higher..

Now you guys made the comment that, and I think 23% of the business was using outside capacity which was whole 10 points or more than you want. And you did say there was 35% more expenses.

But I mean if this current quarter were within your historical range, how much would that have saved you on a cost basis dollar wise?.

Rodney, you might have that?.

(Indiscernible)..

Actually we can get you that number..

Yes, why don’t you give -- you can give it to me offline. We’ll talk after the call. I don’t want to tie it up for everyone else. I’ll give somebody else an opportunity. Gentlemen, I appreciate the time as always..

Thank you..

And we’ll go to Bruce Chen with Stifel. Please go ahead..

Good morning gentlemen and happy Friday. Just a couple of questions for me, I guess first and I’m hoping I didn’t miss this, but I’m looking at solutions, I’m wondering what the main difference was that, that really allow for profitable quarter, this quarter.

Was it mostly driven by volume? Was it operations related? Or was it customer mix or customer attrition related?.

The quicker answer is, yes. So they did -- they established over the last year, year and half a really good revenue base that’s allowing a profit. And then I think more importantly as we grab that revenue base Roger and his team have done a really good job in their operating efficiencies and really driven that OR down to where it is today.

And they still have opportunity. So we’re looking for even more improvement there..

Great. Thank you. And then also turning to the linehaul side, it looks like there was a little bit of a decline in average weight per shipment.

I’m wondering, what was driving that decline?.

Well it hasn’t been declining. If it did, I had missed that..

It did just a bit, Bruce. It’s an issue of mix, it’s reasonably all this. [Ph] [Jason] nothing beyond that (indiscernible) Bruce..

And we look at that every single week and that’s a critical number to us..

Okay, great. And then just one final question. Looking at what's going on over on the West Coast with the poor congestion and what's going on with Chicago. I’m wondering if these types of delay is going into the holiday season.

I mean, if you think back to 2004-2002 timeframe what sort of effect this has on your business in the fourth quarter here, any comments there?.

If we go back as you accurately recall, historically in fact when things get a little bit congested it helps us..

Great. Well that’s very helpful. Thank you gentlemen and I appreciate it..

Thank you..

And we have a question from Shawn Collins with Bank of America Merrill Lynch. Please go ahead..

Great. Hi. Bruce. Hi, Rodney. Good morning..

Good morning..

Can you just talk about the CST acquisition? Now that you’re two quarters in as an owner of it, how is the integration going so far? And do you feel like that is complete or if it’s not complete what percentage of that still needs to be done? And how do you feel like it’s gone in general? Is it a success? Has it met your expectations?.

Yes, it actually exceed, our expectations are doing a great job. We have a great team up there led by Brian and Ron. And they have consistently grown their business. They have consistently since we bought them back in the first quarter improved their operating ratio.

I would tell you that with the exception of few what I would call back office items which sometimes just take longer that the integration was -- is complete and was a big success. And it’s a wonderful platform for us to grow..

Great. That’s nice to hear. Thank you. And then just thinking about the driver situation, the employment picture nationally is looking a bit better certainly on the truckload side there is a lot of talk but there’s a lot of driver shortage and difficulty retaining drivers.

Can you just talk about what you’re seeing in that part of the business?.

We’re seeing exactly what you just described, it’s tough. Basically it’s always been tough because we have such high safety standards. But we think we’ve put together a good team and we put together a good package and we’re going to be able to show some significant growth in that area..

Okay. I understand, great. And then just last question and I’ll turn it over.

Can you just talk about your CapEx plans for -- I know you’re three quarters in this year but what you have planned for the rest of the year and then how you think about that going forward?.

Sure, Shawn, we’re essentially done for the year with that $35 million, $36 million that we have spent for 2014. We’re in the process of finalizing what we’re looking at for 2015 right now but it would be more or less in the same magnitude as 2014 in that $32 million to $35 million range..

Okay. I understand, great. Okay guys, thank you very much. I appreciate it..

Thank you..

And next we’ll go to Scott Group with Wolfe Research. Please go ahead..

Hi. Good morning, guys..

Hi, Scott..

So, I wanted to go back to one of those earlier questions about kind of last cycle and the margins and where they got it.

It’s still just no clear to me why you guys aren’t seeing the operating leverage like you did last cycle when you were getting 200, 300 basis points on margin improvement a year in ’03, ’04, ’05 and we had tight driver markets then too, what's different this time around.

Why is the cycle treating it differently?.

I think if you take your -- Scott the largest cost that we use are the most key cost probably better said that we use for that leverage and it increases step-by-step with the increase in tonnage then the leverage kind of goes away.

Again it’ an area -- the good news is, it’s an area we can tack, we can fix and return to providing that type of leverage and we expect to do so..

You think you can get back there next year to that kind of leverage?.

Without question..

Okay.

Fuel was it a help or hurt in the quarter, how do you think about fourth quarter?.

It was essentially a neutral thing. In the third quarter we’ll expect it to be about the same. And to your earlier question back in the other cycle, we were getting more of a -- relatively more of a benefit from fuel. We had been a little more aggressive on pricing back then and the business mix was different too, Scott.

So, there is a lot of reasons that the last cycle is a bit different from this cycle, but I agree with Bruce on what we can squeeze going into the New Year..

Okay. And then, just last one on peak and your guy’s thoughts on peak.

So couple of the rails have been saying that they think peak is at least for them is over and I know you guys have a different peak but what kind of peak do you think you’re going to have in early, late, big or small, any thoughts there?.

Our thought on our planning process is probably a better way to phrase it, is that peak will be moderate. By business line we still expect the solutions group to have a fairly decent peak. We expect our airport to airport to do actually better than last year. But it won't be an extraordinary peak by any means..

Thank you, guys..

Thank you..

And next we’ll go to Rob Helf with Fiduciary Management. Please go ahead..

Good morning, guys. I got on this call late, so I apologize if you went over this. But your comments really were that you’re using a quite a bit more outside capacity. I think you said something like 20% versus your typical 10% to 12%.

Where do I see that on the P&L exactly? What are the lines that because it seems like you had leverage in few of those expense items, where would I see that mix hurting you guys?.

Rodney, you have that..

Rob, its -- well its within purchase transportation, Rob and in the -- there’s a supplemental page there we put that breaks out PT even further, but you’re not going to be able to drive what's owner-operator and what's third party from that..

So, if I see the 14% increase in purchase transportation, what you’re saying is that that number, traditionally should not have grown as much with your revenue growth.

I assume that obviously with the acquisitions and what not but in general you were saying that, that number should have de-levered more in your normal operating environment using owner-operators, is that fair?.

That’s exactly right..

Okay. And I think and right when I was getting on the call, previous questioner asked perhaps, what that dollar amount could have been? Were you guys able to get that number? I’m just curious about that..

We roughed that out; it’s just over $1 million..

$1 million. Okay. All right, well thank you. I appreciate it..

And we’ll go to Pete Watson with Raymond James. Please go ahead..

Hi. Good morning, guys..

Good morning..

Hey, just for a point for clarification.

In TQI you said that absent the accounting change revenue growth would have been 12%?.

That’s correct..

And so, you probably won't let that change until third quarter next year is my guess,.

When we get to comp that would be first quarter. It would be first quarter 2015..

Okay.

So, I mean the optics in 4Q of ’14 are going to be depressed on a revenue growth because of that change?.

That is great. Q4 will be the last, if you will bad comp and then it is comparable starting Q1..

Okay. Thank you. That’s all I have..

And with no further questions in queue. Ladies and gentlemen, we thank you for joining us today for Forward Air Corporation's third quarter 2014 earnings conference call. And please remember the webcast will be available on the IR section of Forward Air’s website at www.forwardair.com shortly after this call. That does conclude your conference.

Thank you for your participation. You may now disconnect..