Bruce Campbell - CFO Rodney Bell - CFO.

Jason Seidl - Cowen and Company Scott Group - Wolfe Research Jack Atkins - Stephens Inc. Todd Fowler - KeyBanc Capital Markets Nate Brochmann - William Blair John Barnes - RBC Capital Markets Ben Hartford - Robert W.

Baird Kevin Sterling - BB&T Capital Markets David Ross - Stifel Nicolaus David Campbell - Thompson Davis and Company Matthew Young - Morningstar Inc. Ari Rosa - Bank of America.

Good morning and welcome to the Forward Air Corporation’s Second Quarter 2015 Earnings Release Conference Call. Before we begin, I’d like to point out that both the press release and this call are accessible on the Investor Relations section of Forward Air's website at www.forwardair.com.

With us this morning 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 second quarter 2015 results, which were furnished to the SEC on Form 8-K and on the wire yesterday after market close.

Please be aware this conference call 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 facts 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. Now I’d like to turn the call over to Bruce Campbell, Chairman, President, and CEO of Forward Air..

Thank you, Operator and good morning. While not achieving financial results we desired in the second quarter, overall we accomplished most of our long-term strategic objectives we had set prior to going into this transaction.

We had five major goals and we’re totally committed to accomplishing them during the quarter to get the integration cost behind us once and for all, allowing us to move on to running the company efficiently. Here are the key areas we achieved. First, Service.

It was absolutely critical that we provide high levels of service during this period to allow us to retain revenue. We were successful, in fact have provided record levels of service. Secondly, revenue retention.

Because of the excellent service performance just mentioned, we have been able to retain approximately 70% to 75% of the business, better than we had modelled. Third, duplicate employee cost elimination. We had a goal to remove $8 million from the combined companies, but actually were able to remove almost $11 million on an annual basis.

We have more work to do, but this was a great start for us. Fourth, was retain accounts independent owner operators and again, we kept those we wanted and those who could meet our safety standards. This will be a key factor for us as we move into the busy time of the year.

Finally, we shattered 35 duplicative terminal facilities ahead of our goal of 30 and basically we are 90% finished with this important cost removal area.

Each of these strategic areas were critical for us in terms of cleaning up the transition cost so that we don’t have to deal with them in the future, but obviously we incurred a lot of expense to make this happen, causing our profits to retreat during the quarter. This was anticipated and planned.

We are now on the refinement phase of the transition working on the following critical areas. First, reducing our labor cost further as we originally over manned to make sure we provided top levels of service. We are currently fine tuning our labor costs. Secondly, rate reviews.

We knew going into the transaction that we would have to overcome a lot of bad rates, and while we have made some progress, more remains on a number of customers where we had to honor pre-existing contracts.

An example of that was a west coast drayage operation that we were obligated to give almost a 90 day notice to two customers, which alone cost us approximately $1 million during the quarter. It is now gone. We had other situations like this, just not as bad that simply have taken us time to work through.

We believe good progress has been made and hope to be completely finished no later than September 1 of this year, which will have good impacts on our yield. Finally, we continue to refine our network costs shown on the P&L as purchase transportation. While our team has made great progress, more work remains.

We have made many other smaller but important areas that our team has focused on to improve both the cost side and the revenue side of the equation as quickly as possible. We will continue with vigilance to make this happen. And now Rodney Bell, our CFO..

Thanks Bruce. Good morning. A lot of noise in the quarter, so I want to tackle this a little bit differently, but as we traditionally do I’ll start with revenue. On the same number of business days, Q2 2015 revenues were up $55.8 million or 28% compared to Q2 a year ago.

Obviously most of that increase was a full quarter benefit of the Towne acquisition. As Bruce mentioned, we estimate that we retain between 70% and 75% of that business. Without regard to Towne, we estimate FIA revenues excluding CST, had organic volume growth of approximately 5%.

The primary reason for the lower sequential growth from Q1 was reduced distribution activities compared to Q2 a year ago. Intermodal and related revenues related to CST were up 52% at $9.4 million. This was a result of two second half of the year acquisitions, as well as solid organic growth. TQI revenues were $1.9 million less than Q2 a year ago.

This was primarily due to a non-recurring major pharmaceutical distribution last year and overall slower demand this year versus last year. Solutions revenues were up 3%, but actually increased 8% on an adjusted basis as we reclassified a small dedicated operations from that business segment into FIA.

Next I’ll be covering the expense related to Forward Air Inc., calling out the $.69 million in Q2 one time integration cost. Let’s start with purchase transportation. In total PT was up $26.8 million or 39.1% and 60 basis points as a percentage of revenue as compared to Q2 a year ago. Included in that increase was $804,000 of integration cost.

The Towne acquisition caused our network to become out of balance, resulting in costly inefficiencies. This came in the form of costly brokerage miles, especially from the west coast, reduced load factors and a substantial increase in paid empty miles to owner-operators.

At this time, this is more than offsetting the benefit gained from our program to reduce our reliance on more costly third party miles. Given the magnitude of PT as a percentage of revenue, getting our network back into balance will be a key focus for our team for the balance of the year.

Moving to salaries, wages and benefits, overall they were up $15.9 million and 180 basis points. Just over $600,000 of that increase was direct cost related to the Towne integration. Initially we did a good job taking out duplicate functions and departmental salaries as Bruce mentioned.

However, to protect service through the transition, we intentionally stayed over staffed at the terminal level. With that behind us, our focus in the second half is to right-size at the terminal level. Using our pre-Towne operating metrics as a benchmark, there were several million dollars in annual savings available through this process.

Operating leases were up $9.9 million. $4.9 million of that increase was one time in nature as we had better than anticipated success in closing duplicate facilities. We expect Q3 operating leases, lease expense for FIA, inclusive of CST, to be approximately $11.5 million. Depreciation and amortization was up $1.6 million.

Most of that is related to the Towne deal, the amortization on the Towne deal and to lesser extent, newly purchased revenue equipment. We anticipate Q3 D&A, inclusive of CST, to be approximately $7 million. Insurance and claims increased $2.7 million, which included $473,000 in one time integration cost.

For Q3 we expect FIA insurance and claims to be approximately $4.2 million. Other expense dollars increased approximately $6.8 million, with $1 million of that being deal and integration cost. With this line item being a catch-all for operational inefficiencies, we are focused on it as well.

Next, moving to consolidated earnings per share for the quarter, adjusted for deal cost, we posted $0.51 for the quarter. That compares to $0.61 which was the midpoint of our Q2 guidance. I’ll spend a few minutes breaking down that $0.10 delta between what we actually did and what we expected at the first of the quarter.

Solutions missed our EPS expectations by approximately $0.03. This was due to the decision in Q2 to start up a new terminal, increase cargo claims, two large terminals that underperformed being addressed and higher than expected group insurance expense.

Due to the non-deductibility of the Towne deal cost, our effective tax rate increased resulting in a $0.01 drag. This was unanticipated. We expect that 38.7% tax rate and the $0.01 drag to continue for the balance of 2015.

Going into the year, we expected a negative impact of lower fuel surcharges to have a negative impact of nearly, or of approximately $2.5 cents per quarter. On a consolidated level, it was close to the $0.04.That’s approximately $1.5 cents per share, worse than we modeled and again we anticipate that to persist through the end of the year.

Twice a year, we are required to perform an actuarial study on our vehicle liability and workers compensation reserves. This year it resulted in an unexpected negative adjustment of $0.03 per share.

With all that, the remaining $0.02, approximately $0.02 per share is a shortfall related to essentially Towne and the specific [dollar] opportunities, primarily in PT, salaries and wages and other operating expense line items. In addition, we are looking very hard at the quality of revenue for opportunities there.

Finally, I’ll cover the Q3 and full year 2015 earnings outlook. We anticipate third quarter revenue growth to be in the range of 23% to 27%. While there could be additional Towne related integration costs in the third quarter, we expect those to be minimal.

Without regard to those costs, we expect the income per diluted share to be between $0.58 and $0.62 compared to $0.54 a year ago. In line of our current quarter miss and adjusted expectations regarding integration, we are adjusting our previously provided full year guidance to $2.15 to $2.25. That concludes our comments.

Now back to the operator for your questions. .

[Operator Instructions] Our first question comes from the line of Jason Seidl from Cowen and Company. Please go ahead, sir..

Hey Rodney. Hey Bruce. How are you guys this morning? A couple quick questions. I want to focus a little bit on sort of 2016. So it seems like you’re incurring some extra cost here to integrate Towne. Maybe the market is a little bit slower than it was at the beginning of the year.

But walk us through how much of the expense, extra expenses that you’re incurring in 2015 that won’t be reoccurring in 2016 and then I’ll have a question on pricing and some of the customers after that. .

I’m not sure we can give you an exact number. We have some ballpark figures. Let me tell you what we’re attacking. We are going after the PT and basically refining that network. We inherited some bad network lanes that we are in the process of cleaning up. So there’s improvement there and there are other areas Rodney mentioned.

But the big thing for us is to get through a rate review and I will tell you we inherited some less than good rates and we inherited them in all types of forms, things I’ve never seen in my 40 years of business.

It will take us literally going one by one to each of the customers to revise those rates, to get them to where they need to be or at some point we have to say we can’t do business with you and hopefully that’s not the case. I think we build a solid case to retain that.

All that is to say we’ve got to work very hard on the cost side and we’ve got to work very hard on the revenue side to clean it up, or to yield, probably better said. As that progresses, I don’t want to wait until 2016. I don’t think there’s anybody in our company that does.

We want to have everything completed by the end of the third quarter so that we don’t even have to think about this after that. .

In terms of ballparking the total number of expenses that will not be reoccurring, could you give us a ballpark range?.

The hard costs are pretty easy, Jason. They’re actually in the earnings release. We had $18.7 million through the second quarter in integration and deal costs. All of those are one-time in nature. Those were primarily the cost to buy out duplicate facilities, which that goes away and when we cease having to pay the rent on those facilities.

And the other big piece of that is severances. Beyond the hard costs, the overstaffing at the terminal level as we ….

That’s what I’m trying to get at..

That’s a tough one. If you look for instance at the line item cargo handlers, and if we can get back to the metrics of the cost per pound that we were incurring prior to Towne, that’s seven or eight million bucks that we can pick up if we can get back to that level of efficiency.

That’s just an example, but we have not quantified line item by line item what -- quite frankly we just can’t answer your question right now. .

Okay. And Bruce getting back to some of your commentary on the rates, I think people can understand it’s probably going to be a lot of blocking and tackling for you.

But how long do you think it’s going to take to get through this? Is this sort of early 2016, mid-2016 by the time you get through all the guys that need a quick talking to?.

Yeah. Let me share with your our approach. Number one is if it was airport to airport traffic or the typical Forward Air freight, that automatically became a Forward Air rate. But then the old Towne rate structure had additional rates, many of them under contract, a big of group of them, the airlines.

Basically all of those rates had to be renegotiated because they simply weren’t compensatory. We are basically finished with that or very close to being finished. We have one straggler. So we have that behind us. Now our next phase is to go after, lack of a better word description, class rated shipments.

Falling into this are international freight forwarders and some on a limited basis, some commercial accounts. That will take us, hopefully we will be done by September 1 and that is exactly as you said blocking and tackling one on one with really hard efforts by ourselves, but we can do it.

So we’re hopeful that we’re out of that no later than October 1st. .

October 1st, okay.

And what percent of the business do the class rated freight make up per ton?.

I don’t have the exact number in front of me. Somewhere around 20%, 25%..

Okay, 20%, 25%. Gentlemen, I appreciate the time today. I’ll turn it over to somebody else. .

Thank you. Our next question comes from the line of Scott Group from Wolfe Research. Please go ahead..

Hey, thanks. Morning guys.

Bruce, when you talk about non-core service offerings and then some of the business, the Towne business that’s operating at low profitability or not profitable, how much revenue are we talking about that could potentially go away if you can’t figure out the pricing?.

I think we can figure out the pricing. I think we have proof based on some contract negotiations that we’ve already been through that we’re going to retain a large amount of that. We have certain advantages that others don’t.

And so while we certainly aren’t going to go to the customer and jam them, we are going to simply return them to compensatory rates. And I think most of our customer base, even the new ones from Towne; they’re going to accept that because it’s a fair value for a good service. .

And what is the non-core service offering? Is that what you were just talking about with Jason that’s 20% of the revenue?.

Yeah. I’m not sure I would term that non-core. .

I’m just reading from the press release, your comments from the press release from yesterday. .

Yeah. I evidently misspoke. Non-core means to us that it was not a domestic forwarder business that we were used to doing in the past. But it’s still very common in our world..

Okay.

Bruce or Rodney, can you talk about just the underlying demand environment and if there’s any way to give us a view on same store tonnage levels if possible?.

Sure, Scott. There’s certainly more art than there’s science with the noise that Towne creates, but independent of the work I did, our senior VP of sales came up with essentially the same number. We think that the underlying legacy volumes in airport-to-airport are around 5% to 6%. .

And are you seeing that strengthen, slow? How would you characterize that?.

You know the base of that is pretty consistent. What we have seen is big risk distributions when a customer comes to you and said I’ve got -- this is an off the wall example. I’ve got 2,000 flat screen TVs I need to move this weekend into ABC retailer.

And we’re not seeing those big pops that we did last year of that kind of distribution business, but the underlying base business is pretty consistent. .

Okay and then just last question and maybe getting to the crux of Jason’s question from earlier.

So as we look out to ’16 and we’re trying to model the margins for the core Forward Air business, do you think we can get back to where we were last year? Can we get back to where we were a few years ago in terms of really good margins or does this take a little bit longer to get back to where we want?.

Okay, I’m sorry. We certainly think we can get back to where we were last year, if not a little better. .

Great. All right, thank you guys. .

Our next question comes from the line of Jack Atkins from Stephens. Please go ahead sir..

Good morning guys. Thanks for the time. When I look at the revenue guidance in the third quarter relative to what you guys did in the second quarter, it certainly implies some deceleration in terms of growth.

Could you maybe walk us through what’s behind that if anything specific?.

You look at -- Jack, you look at beyond the Forward Air segment, quite frankly TQI has been a bit of a drag. We’re not going to get that fixed overnight. That’s going to require adding capacity. That’s another store in sale. Solutions, their growth is tepid as well. Those two pieces put a drag on the overall. CST is doing great.

They have been going gangbusters, but for the reason mentioned earlier, just that low distribution activity is -- in the underlying legacy business is tough. We are going to lose a little more of the Towne business going forward. The attrition is not over.

I'm not talking crazy numbers, but we’ll probably get down to that 65% that we modeled going into it before it's over. I hope not, but it probably will, but that’s also factored in..

Okay. And then in terms of the outside miles, which I know was a challenge last year for you guys. Maybe give us an update there because I think that’s getting clouded in terms of progress that you’re making. So far this year it seems like the initiatives ….

That’s really a different circumstance this year. This year is primarily an issue of being out of balance. For instance we may have 20 loads, extra loads out of LA and we don’t have our equipment positioned there because of the flow of the freight. And so we have to go to outside sources to move that freight.

The big thing though this year is we do have owner operators, where a year ago we did not and so that’s been a positive. Rodney, go..

Okay. Jack, without regard to Towne, we would be in really good shape. We are in really good shape with Towne, but as it relates PT and outside usage, we are down, this quarter is 14.7% compared to 19.6%.

That’s good, but to your point, it’s being muted by everything else that’s going on and to Bruce’s point to being out of balance, which we’re working hard to get that fixed..

Okay, that’s a helpful update. And then I in terms of the solutions business, I think you said that was $0.03 of the miss relevant to your guidance. Maybe walk us through what changed there because it seemed like you guys had some good momentum going for the last four, five quarters.

What's happening on that business and can we get back to the runway we were on from a profitability level?.

The big drag there in the quarter, Jack was we opened Rochester, New York. We opened that at the demand of our customer base. While they got off to a good start, and we’re glad we’ve made that investment, any time you start one up, you are going to lose money for a few months. Hopefully we can have it down to one month.

Then we had an unusual claim experience that occurred in the quarter that should be behind us. And then we had a couple of issues at a large terminal that we now have fixed. We think we can gain that momentum back and get them rolling into the third and fourth quarters. They do have a pretty nice pipeline ready to come on.

That will occur both in August and September. Those are positives for that..

Okay, so you would expect, Bruce that the profitability of that business to sort of bounce back in terms of what we should be seeing on a year over year basis in the third and fourth quarter?.

That’s correct..

Okay and then I guess last question and everyone is trying to get to this, maybe I'll ask a little bit different way, but when you think about the accretion profile of Towne, given what you know today four, five months in since the deal was closed, do you feel like the transaction will be in line with your expectations, better or maybe worse that what you guys were expecting before you made the acquisition?.

Yeah, when you think about accretion, let me back you up and give you a bit of perspective. Every tuck-in acquisition we’ve done in the past was a net asset purchase. We were able to take that business and literally ignore everything else and simply throw the revenue into the Forward Air network and immediately it became accretive.

This one obviously was a stock purchase which meant we had the deal with all the problems. We knew that going in and we knew we would have a rough quarter, quarter and a half, two, whatever, but it doesn’t change our thoughts on your accretiveness. We will get it to the point where it’s right where we want it to be in terms of accretiveness. .

Okay Bruce, Rodney, thanks for the time..

Our next question comes from the line of Todd Fowler from KeyBanc Capital Markets. Please go ahead sir..

Great, thanks good morning. Thanks for the additional color today. Bruce, maybe just to start to make sure I understand what’s left to do with Towne. On the release you’re saying that you’re 85% to 90% of the way there. You talked about the areas of focus.

Is the last 10% to 15%, is that doing the re-pricing and the evaluation of some of the business, or is there’s still more work to be done on the network side? It sounds like you’re ahead of plan on the terminal consolidation. I’m just trying to get a sense of the last 10% to 15% that you have to do with Towne at this point..

We basically have Todd, one more terminal to dispose of, which is in the works. We have, probably 5% of what we mentioned is further network refinement. And then the balance of it, by far the most important at this stage of the integration, is the yield improvement..

Additionally Todd, we didn’t get the benefit in the quarter because it came very late in the quarter and subsequent to quarter end, but has occurred. We’ve reduced the managers’ salaries on an annualized basis, including benefits, $3 million.

And to the earlier point, we’re going to be chipping away at the hourly wages where we’re over staffed at the terminal level. That’s taking places as we speak and we’ll see the benefit of that going into Q3 and certainly the full benefit of it in Q4..

When I think about the big things that can get your network out of balance, particularly on the facility side, you’re through the lion’s share of that and so the last 10% to 15% is much more on the cost and the revenue side with one facility that’s still out here..

Correct..

Okay, that helps..

There are plans in place for the one facility, so it’s not going to be a big deal..

Okay. And then what is the expectation for baseline haul yields for the rest of the year? I think that the initial commentary was that, and I know that there are some mix issues. I know that you inherited some bad freight, but the line haul yields could be flat on a full year basis.

Is there still some potential for that or is that going to be pushed out a little bit more of the yield where it comes in the first part of ‘16 at this point?.

We think we can push the yield up still this year. If you tend to stand for an exact number Rodney was saying 2%. We know for instance last week, we turned neutral finally on yield, after being down 3%. A lot of that work has been done, but again as we’ve said, more work remains and we have a good team that will make that happen. .

The 2% would be where you think you can end on a full year basis or that’s a fourth quarter run rate or how does the 2% compare to it looks that you are basically flat in the first half of the year?.

That would be a run rate..

Okay, that helps. Okay and then the last one that I had was, maybe just a little bit of sense of what you’d expect from operating ratio progression in the airport-to-airport business.

I'm not asking to give specific guidance, but thinking about the things that you’ve learned with the Towne business, at some point in first part of ‘16 or is it second part of ‘16 when you think you can get the business back down to the kind of historical low 80 ORs or something different than that..

We’re certainly not going to wait till the second half of ‘16, I can assure you that. We are working hard again not to be redundant, but we think we can start hitting the levels we want or be very close to it in the fourth quarter and then carry that momentum into 2016.

This should not -- let me say this, I would be intensely disappointed if we couldn’t start reaching those levels in the fourth quarter and you wouldn’t like me intensely disappointed..

I'm sure there are people within the organization that would not care for that as well. All right guys, thanks for the time as always..

Our next question comes from the line of Nate Brochmann from William Blair. Please go ahead sir..

Good morning gentleman. Thanks for talking the question. Hey, just want to just get a little bit of perspective like going back to like April when you guys reported the first quarter and kind of looking at all the integration issues ahead of you.

It sounded like we were off to a really good start even at that point just a couple of months into it in terms of customer retention, the driver retention.

Did things accelerate in terms of just having to staff up those costs as you move forward in terms of retaining that revenue in those service levels? Or was that truly something you anticipated was going to reach those levels and maybe just crept up a little bit beyond expectations?.

Yeah, I think it’s the latter. We accomplished a lot quickly and then you run into those issues and there were numerous issues that either were under contract or had some other obligation that you simply couldn’t move quickly on. While you can move quickly on this, and this, we could sign up owner operators literally within a month.

Just wasn’t that big of a deal in terms of the process, but other processes have been very extensive, very time consuming and it's just something we had to work our way through. Again we knew that was going to happen and we are good with where we are at and we also realize we have more work to do there..

And on the customer retention side, obviously those numbers are a little bit better today than you originally forecasted. It sounds like maybe as you work through the final pieces of this, there might be a little bit more slippage, but still pretty decent levels.

The customers that have left, are those mainly due to pricing and they didn’t want to accept that or was there another issue in terms of putting all their eggs in one basket and they wanted separate providers or kind of -- could you give us a little framework for where that slippage was?.

It was almost all due to pricing. I’m sure there are people who are looking to diversify their basket as you put it, but we’ve really not run into that.

And I think that’s because we had some doubters out there that we had done limited business with in the past and when we took it over, we really popped them on service and gave them good products and I think that opened some eyes..

Okay.

And then now as you’ve been able to do that and we think moving forward and obviously the first phase is getting everything right sized and aligned and getting through these final integration issues, but as you’ve been able to look at some of these accounts, do you see any additional opportunities maybe going into next year for some additional cross sell, and particularly as you said, maybe as you popped them with service, maybe they’ve opened their eyes to be able to either give more business to you or you’ve identified other opportunities in some of the other areas to be able to cross sell through..

That was our question. That doesn’t apply across the board, but with a lot of the customers, especially new customers that we didn’t have before, we have some really solid opportunities to sell the breadth of our service offerings..

Okay, great. I appreciate the time..

Our next question comes from the line of John Barnes from RBC Capital Markets. Please go ahead sir..

Hey guys. Hey Bruce, so I don’t think anybody here was shocked that Towne was not a great operation. I mean the history of the company and comments that have been made about their pricing structures philosophy going back over the years, no real surprise. These things are always complicated and take time.

Outside of the thing that -- poor price structures that you were unaware of and didn’t see, is there anything worse than what you originally expected as you were going through due diligence? Is there anything that kind of surprised you at how poor it was set up? Or was this all the course of normal integrations?.

They were a few what I would call minor surprises, John but nothing that was completely out of the box. We knew as you said during diligence and we knew even before that that we would have a battle on our hands and that we would have to do a lot of cleanup for lack of a better phrase. I think overall we’ve done a good job with that.

The biggest frustration that we’ve had going through this is simply working through the wickets where we were limited by contracts or we were limited by other legal functions where we just couldn’t go as fast as we wanted to. But we identified those.

We set up a process to handle them and we are hopeful that most of them will be behind us by the end of this quarter..

Okay, all right. And then as you think about integrations, right now it’s all operations and redundancy and the yield.

Is there anything that you found that’s going to be the next step? Is there an IT investment that needs to be made? Is there anything that you say okay, we get the core piece of the integration done, but then we are going to have to come back and we are going to have to address some lesser shortfall in the operation or something.

Is there another, kind of for lack of a better word, is there another shoe to drop out there as you have passed all these?.

We call those bombs, John and we don’t see anything out there. Our IT has performed flawlessly and I would say even under some really difficult circumstances. As in the past, we consistently invest in IT so that we don’t have to do these big projects.

And if you look at the other areas, we had almost every one of them identified and had a plan to address. And as you said though and I think it’s a very fair comment, you are always looking for again what I call bombs and we just have not run into it.

The only big negative we ran into was the drayage operation in California, which we knew about but didn’t know the extent..

Yeah, okay. All right. No bombs Bruce, no bombs. That would be a bad thing. But lastly, just as you think about, your focus obviously has been so much on Towne. Can you talk a little bit about your own core airport-to-airport business and what you’ve seen trend line there and then the other businesses, TQI and FASI.

Maybe, I know it’s hard to keep an eye on everything when you’ve got something this major going on.

Do you feel comfortable with where those results are given what you’ve got on your hands right now?.

Given the circumstances under which they operated during the quarter, yes. Again we have work to do. Our core airport-to-airport business I thought our people did a super job. We didn’t have any major customer loss. If we had an issue with service, you are always going to have things pop up.

I thought our people reacted to it strongly and took care of the situation so that we can continue on normally. We are seeing some nice growth, so we are happy with that.

On the Solutions side, we probably could have maintained our earnings per share had we not made the decision to open Rochester, but we consider that to be a good long-term investment and I think that will pay dividends as we go forward and quickly. We are not going to wait forever. TQI is battling a really tough comp from a year ago.

If you recall the Nexium roll out occurred in the second quarter and it was substantial. And they are also facing a few issues on outsourcing of loads which we are working our way through. We think we have adequately each of the issues identified. We think we have plans and place to make them better and we think we will.

But clearly the star of the second quarter was CST. They are just rolling. And so as a result of that, you will see us really start to invest in expanding them. We brought them at a $65 million, $70 million revenue clip.

They are up to about between 110 and 120 run rate now and we’ve got some really good opportunities in the pipeline and we are going to grow that business as fast as we can go..

Okay, all right. Very good guys. Appreciate your time as always..

Our next question comes from the line of Ben Hartford from Baird. Please go ahead sir..

All right, good morning guys. Just one or two questions probably Rodney for you. When you think about the, what is now an implied fourth quarter earnings guidance of let’s call it $0.70. Typically that’s the seasonally strongest quarter.

I understand the progression that you are expecting to make in the back half of the year with regard to Towne and it sounds like October 1 you’ll be hitting your stride more or less. But there still are probably some headwinds, particularly from pricing and negotiations during the fourth quarter.

But the fourth quarter feels like it should be more representative of what the earnings run rate for the company will be as we go into 2016.

I guess Rodney, is that fair? And then what are some additional opportunities that can allow that, let’s call it a $0.70 guidance this quarter to grow, to be greater than expected in the fourth quarter and then also to grow in 2016?.

Ben, you are looking at it exactly like we are. As a matter of fact the fourth quarter should be a proxy for the baseline full year profitability for 2016. But on top of that, this past year we did our fourth consecutive annual GRI. So there could be some upside certainly from pricing.

Bruce mentioned the opportunities within CST, these tuck-in acquisitions. That will definitely result in some upside for 2016. And there’s still room for improvement in Solutions. They’re not where they need to be in terms of operating ratio and we could certainly improve their OR 150, 200 basis points next year.

There’s ample opportunities for upside, but you are correct in your assumption on the benchmark in the baseline..

Okay and then Bruce, you had talked about really the net accretion from Towne being no different, normalizing for the treatment of the purchase.

When we think about core and that business with the business that you expect to retain from Towne 2016, 2017, 2018, thinking about the margin profile, I know that we probably shouldn’t be thinking about the 21.4% peak margin that we saw in the mid-2000s, but still in upper teens margin, are you comfortable with the ability for that core business to be able to get there? And if so in your mind, what’s a reasonable timeline and what’s a pathway to get to that margin level?.

We’d like to be at an 85 by the end of the year. And then once we hit that number, Ben, we want to push going into 2016 to achieve a number below that. How good we can get, we’re not comfortable telling you today, but obviously we think we can drive that OR. .

Okay, that’s helpful. Thank you. .

Our next question comes from the line of Kevin Sterling from BB&T Capital Markets. Please go ahead sir. .

Thank you. Good morning gentlemen. Bruce, really at the end of the day when I look at Q2, it sounds like you guys really did go out of your way to service the business and obviously that impacted cost, but I think almost to prove a point to your customers that you guys offer the best service out there.

Is that right and something that’s going to pay dividends as we think about the back half of the year in 2016? Is that a fair assumption?.

You’re 100% right. That was exactly our approach..

That strategy, you think it’s paying off? Obviously the customer retention is better than what you thought.

As you think about growing the book of business, as your sales teams out there making calls; do you feel that strategy is really paying off?.

The measurement obviously, Kevin is the retention rate. We’re between 70 and 75. I would tell you that what we did retain, we probably didn’t want. It wasn’t so much a matter of us not servicing them properly. And there was business in there that simply weren’t a fit for the customer or for us, but we’ve been able to minimize that.

We’ve been able to work through some difficult situations and hopefully to the benefit of both our customer and us. So we’re happy with where we are now, again with recognition that we have work to do..

Rodney, can I ask you about July trend? I think you said you look at your organic growth. That was about 5% in the quarter.

Can you tell us what you guys have seen in July in terms of maybe year-over-year growth for the combined business, but also organically how July has been shaping up so far?.

Sure. On the volume side, Kevin, volumes were up overall, inclusive of Towne in the mid upper 20%, call it 25% to 30%. Bruce mentioned from a yield perspective we got back to neutral and actually yields taking up slightly positive right now. So we’re happy with that, but there’s work to do with that part. .

So that mid to upper 20% is a little bit higher than your Q3 guidance. I guess you guys are baking in some conservatism because July has started so good, but in case there’s some slowdown in August and September.

Is that right too? Is that a fair way to look at it?.

Yeah, but keep in mind that the number, the range that I just cited is airport-to-airport. There are some slow or some segments of the business that are rolling quite a bit slower than that that are going to pull that a bit down. .

Okay, thank you. That’s all I had guys. Thank you for all your explanation of the cost and everything and best luck going forward. .

Our next question comes from the line of David Ross from Stifel. Please go ahead sir. .

Good morning Bruce. Good morning Rodney. TLX seems like a bright spot in the quarter.

Could you just talk a little bit there about what led to the revenue per mile increases significantly exceeding the cost per mile increases and what the outlook is for TLX through the balance of the year?.

We actually began that in the latter part of last year, David with the real push that we have to get our revenue right. So obviously with capacity somewhat lean, you’ve got to push your revenue, your rates up and they did that and did a good job. They were on a roll prior to the acquisition.

So when we did the acquisition, they inherited some additional business from the Towne acquisition. That business was priced overall pretty good. We didn’t have to do a lot of struggling to get the rate where we needed it to be. And so as a result, they’ve really done a very, very good job.

I said CST earlier was the star of the quarter and I should have included TLX. They’ve just done a great job..

And then back to CST a little bit, can you talk about the margin profile of CST versus the core airport business? Is that growing? Is that going to be a drag on margin, enhancing to margins or margin neutral?.

I think the quick comment when they’re in the 88 to 90 range because we basically have limited investment there. In that business, we think it would be difficult for them to get -- assuming we can get airport-to-airport back to an 85, they would have to have a whole lot of things go right in order to get that low, but it’s still great business. .

David, for Q3 -- pardon me, for Q2 CST operated at 87.6 which is outstanding for them. The transactional nature of that business then provide a whole lot of leverage so that OR doesn’t -- Bruce is right. I mean if everything absolutely went perfectly, we could probably get down to an 85 or 86, but we’re pleased with where they are today. .

So is the return on capital on that business as good as the Forward Air business, even if the margin isn’t?.

It’s a bit better. .

Okay, excellent. Thank you very much. .

Our next question comes from the line of David Campbell from Thompson Davis and Company. Please go ahead sir. .

Rodney, you mentioned quickly the tax rate 38.7% would continue in the third and fourth quarter, but that there was higher than -- and I guess you thought would be or higher than last year.

What’s the reason for that and is it going to continue at that rate into next year?.

That’s a great question, David because we didn’t anticipate it.

Our tax experts told -- we found out after the fact that given the nature of the Towne transaction, I won’t get too far down to the weeds, effectively had exclusivity because of the permanent difference with the deductibility of some of the deal cost and that drove our tax rate up about a percentage.

That will persist throughout the – through the end of 2015 and then you’ll see it mitigate back down to the former levels in 2016..

Okay. And also during your discussion you said something about 1.5 cents per share and I didn’t -- I don’t remember.

What was that about?.

I think David that’s where I was calling out opinion I have of more than anticipated negative impact from net fuel surcharges because of fuel being down obviously. .

Lower fuel surcharges.

Yeah, that’s included in your yields of course, right?.

Correct. Yes..

Okay and Bruce, now that you’ve bought Towne Air, how would you describe the competitive situation on a long-term basis? Is there still opportunity for growth on a long-term basis that exceeds the overall industry growth? Or do you see forwarders taking the Towne -- took some of that Towne Air business I guess that they will keep that business on a long-term basis?.

The quick answer is David it’s still a very competitive business and we’re in there fighting every day for our share of it and that I don’t see changing. We believe that this market is a GDP plus 2%, 3% grower. We think that will continue.

We think if anything there an opportunity as supply change adapt to the new way of the world there may be even more opportunity there, but we’ve not seen it yet. Our forwarder friends are doing great in their businesses for the most part. So we’re happy with where we’re positioned. It’s a competitive battle every day, but that’s what we like. .

But the Towne business you didn’t retain, do you think it went to less than truckload operators or to other forwarders?.

Now, there are other expedited line haul carriers. There’s the BX Company out of Toledo, Ohio. There’s American Linehaul. There’s numerous others that are still in the markets. So just because we bought Towne doesn’t mean we don’t have any competition. I can assure you we have a lot of competition..

Right. Okay, thank you very much..

Our next question comes from the line of Mr. Matt Young from Morningstar. Please go ahead sir..

Morning guys. For TQI, I think you motioned that you’re looking to add capacity. Was that -- I'm assuming that’s company drivers versus third party capacity..

Both..

I'm sorry?.

Both. I'm sorry. Oh, both. I guess along those lines then, could you talk out your success on the driver recruiting front. Obviously, it's been difficult for everybody in the business.

Are you seeing any improvement? Is it getting worse?.

Speaking about the macro market, it's still tough. I will tell you that I think our team has, we completely re-built our recruiting and retention team starting last July and as a result of that Matt, we’ve really had a lot of success and knock on wood, that will continue and right now basically all our operating segments are at full C..

Okay. So then on the revenue side then you did say capacity was somewhat of a problem there.

It's probably not because it’s down unless you had a lot for turnover, but is that the reason you didn’t see more growth at TQI because you didn’t have the capacity you needed in the right places?.

That’s correct. That’s exactly right..

Okay, all right. That’s all I had. Thanks..

Our next question comes from the line of Ari Rosa from Bank of America. Please go ahead..

Hi, good morning. A lot of my questions have been answered already at this point. But let me just kind of try to pinpoint just a little bit further because this is unclear to me.

At what point did some of these issues around Towne become apparent to you guys? Was that following deal close? It sounds like it’s been a little bit of a distraction for the quarter.

Is that kind of fair to say, just kind of the magnitude of the challenges?.

I think we knew going into the transaction that we were going to have some battles, so we weren’t surprised by that. The only thing I would tell you that it really wasn’t a surprise, it was a just a bit frustrating, was anything that was contractional that we simply couldn’t move on. At Forward Air, we get things done and we get them done quickly.

When you have a contractor, some other type of relationship that stops you from doing that, it's frustrating. We anticipated it. We knew we weren’t going to get it all done day one. I would go back to the drayage business.

We made a decision there that rather than fight lawsuits for the next three years, we were going to service the business for the 90 day required and then simply get out of it. None of that was surprising. It's just if you’re like most of us at Forward Air, you can become very impatient very quickly with that, but we dealt with it.

We got a lot of it behind us. We’ll get the rest of it behind us in Q3 and we’ll move on..

Got it and just maybe you guys can say a little bit more about the process of contract renegotiations.

What’s that been like when you go to customers and have that discussion?.

Usually because the rates are too low, they aren’t jumping up and down to see us, but we work very hard to explain gee, we’re going to provide you top levels of service. We are going to provide you a true value and the rates you had just simply aren’t compensatory. It's really not an argument.

It comes down to they either accept our freights and the services and the value we bring, or they have to go out and find somebody else and we certainly understand that. But for the most part, we’ve been able to keep them in the fold and we’re pleased with that..

But it sounds like a lot of customers kind of anticipated that conversation, maybe were aware that we are getting rates that were below market.

Is that fair to say?.

That’s very fair to say..

Okay, great. And then just the last question I had. Maybe you could give a little more clarity on the operating leases. A bit higher than what we expected. Maybe just what was going on there. .

That’s mainly a function of much of the equipment we acquired from Towne was under lease as opposed to a depreciation expense. That’s probably driving most of it..

Got it, okay. That makes sense.

And so that will be on an ongoing basis that will continue to be elevated I guess or roughly in line with this quarter?.

Yeah, until we can get out from underneath the -- our goal is not to lease because it’s more expensive, but again here is a contract issue that we have to deal with and we’ll honor it..

Just to make sure that we’re on the same page, on the operating lease line it was -- of the $9.9 million it was up, $4.9 million of that was one time deal cost and we expect that operating lease line item for Q3 for Forward Air, inclusive of CST, will be about $11.5 million..

Got it, okay. That’s helpful. Thank you..

Ladies and gentlemen, that does conclude our question-and-answer session for today. Thank you for joining us today for Forward Air Corporation's second quarter 2015 earnings conference call. Please remember the webcast will be available on the IR Section of Forward Air's website at www.forwardair.com shortly after this call.

Thank you and have a great day..