Michael Morris - CFO, Principal Accounting Officer, SVP & Treasurer Bruce Campbell - Chairman, President & CEO.

Todd Fowler - KeyBanc Capital Markets Jizong Chan - Stifel, Nicolaus & Company Benjamin Hartford - Robert W. Baird & Co..

Thank you for joining Forward Air Corporation's First Quarter 2018 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 Chairman, President and CEO, Bruce Campbell; and Senior Vice President and CFO, Mike Morris. By now, you should have received the press release announcing our first quarter 2018 results, which was furnished to the SEC on Form 8-K and on the wire yesterday after market close.

Please be aware that during this conference call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the company's outlook for the first quarter and fiscal year 2018.

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

For additional information concerning these risks and factors, please refer to our filings with the Securities and Exchange Commission and the press release and webcast presentation relating to this earnings call.

The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. And now I'll turn the call over to Mike Morris, Senior Vice President and CFO of Forward Air. Please go ahead..

Thank you, Nick, and good morning to everyone on the call. Before we get to Q&A, we would like to update you on a few strategic and other items. On the strategy front, our LTL group is continuing to make investments in drivers and expanded capacity to provide our current customers with dependable, expedient and readily available freight movements.

To grow its customer base, our LTL team has also begun serving the expedited segment of the 3PL market, which we believe is a $2 billion addressable opportunity.

It remains early stages, but we have implemented local pickup and delivery at the terminals that will initially participate in this initiative, and we have our tariffs loaded in roughly 175 transportation management systems.

We're excited about being in a position to provide sustained service to our current customers while penetrating the 3PL market to selectively supplement our existing density with heavier-weight shipments.

Our Truckload business continues to implement the McLeod operating system, which will help us grow by improving our load visibility and real-time decision-making. The dry van business in our Truckload group has been migrated to McLeod, and we're in the process of converting the refrigerated business.

We're also enhancing our focus on growing our nonpharmaceutical refrigerated offerings as we see a strong secular growth trend for this mode. Our Intermodal group is pursuing additional acquisitions. We're now a top 10 drayage provider, with an annualized revenue run rate of $175 million.

We have a strategic road map of organic and inorganic investments, which we believe can grow this business to a $250 million run rate in the next 2 to 4 years.

Finally, while our Pool Distribution group continues to strengthen its position in retail where it does all of its business, we're also exploring other verticals where this final-mile distribution model makes sense, such as health care, hospitality and parts distribution.

In total, we believe that these initiatives will broaden and strengthen our premium service footprint and enable us to become a larger, wider-reaching, asset-light freight and logistics company.

Regarding capital allocation, we repurchased $20 million of stock during the first quarter of 2018 and have reduced our year-over-year quarterly share count by 2.1%. We did not incur any additional debt during the first quarter, and our leverage remains at roughly a 0.25 turn of EBITDA.

Over time, we will continue to buy back stock because we believe in our growth initiatives. We will also look to optimize our capital structure by carrying a more prominent level of debt, which we do not expect will exceed 1 turn of EBITDA. As we described in our past few calls, the standard for revenue recognition has changed in 2018.

We are not reporting our linehaul revenue on a percent-complete basis and our fuel surcharge revenue on a gross basis. Our prior period is also presented under these new rules in order to provide an apples-to-apples comparison. We will continue this approach each quarter for the balance of 2018.

In our 2018 10-K, we will present five years of historical data recast under the new rules, consistent with our full retrospective adoption of this accounting standard. One final item before we wrap up our prepared remarks.

Historically, we have self-insured our automotive liability risk up to $1 million and have purchased layers of external insurance above this retention level. The current challenges in the insurance market for trucking companies have been well publicized.

And those challenges, combined with some adverse loss history of our own, resulted in a difficult insurance renewal process this year. With much effort, we were able to economically procure insurance for our Truckload and Intermodal businesses.

However, for our LTL and Pool businesses, we could not find reasonably priced policies for our initial coverage layers. As such, we chose to self-insure these primary layers and retain a maximum claim exposure of $7.5 million, with external insurance policies kicking in above this level.

These policies also contain limits on our aggregate exposure at various layers, which reduces our risk if we ever did experience more than one significant claim. The specifics of our self-insured coverage will be provided in our 10-Q, which will be filed today.

For the balance of 2018, we estimate that the cost of our consolidated automotive liability risk will rise slightly. The premiums we are saving through self-insurance should help mitigate this cost inflation. We are also exploring establishing a captive insurance company to generate additional economic benefits.

However, we are more exposed to claim volatility, both favorable and unfavorable, than we have been in the past. From a guidance standpoint, we will project costs that are actuarially predicted and will not forecast additional claim volatility.

If any excess volatility impacts our actual performance relative to guidance, we will provide commentary to that effect in our future earnings releases and calls. With that, Nick, let's open the line for Q&A..

[Operator Instructions]. Our first question today will come from the line of Todd Fowler with KeyBanc Capital Markets..

Great. I guess maybe just to start, can you give us some comments around purchase transportation in the Expedited LTL business? We understand that capacity is tight right now and that third-party costs are going up.

Can you give us a sense of how much outside capacity you were using during the quarter? And how we should think about purchase transportation as we move through the year? Are you going to be able to recruit more owner-operators and kind of reduce the outside third-party capacity? Or will it be at this level as we move through the next couple of quarters?.

Let me give you a quick commentary, and Mike can give you the actual numbers. But PT continues to be a struggle for us. Finally, over the past few weeks, we've seen a change in terms of our ability to recruit, what I call, significant numbers of owner-operators.

So as an example, this week in our class, we have up to 26 people, I believe it is, which is a big number for us. We were very pleased with that and with the hard work of our recruiting team. That has to continue. Throughout the quarter, we have a lot of ground to make up.

So we're really focused on that initiative in the entire company, and a number of programs are going on there. So perhaps, Q2 will have much better news in the PT front. As far as what we're finding in the excess markets in terms of purchasing the transportation, that has leveled off.

The pricing has gone away from the craziness that we have experienced, let's say over the last 6 months, and has really found a good area and not as bad as it has been. So a little bit of relief there as we go forward.

And Mike?.

Yes, Todd, for the first quarter, broker power was 24.5% of miles for LTL versus 11.8% of miles in the prior period quarter..

Okay.

And Bruce, just the comments on the improvement in the recruiting classes in the past 2 weeks, is that a seasonal impact? Is that the -- is that company specific in your initiatives? Or what do you attribute to seeing kind of the improvement more recently on the recruitment side?.

I'm hoping it's because of all the hard effort that our people are putting in classes where they mean to be. I would tell you, and I can't tell you this factually, but I would tell you.

I believe that when the ELDs enforcement went in, in early April that some companies, and they would have been smaller ones, people you'd never heard off, they just basically shut down total drivers, go get another job. And so we may be reaping the benefit of that. I can't sit here and tell you that absolutely, but I do believe that's the case..

Okay, yes, that makes sense.

And then, can you help us think about the pricing environments and maybe your approach to pricing right now, given some of the capacity costs and what your expectation would be, either what you have embedded in your second quarter guidance for yield and pricing improvements, but also maybe some thoughts around improving yields either through a GRI or just general price increases in the market right now?.

Well, on the LTL expedite, in that group, we have almost daily conversations on what to do in the pricing. That includes not only just an increase, but are we structurally correct in our pricing. We have seen a movement to minimums. So if we have to look very hard, do we charge enough for minimums, because that's a big cost item.

And our predictions are that will continue to increase into the future. So going back, I can tell you, structure may be more important than the actual percentage of increase we go after. I would tell you that you probably sometime in the Q2 will see us do something. Exactly what we're going to do, we're not prepared to say today.

In the Truckload environment, as I've said earlier, that's kind of calmed down a little bit, as you would expect this time of the year. The good news is our Truckload group got -- finally got through all our contracts, finally got all the increases we needed and in March, made money to -- on a really good basis of business, if you will.

So we're really comfortable that they're going to come back and they're going to have a good quarter and a good future, now that we have them priced correctly. We don't see in general terms, that pricing going much higher, but we didn't see going this high a year ago. So I'm not sure how good we are at that..

And Todd, just to get to your question about guidance, but first, one comment on building on Bruce's structural comment. For example, in the first quarter, LTL raised its fuel surcharge rate 2% and introduced a new floor at a lower diesel price, if diesel prices do go back down. So that's an example of targeting price at a particular cost.

In terms of the guidance, we're expecting system yield ex fuel to be flattish.

On the one hand, you have core linehaul pricing, legacy airports, airport pricing moving in a certain direction, but we also have these growth initiatives which bring in a different mix of freight that have varying weight per shipment and length of haul characteristics that can impact reported yield, which as you know is not price.

So in terms of our outlook, flattish outlook for yields for the second quarter in our guidance..

Okay. That helps, Mike. Just a couple of last quick ones.

With the rollout of the 3PL initiatives, how do we think about -- is that -- should we think about it as the number of terminals where you have pickup and delivery operations to support that? Should we think about that as do you have a revenue number that you're seeing here in the quarter or a tonnage number that we're seeing in the quarter? How should we think about kind of benchmarking the progress that you're seeing with that initiative in your reported numbers?.

Yes, I mean, what we're going after is higher-weight shipments to increase the density in our existing capacity. That's where we're starting. So over time, we'd like to see the total company's weight per shipment grow.

That 3PL initiative to bring in heavier-weight shipments is competing with the overall growth of the rest of the LTL company, but we should see it help our weight per shipment grow.

And one of the things that we've done to help you gauge progress on this is in our new disclosure, operating statistics, we left a line called total shipments with pickup and/or delivery. We sought to conform to the broader LTL universe. A common carrier wouldn't contain such a line. But given our unique nature, we wanted to have that line be there.

You should see shipments with a pickup and/or delivery grow as we grow in the 3PL space and, more broadly, in the door-to-door space of which 3PL is an important part. So I think those 2 should be statistics that should show growth and improvement over the medium term as we work on this initiative..

But Michael, are you willing to share how many terminals you have the pickup and delivery operations in? Or is that not something that we should be focused on because it can be skewed if you've got it in a large market? It means something more than if you have it or if you don't have it in a small market?.

Well, we put it in the markets where it made sense. And so I don't know that it's necessarily these many terminals..

I think candidly, Todd, I wouldn't get too excited over that in terms of its importance. What's important is that we grow that market. That we -- if you look at our average weight per shipment, it's around 600 to 650 pounds. And if you look at the normal common carriers, it's a much higher number. It's over 1,000 pounds. That's what we have.

That's the distance, the gap, we have to make up..

Okay. That helps, Bruce. Okay. Just the last one I've got. Mike, do you have any comments on -- I think that there were some general comments in the release about weather. Do you have any quantifiable numbers? And I know it's kind of a, be a much more art and science to specifically say how much weather was during the quarter.

But can you help us maybe think about couple of line items or some where weather would have shown up in the numbers, just from a kind of an, I won't say adjusted, but just to give us a sense of kind of what the underlying cost structure is?.

Yes, and I appreciate your recognition of the art versus science in gauging the effect of weather. Our best estimate is it cost us $1.2 million of operating income in the first quarter, $650,000 at LTL, $300,000 at Pool and $250,000 at Intermodal. So that's -- and that's a period on period.

If we looked at what weather was in the first quarter of last year so that it contemplates that, you see it in lost revenue. You see it in higher cost as a percentage of revenue because of the absence of the revenue and also because your networks just get gummed up.

This past quarter, we had more severe weather in places where there used to bad weather. I think there were 4 nor'easters or something like that. But we also had bad weather where there used to good weather, like ice in Houston. So it was a stiff headwind, but that's what we have to do, we have to manage through it. But I think it cost us $1.2 million..

Okay, understood. Good results in light of all of those things and a good outlook for the second quarter..

Thank you..

Thank you, Todd..

Next we'll go to the line of Bruce Chan with Stifel..

Mike, you mentioned that higher weight per shipment was one of the primary goals. This kind of new push in Expedited LTL kind of offset some of these negative mix trends that we're seeing.

I'm wondering is there also a meaningful difference in the length of haul of this business as well? And can you give us maybe some insight into what those trends are seeing as far as the mix of the industrial heavyweight business length of haul versus some of the traditional business?.

Well, I'll tell you that the shipments that we've seen such far -- thus far in our early growth in this, it certainly has attractive length of haul characteristics similar to our legacy length of haul characteristics. So we like that aspect of it.

What we need to do to really bring home the profit we're going after though is get that weight per shipment up..

Got it. And then on the TLS business, can you talk a little bit about what happened there in the quarter on the revenue side? I don't know if it was a maybe a large customer loss that had something to do with some of the pricing discussions.

Can you maybe give us some color there?.

Yes, Bruce, I think it's important to take a step back and look at the path traveled with our Truckload group, beginning with this tightening cycle. So last quarter, you may -- in the fourth quarter you may recall, we put a loss up of about $0.5 million.

As the Truckload market tightened and tightened rapidly, our Truckload team stuck by its contracts and honored its relationships with very large, sophisticated customers that are important part of this business, common carriers, airlines. These aren't companies that you leave hanging when you have a long-standing relationship.

And so we ran some loads that are loss, and we took it on the chin. In the course of the first quarter, we went back and had those conversations. We can't run unprofitably. That takes a little time, and we worked our way through some contract repricing.

But as part of that, the team had to selectively turn away loads, where they couldn't provide an alternative that was profitable to us.

And so you saw a gradual decline in the revenue in the shipment count and the miles over the course of the quarter, but you also saw the revenue per mile start to work its way up as a result of the contract discussions. And so you end up with a breakeven position in the first quarter, and now we can start marching forward.

Hopefully make a good progress on the recruiting to get our fleet back up and then have available capacity to serve. And the demand, it's still there, but at a price that afford some reasonable profit for us. So I think we're in a period of transition to a tightening Truckload market.

This is kind of the -- if it's a three or four scene play, this is the end of scene two, and we should be looking forward to a much greater results in the next two quarters. The last comment I'll make is, inside of these results is our refrigerated offering. And refrigerated offering is actually showing some nice growth.

It's coming of a lower base, but we have turned the corner and are starting to see continued growth in that mode. That's kind of behind these numbers as well..

Great, that's very helpful. And then just one final question since you're on Pool. It's nice to see some margin stability kind of throughout the year in that business. I know you guys have been talking about ramping up some of the other verticals to help with that trend even further, maybe do some margins a little bit more.

But it feels like we've been talking about adding other verticals to Pool for a while.

I'm just curious, what's involved in the process of bringing on other verticals, what kinds of things that you guys are doing and sort of what are your expectations as far as when those other verticals may come on?.

I don't want you to start with a negative attitude towards Pool like David. It's a good question. And we have talked about it in the past. And we have struggled in giving our Pool offering into other verticals. So you're absolutely right on that count. We have taken a different approach this time.

We've had a modification or resurgence of our sales group within the pool segment. And we really believe that we're finally getting on the right track. But probably as you know, you can't just walk into some of these companies and offer the services and you get the business tomorrow. It's a long process, much longer than LTL Expedite, as an example.

But once you get the business, it's very sticky. So Roger and his team have put together a really good plan. We have really concentrated, since it started at new year, on entering and acquiring different verticals.

Now we may be sitting here in Q2 for our earnings call in and not have any good news in this area, I hope we do, but I would stress we -- each account's probably a 6 months to a year sell cycle..

Our next question or comment comes from Ben Hartford with Baird..

Sorry, I jumped on a little late. So I missed the opening [indiscernible]. So I'll try not to be redundant. But I did get, Mike, your comment on the second scene or the three or four-scene play. Maybe for both of you, your perspective on this current cycle, obviously, there's a lot of moving parts. It's coming way economically.

It's driven by supply of the driver, in particular Class 8 orders are spiking, let's say, halfway through this current pricing cycle or at least 6 to 9 months in.

I guess, I'll start with just a broader perspective from you guys as to how long this particularly acute period of tightness last? Is it wrecked by equipment orders? Or is this driver related and therefore more chronic? And maybe a part of that -- or do you -- how are you leaning as it relates to demand outlook through the balance of the year?.

It's a good question, Ben. I would tell you this to begin with. Number one, the demand is very solid. We were concerned going into April that April tends to be a little bit soft in our cycles, but it's very strong. It's very strong.

So that's indicative to us that this demand rate that's going on now is going to continue at least through the end of the year. That could all change in October, who knows. But that's how we're planning for. The equipment order numbers, obviously, are important to a lot of people. They're not to us.

Because you wouldn't have all the equipment world if you don't have a planning to put in that seat, it's of no value. So we really are focused on drivers. I think if you talk to the most of the companies in the business, they're focused on drivers and not on trucks. So although the truck manuals are pretty impressive.

Does that make any sense?.

Yes, no, I think that's inconsistent with -- I think it's very logical. So to that point, obviously, you start to face some easier comparisons on the Expedited LTL side. I think you mentioned flat yield sequentially, Mike, in the second quarter. But what is the level of confidence? You've got robust demand. You've got easing comps.

Presumably, the balance, as it relates to outside PT, can -- begin to normalize.

What's the level of confidence that you can begin to realize operating leverage in Expedited LTL in the back half of '18 and 2019?.

It's all about purchase transportation. Our other cost saves, I'll say quickly, they have done a terrific job here, which kind of takes a bad problem makes it a little bit better, not a whole lot better, but I think our people adequately focused.

We're going to -- you're going to see us to make gains in purchase transportation, more specifically in our owner-operated fleet count. And with that, you will see the power and the leverage of the full Intermodal, and that's -- you're talking between 200 and 400 basis points alone..

And that 200 to 400 basis points, is that over time, is that kind of line of sight from current levels? You think 200 to 400 basis points is still reasonable?.

Yes. And it will be -- it's not something that will occur tomorrow, but it will be a -- we're going to build on throughout the year..

Okay. So in sum, I mean kind of upper teens type margin profile is still reasonable that the low 20s that you enjoyed in the mid-2000s is going to forget about those, but upper teens is still reasonable and attainable.

You just need some normalization in demand versus supply?.

That's exactly right..

Okay. On the Intermodal front, obviously that market's been particularly tight in the first quarter.

How are you thinking about -- I mean, the acquisition, has that tightness in the first quarter accelerated some of the acquisition opportunities in Intermodal, in particular?.

I'm not sure you can correlate that, Ben. Perhaps, that's a case, but we haven't had anything in particular come up with those 2 factors. So I'm not sure you can put that together. We do have a robust pipe. Our team at CST has done a terrific job, as they always do. They are -- they have been able to get price increases.

So everything at CST is really going strong right now..

Okay, good. And then just back to Expedited LTL.

As you think about the endeavor to broaden the addressable customer set there and you think about the network and potential terminal adds, I should -- when I'm speaking of the network and speaking specifically to the terminal footprint, when you think about potential adds away from that incumbent adjacent airport type setup, what's a reasonable time line to think about the probability of beginning to add terminals that might be in a different footprint or location from what you have there? Is it -- are you are a couple of years away? Is that five years away? How are you thinking about that?.

Yes. Your guess would be as good as ours. I think what will drive that will be our ability to penetrate 3PLs who require a presence in some of these secondary cities, if you will. Basically, we're in every primary city. So we're in good shape there. We're in a number of secondary cities. But our business penetration will guide us there.

So that could occur in July of this year or it may occur in 2, 3 years. We're very aware of that fact, and we'll deal with it as we need to deal with it, if that makes sense..

That does conclude Forward Air's First Quarter 2018 Earnings Conference Call. Please remember, the webcast will be available shortly after this call on the Investor Relations section of Forward Air's website found at www.forwardaircorp.com. You may now disconnect..