Tom Schmitt - President and Chief Executive Officer Mike Morris - Senior Vice President and Chief Financial Officer.

Jack Atkins - Stevens Ryan Greenwald - Wolfe Trahan & Co Seldon Clarke - Deutsche Bank Todd Fowler - KeyBanc Kevin Sterling - Seaport Global Securities Ben Hartford - Baird Bruce Chan - Stifel.

Ladies and gentlemen, thank you for standing by .And thank you for joining the Forward Air Corporation’s Third 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 our CEO, Tom Schmitt; and CFO, Mike Morris.

By now, you should have received the press release announcing our third quarter 2018 results, which was furnished to the SEC on Form 8-K and on the wire yesterday after the market close.

Please be aware that during this conference call, we will 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 fourth quarter and fiscal year of 2018 and those forward-looking statements identified in the presentation.

These statements are based on current information and our current expectations. As such, they are subject to risks and other factors that may cause actual operations and results to differ materially from the 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'd like to turn the call over to Tom Smith, CEO of Forward Air..

Thank you, Lia. And good morning to all of you on the call. My name is Tom Schmitt, I've recently became the CEO of Forward Air. And I can tell you I am pumped to be here.

Since I joined in early September I've been immersing myself in the culture, the operations of Forward Air, leading our teams, going across the country, visiting office and all this, and learning and what makes this great, great company tick.

I've been around this industry for 25 years and I can tell you I'm incredibly impressed by the capabilities, the commitment of our people and our underlying growth potential.

Our core competencies in premium service offerings and our operational excellence positioned us well for both secular growths in expedite and on other value added segment, as well as in the new businesses. Forward Air has a lot of runway to go across the increasingly optimize supply chains of both retail ecommerce and the industrial complex.

What we are up to in the next few months, in the upcoming months, our leadership team will be focused on becoming an enlarger, asset light freight and logistics company. We have a terrific business model and a very, very solid core strategy, and we will be somewhat aspirationally now thinking about ways we can accelerate our growth.

We'll ask and answer the how high up question and there is tons of untapped upside. We will review our portfolio to ensure we have the right offerings for the future. We will consider organic and inorganic investments to achieve our objectives, with a careful focus on returns results matter and we will not confuse efforts with results.

And along the way we'll also have some fun as a team of 50,000 plus teammates. As a continuation of our strategy to grow into intermodal, we are please to announce the signing of a definitive agreement to acquire the assets of Southwest Freight distributors for $16.25 million.

There's a good example of our inorganic growth strategy in places where it matters. Southwest is a Dallas, Texas based premium drayage provider. We expect the transaction will close in a few days. And we anticipate that Southwest will contribute about $20 million of revenue and $3 million or EBITDA on an annualized basis.

I truly look forward to bringing you strategic updates such as this one in future calls. And as we execute on our growth strategies. Before we go to Q&A, two important points. The first one, first and foremost a big thank you to Bruce Campbell who got this great place to where it is today.

And enables us as a team to really make a remarkable reality happen going forward. And the second point before we go to Q&A, let's get some meat around the bone and get some more specifics from our CFO, Mike Morris.

Mike?.

Thanks Tom. Our quarterly results were adversely impacted by vehicular claims related expenses which we recorded in other operations. Specifically, we saw these costs rise $1.4 million more than we had expected, which was worth roughly $0.03% to $0.04 per share. Let me take a moment to explain the nature of these charges.

GAAP rules require that we recognize expenses today for future costs that we may experience related to our current vehicular claims. These expenses are predictions of future losses on these claims as the claims develop over time. We therefore refer to them as lost development charges and they are a non-cash expense for the period.

As we've discussed in prior calls, we are now self-insuring to a much larger extent. We anticipate these loss development charges in our forecasts, however, last quarter the actuarial estimates of these expenses came in $1.4 million higher than we had expected. We've subsequently improved our forecasting process to better project these charges.

Our greater challenge, however, is to keep claims from occurring in the first place with safe operations. Since last year, we've made significant strides in our safety initiatives. Our safety culture is very strong, even in this tight driver market we will disqualify an owner operator who does not meet every one of our safety standards.

On a year-to-date basis our DOT accidents with recorded injuries are down per 71% and barring any severe incidents, we don't expect further vehicular claims surprises like the one we experienced this quarter.

Regarding capital allocation, we repurchased roughly $17 million of stock during the third quarter and it reduced our year-over-year share count by 2.8% per. We did not incur any additional debt during the third quarter and our leverage remains at roughly a quarter turn of EBITDA.

Finally, we're pleased to announce a 20% increase in our quarterly dividend from $0.15 to $0.18 per share. Our dividend is an important component of our capital allocation philosophy, and we believe it should rise over time commensurate with increases in our earnings.

Between share repurchases and dividends, we've returned over a $0.25 billion to shareholders over the past five years. And with that Lia let's open up the line for Q&A..

[Operator Instructions] Our first question is from line of Jack Atkins with Stevens. Please go ahead..

Hey, good morning. Thanks for taking my questions. And Tom congratulations on your new role at Forward Air.

So Tom I'd like to start off asking you a sort of a broad question and you touched on this too to some degree in your prepared comments, but if you could, I'd be curious to hear you sort of speak about your vision for the company as you look out over the next three to five years.

D you see the growth coming in the existing sort of core business lines around intermodal and Expedited LTL or do you see Forward Air expanding into other parts of the asset liable or just accept work? Could you see Forward Air expanding internationally? Yes, I'm just curious to know sort of what your focus will be as you look to put your stamp on this company over the next several years..

Yes, first of all, Jack thank you for the question and for the interest. And I think the quick answer would be yes. And that more specifically, yes, we will be obviously focused on the two businesses that have had remarkable close to double-digit or in some cases actually consistent double-digit margins, expedited LTL and the intermodal business.

We've got the machines going there which my experience, my background of driving profitable growth really just makes me excited about how fast, how high is up for those places. And we only own a limited share of the market in those two spaces. So there's much more untapped upside in those spaces.

So the answer is yes we will be doing more in those two businesses. The second yes Jack is also we, I'm very, very confident that this is also where kind of value focus comes in. We can bring more value to the other offerings and business segments that we are in. Good examples to pull distribution business.

We've been focusing a lot on maximizing and optimizing this business for our retail customers. We continue and will continue doing that. And at the same time whether it's spare parts, whether it's medical, whether its telecom, there should be other segments where we can bring the same value to the table. So I believe we're far from done there either.

And as you can tell Jack I'm proud US citizen but I wasn't born and raised here, so I also know how to look across borders. We bring here the world to America, moving America forward with Forward Air and at the same time I think we can and should stretch a bit more north and south. As you may know, we actually do have stations in Canada.

We do have a partner in Mexico and obviously NAFTA and the future of those three countries will play a big role, but again it's a bit early for me to say, I still believe we will be looking left and right. But at the same time, I want also want also make sure, we're going to keep the main thing the main thing.

So what you've been relying on in the past, you will see going forward also which is going to be a highly rigorous focus on results. And we've seen them in some of our businesses. We're going to keep driving that.

I've grown up in a culture of precision, and we're going to bring that precision to those businesses, but at the same time, yes, we will be looking to more from the core businesses. We're going to be looking for add-on and value creation in the other two businesses beyond expedited, intermodal.

And yes you we going to also stretch and see whether there is more upside bringing more of Forward Air excellence to more people even beyond of our borders..

Okay, Tom, thank you for that, that's awful response. And I guess sort of shifting gears and sort of looking back more towards the third quarter, Mike maybe this one's for you.

Is there a way to think about the purchased transportation costs and core particularly with an expedited LTL, what percentage of your miles or outside miles versus owner/operator miles? and I guess you guys have been sort of grappling with how to get those costs under control for a while now.

At what point you think we're going to be able to start making some progress there?.

Thanks Jack. First the numbers answered to your question, the broker power was 28.3% of miles in the third quarter of 2018 compared to 13.9 in the third quarter of 2017. It's still a tight market, that's the first challenge we've been facing. It's not just rate in this market.

There are a lot of other softer factors around attracting and retaining drivers. And Jack when you peel back on recruiting and look inside, we've actually been making good traction on solos, where we've fallen short is teams. And to be an expedited service provider we need teams to be around 40% of our fleet.

So that we can service long-haul lanes within the service requirement standards that we have with our customers. So a generally tight environment, coupled with an even tighter environment for recruiting teams is the first place where we ran into some challenges this past quarter.

But I will note --my prepared remarks that as part of our safety initiatives, we are not going to let anyone into this fleet that we don't think will operate to our safety standards even if that means we have to have some higher PT for a period of time. We're chopping away at it, Jack, we're making some progress.

We're up a little bit from the end of the quarter, but we're also trying to reinvent how we recruit offering different features, different amenities, different incentives and we will just keep at it, Jack..

Jack, let me -- this is Tom. Let me just add a couple of points to Mike, to your points. The first one is that when we look at growing this place we know obviously there's a one-two punch between kind of commercial progress in terms of sales, marketing, and revenue management on one side.

And the second leg that needs to go equally strong is obviously what we kind of ducked people forward which is being extremely first-class and focused on attracting and retaining talent and that obviously includes the driver pool.

We have had as Mike said we've had actually a good trend over the last several weeks now, a few weeks don't make a trend yet but at the same time we're going to be extremely creative.

and I've grown up also with FedEx 12 years in a people intensive culture we are going to be extremely creative about to, how can you get really first-class in finding ways to make it appealing to people to make Forward Air a top-notch people focus company their professional home.

So more to come obviously, they're not going to confuse efforts with results here either, but be very, very certain that people forward for us is kind of a core thing to make sure we can service that growth that we're going to be acquiring..

Okay, that helps. And I guess just following up on that. I mean obviously the need to recruit more drivers that obviously means that you're having to pay your owner operator capacity more. You're certainly having to pay more when you go into the outside or broker market.

I know you put two GRI through in the last 13 months but you were sort of behind from a pricing perspective going into this year or going into that period. I mean do you feel like there's more to do on the pricing front Mike and Tom as you look out into the next a couple of quarters just given how tight the driver market still is..

Jack, we knew this one would be coming. So but we also have an answer, that's an answer beyond this call. So in my mind in we had the same conversations here as a team.

Every year there is something called Christmas or if you are of a different denomination then there's another event that's like that every year there's Easter and every year there's a pricing review.

And we are going to actually get into that good habit of having annual pricing reviews as and if and when there are extraordinary circumstances, there may be supplementary reviews.

By the way a pricing review doesn't always mean a significant increase, but again very predictably for our customers, for our partners, for ourselves, and our drivers for planning --drivers exactly for planning purpose. There will be a certain date, on that date there will be a pricing review every single year.

And, yes, I think we are --we need to get the same discipline predictability for planning, execution and thank you for making a livelihood purposes available to our drivers to our partners to our customers. So you should be expecting annual rate reviews the same way as many of our other competitors have done it for a long time.

And frankly the same as is customary in many other industries..

Okay, got you, makes sense. Mike one more question on the expedited LTL business. There was a fairly sharp slowdown in growth range from a tonnage perspective.

Is that just because you guys were tapped out from a capacity perspective? I mean the overall macro sounds like it's still fairly strong, how should we be thinking about tonnage growth that expedited LTL moving forward here?.

Yes, tonnage growth was a little slower in the third quarter. I think there was a relative basis a little bit of a macro slowdown from a comp standpoint as we lapped the tightening that began last year. We did have some capacity allocation issues which would also impact tonnage as we look to preserve capacity for some of our more important customers.

On a go-forward basis, we still are looking forward to a solid peak. We think that peak will be higher than last year's peak. I can't say by how much but we are anticipating a good fourth quarter. We think it will have the usual shaping of an e-commerce start and a rush into December.

I think one question mark that I would look to the research community to answer is will we see any pull forward into December if there are tariffs looming in the new year. But that's some commentary about outlook for tonnage on LTL, Jack..

Okay, one last one. And I'll hand it over but within expedited truckload, obviously we would like to see some stabilization from a profitability perspective there, but we're still well below prior levels of profitability.

I mean what's the strategy there over the next couple of quarters to get that business back to where it should be from an OR perspective..

Yes, Jack. I'd say there are two prongs to that strategy and you have to acknowledge the progress the team is made over the past several quarters, coming out of a difficult reaction to the tightening that began this time last year.

The over the road driver is a difficult one to recruit and we continue to focus on recruiting and building back our owner/operator fleet. But in parallel, the truck load group has done a fantastic job of somewhat reinventing itself around the broker model. And working with customers to have the ability to broker transactions.

They've added nearly a 1,000 broker, brokered carriers to their database. And we've had a lot of success restoring profitability and growing our spread between revenue per mile, cost per mile, while still using brokers. And I think those are going to -- those strategies are going to continue in parallel.

We'll see when the tightening cycle around driver starts to loosen to the point where we could pick up more owner operators, but at the same time we'll continue to leverage our capabilities around brokers.

How those two paths play out, Jack, will kind of determine the OR you land at, you're not going to get as much leverage off of a brokered load as you will one run by an owner operator. But we do believe, however, we can continue to grow top-line revenue and profit, but margin will depend on how much leverage you can get on your own your fleet..

Next we go to line of Scott Group with Wolfe Research. Please go ahead..

Hey, guys. It's Ryan Greenwald on for Scott. Thanks for taking our question. Tom, on the new role.

Are you guys able to share monthly tonnage trends and what you're kind of seeing so far in October?.

Sure. So at expedited LTL tonnage per day for the quarter was up 1% in June comes --I'm sorry July it was up. 0.7%. In August, it was up 2.9% and in September it was down 0.2%. And thus far in October tonnage per day is down 2.8%..

And do you have any thoughts on the deceleration?.

We've anticipated the deceleration in our outlook. We still, however, to my earlier comments are anticipating a strong fourth-quarter peak season..

Got you, and as the stock market softens you touched on this a little bit in your commentary, but should we start to expect meaningful LTL margin improvement or are there kind of enough other factors and they're between tight driver markets that you might not see meaningful improvement in the near term?.

It really depends I mean we're cautious in our outlook. We are expecting margin improvement in LTL, but I think kind of how the fourth quarter plays out and from a tonnage perspective we'll probably be more of a driver of margin improvement relative to recruiting.

We are making traction on the recruiting though and we do anticipate continued year-over-year margin improvement at expedited LTO..

There's a second part, Ryan, to add to Mike's sense or the second part really is --we are continuing to actually complement and to some extent actually complete the services that we are offering in expedited LTL going from what used to be an airport to airport model to a more complete origin to destination model.

So as we actually are being more complete with the value that we create with the offerings that we have with the value adds to assessorial that come with it, this goes back to my earlier point. We also obviously will be extremely precise with our customers when we create value for them.

When we add services; when we articulate that value, when we quantify that value and frankly when we also capture our fair share of that value. So when it comes to rigorous surcharge assessorial management for services, we actually provide to our customers that their value will be all over that..

Right and it is that kind of higher margin business than your legacy?.

So, all two points, like one is it's more sources for margin because there's more services and the second part is once you actually provide those services you also need to be tuning to commercial marketing which is actually charging for them..

Make sense and then lastly for me before it passes up.

Are you guys able to give us a sense for the margin targets for each segment looking out to the next year?.

We're not going to give guidance into next year for margins per segment..

Next we go to line of Seldon Clarke with Deutsche Bank. Please go ahead..

Hey, thanks for the question. I just want to get a little clarity on the deceleration and LTL tonnage. I think on the last call you talked about being more selective, and like some of this is your initiative taking away volume and then some of it is a capacity constraint.

Could you just help maybe quantify how much volume was constrained by capacity and then maybe just give us a sense of what some of those initiatives are and what exactly do you mean by being more selective? Are you kind of leaning into the more industrial heavy goods and walk away from some retail business? Just some color there would be helpful..

Seldon, thanks for joining the call. So I want to make sure I get the time frame of your question understood. When you talk about deceleration, I assume you're speaking towards the end of the third quarter..

I guess really just from the second quarter. So they grew up over 8% - yes really just kind of from April or May..

Part of it is just a comp standpoint. We did see in the legacy backdrop a bit of a slowdown notably on the airlines, airline tonnage was down in the third quarter pushing against that have been growth initiatives. So our door-to-door offerings are growing, within that our 3PL offerings are growing from a tonnage perspective.

And it was a bit of a push when you put it all together. On the capacity side, there is a capacity angle to this. There's certain business you're not going to win unless you're pricing it off in an owner-operator fleet.

And if that fleet is a scarce commodity then you have to decide where you allocate it and you lose some business opportunities like distributions or things like that. So I would say, Seldon, is it's a mix of all that stuff kind of coming together in the third quarter. .

At the same time very, very confident that our us going after additional segments very rigorously and with positioning to some extent completeness, international forward of flying goods in there oftentimes high-value very time critical leave us a lot of runway for growth.

So the initiatives Mike you mentioned some of them retail, international forwarders. There's a lot of untapped upside for us, for the best company in many aspects of what we do having a market share that we have that's in most cases single digits. Frankly makes it pretty excited about what's possible..

Okay, that's helpful.

And just continuing on that longer term and you don't have to give, I'm not asking for particular numbers on guidance or anything, but what's the right way to think about your expedited LTL business from a top-line perspective longer term? Like is this in terms of growth, are we thinking about GDP plus ecommerce, freight forward volumes.

What's just the right way to think about the longer term runway for revenue?.

Yes. I mean so revenue which is going to be different than profit.

From a revenue perspective it's the GDP plus to an e-commerce type of growth rate would be my expectation ex fuel, and then you have to have a view on the macros and how fuel is going to behave because the fuel surcharge plays a role in the change in revenue, but we do feel longer-term we continue to have a secular tailwind around ecommerce type offerings.

And I mean that in a broad sense not necessarily going to your front door. But kind of that whole expedited nature of the supply chain. We think we have a role there and then you got to remember fuel. And wherever you think diesel is going to go..

Let me, Seldon, let me say, I have two data points and this is a perhaps a bit more forward-looking over a longer period of time , if you look at our Forward Air today 2018 and very most likely will end up, and I'm referring to revenue the same way you do, Seldon. And if you look at the company five years ago Forward Air more than doubled.

And then if you take the remarks I made over the last few minutes about untapped upside single digit market share operational excellence in what we do just as a headline level I got every reason to believe that what we saw from five years ago to today and what we're going to be seeing between today and five years from now will be somewhat very similar.

So we're far from done and I also would have to believe that if you're the best at what you do that you should be able to outpace the growth of the industry. So some of mark out of the comments that Mike made here in terms of industry behaving a certain way but then we behaving in a certain way that certainly is that I should set us apart from that.

The second point I want to make is that's as organic growth there is inorganic growth. I talked earlier about the acquisition in the intermodal segment with our Southwest. Even on that front with the inorganic growth I believe we are far from done..

Okay, that's very helpful, and then just kind of a quick housekeeping question.

Are there any one-off items like similar the vehicular charges or maybe the acquisition of Southwest that are impacting the fourth-quarter guide?.

No, not that I would call out. Our outlook I mean it is in already baked into our guidance. I mean what caught us off -guard was the unexpected nature of that charge. .

So that should come back to that like $1.5 million or wherever it is well..

Well, we will see, but yes I don't want to -- I'm going to call anything out for you.

So there's nothing in your guidance related to it..

Whatever is in our guidance is what we believe is going to happen..

Next we go to line of Todd Fowler with KeyBanc. Please go ahead..

Great, good morning. Tom welcome, Mike, good morning. Tom maybe just to follow up on where Jack started the Q&A.

What would the thought process be on your sharing some of your strategic initiatives with the investment community? What should we expect as far as how -- can you map out where you want the company to be? What are you going to lay out for us from some things that we could --we should be following and what should we expect from a timing standpoint?.

Yes, great question obviously. And this is one of those things where it's better to be somewhat solid, rigorous, and precise than to be fast. So at the same time I'm very kind of constructively impatient. And this constructively impatient I think together with me, in tandem with me. So what does that mean? We have I think good observations.

We just had our board and committee meetings earlier this week about again some of what I talked about the upside in specific spaces. Obviously, what we will be doing Todd is over the next few weeks and months, and I say few weeks and months I'm talking about not 12 months, and I'm also not talking a week or two from now.

But over the next few weeks and months, we need to be taking those observations, some of the initiatives that we, that Mike just talk with the headline level and articulate them and quantify them, and obviously you and the investor community will be part of that communication process.

So I think we're very, we make good progress, making strong observations and kind of what's the excellence that we can build on. How can we make more out of this goodness and now over the next few months, we're going to turn this into specific initiatives with meat around the bone and numbers next to it..

Okay, so sit tight for now but stay tuned maybe..

Yes. I think it's fair for us. I mean in all fairness that's a good way of putting it. I mean this place didn't start with me joining six weeks ago, but in terms of us as a team creating joint initiatives with numbers behind it. Obviously, we have to be somewhat again as I said before precise, rigorous rather than being weak or so quicker.

So there's going to be precision and rigor, but yes you should expect to see something over the next few months..

Okay and then just a couple of ones on the numbers and this is kind of asked and answered a couple of different ways, but with the expedited LTL results here this quarter, yields did take a nice step up and I know that's a function of some of the pricing initiatives, but then tonnage decelerate.

And I know that's comparisons but a high-level we think about if you're pushing price do you lose a little bit of volume? Do you have a sense if there was any share shift because of some of the pricing or do you think that that's the tonnage change is more just a function of the comps and what's happening in the in the macro environment?.

I think the bigger picture was the latter part. I mean obviously when you adjust price it has impacts on tonnage. Sometimes those are impacts that you desire to occur based upon the way you designed your price increase. But I would not look at price as the driver on that.

I think it's more of the bigger picture commentary that you provided in your question, Todd..

So you don't feel like Mike that you overshot on price now you lost some share because of that?.

No. I think to someone's earlier I think was Jack's comment, I think we're a little behind and so, no..

Okay, fair enough.

And then Mike in the fourth quarter guidance just to be clear is you anticipating tonnage to be positive in 4Q?.

Yes. Yes. We're anticipating tonnage to be positive in 4Q. And we also anticipate a shaping of the peak similar to what we seen historically..

Got it, okay. And then you commented that there's some puts and takes. I mean that the airline tonnage was down that the door-to-door is growing and you said of the 3PL initiatives also growing.

Is a 3PL initiative at this point I mean is it enough to move the needle? I mean as a contributing percentage point of tonnage growth or is it still too early to really quantify or put some numbers around what you're seeing from that?.

I don't have the math as to how much it moved the needle but it is growing nicely, but we have a ways to go. We're still coming off the small base. We're still building our brand, but we are tracking with our goals internally..

Okay, got it. And then just maybe the last one that I have. The intermodal margins have been very strong for the last two quarters. You actually get to a level where the legacy LTL business has been and it's kind of perceived as one of the industry leaders from a margin perspective.

Is the margin level in intermodal sustainable as you continue to grow? Is there leverage in that business if you layer on more of these small tuck-in acquisitions that you see more margin improvement? And I understand that if you don't want to put out guidance for 2019 I'm just trying to think about what is the margin profile that intermodal business because it's a little bit different from what we see from some of the pure IMCs in the space?.

Yes. So as we've talked about in the past think about the intermodal business as a series of layers and its bottom is the platform. The CST platform and that's tended to operate at a 10% to 12% margin. And then the layers are all the subsequent acquisitions that are getting stacked on to the platform.

If it's a small acquisition, it'll get absorbed into the platform very quickly and whatever the margin of that target was, it would get brought up to the margin of the platform. If it's a big acquisition then it's mathematically going to be dilutive and it will take a while to fully integrate and that's what we experienced with Atlantic.

The Atlantic margin has been improved dramatically since we did the acquisition, but it took a year because it was a rather large one. So if you were to stop, Todd, and just let things run forward, you'd see it walk itself up on a full intermodal segment P&L up to 10% to 12% steady-state margin.

But then you have to overlay your M&A thesis to see what type of dilution would happen and where you are and the process they called as top grading of bringing that target margin up to the platform margin.

So if you're looking for something longer-term it's a 10% to 12% but we're going to bounce around quarter-to- quarter based upon M&A, and where the overall macro environment is..

But the Machine that you're describing Mike has been working actually almost, almost scientifically well.

And to your point if you have a bigger item on the menu, it just takes a bit longer to digest, but the machine works and it's been working very, very precisely to actually get the acquisitions to perform at the platform level and that's more in the 10% to 12% range..

Okay, that helps, it helps in the context of if there's a period where you've got a big acquisition that there would take some time to get it back to that that platform margin, and some of the smaller ones would perform in line, probably sooner than the bigger ones, okay, good.

Okay, guys, thanks so much for the time and look forward to catching up soon..

Next we move to a line of Kevin Sterling with Seaport Global Securities. Please go ahead..

Thanks. Good morning, Tom and Mike. Tom, congrats. Let me share my congrats with you. You joined a great organization. .

Thank you. That CEO in me is thinking the same thing, yes. .

Well, good. And Mike them maybe this question for you kind of talked about the vehicle claims.

Were just more severe this quarter to jab more accidents maybe could share just a little bit more color? I know yourself and largely self insuring but was it just kind of with a little bit more, sounds like was obviously a little bit more severe this quarter?.

Well, we didn't actually have any severe claims. Where we had a gap in our forecasting process was anticipating the amount of this non-cash actuarial adjustment called a loss development.

So if you have an existing claim, you paid out a certain amount on that claim and then the actuaries would come in and predict how much you ultimately payout and you have to book that. So we had anticipated what that incremental expense would be, we just fell short because we had a gap in our process.

So we didn't actually have any claims, it's older claims from last year that kind of start working their way through the data set that the actuaries used to make their future predictions.

We've actually and this is me knocking on wood but we've actually done a fantastic job this year in reinventing ourselves from a safety perspective and beginning that long-term safety journey..

Let me just -- I'm going to attack him here because I'm; this is a great example of the rigor and precision that I talked about.

So on the safety front, obviously we had some tragic events in 2017 and to Mike's point we took it and Matt Casey on our team and his team just did a fabulous job that we took a set of initiatives and really turned them into a safety culture, where we want to be the best in our industry and frankly I was looking at other industries as a safety at a top-notch non compromised no options level.

2018 this year has been a great example of that becoming actually remarkable reality. We've had a tremendous year. What's catching up with us is exactly what Mike's talking about. We now have to account for some of the challenges that we had in prior years specifically in late 2017.

This year has been remarkable so far and that's a testament to turning a set of initiatives into a true pervasive safety culture, and that's what Matt Casey and his team have been doing..

Okay, great, thank you for that clarification color. And as I look at the operating margin and pool distribution it looked like it dipped this quarter about 1.6% after running north of 3% the first two quarters of the year. And with your comments around you're expecting a strong peak season.

Should we see it pick back up in Q4 as the retail peak season kicks in? How should we think about that in Q4?.

Well, we're certainly going to anticipate a better margin in Q4 at pool as they have their biggest quarter of the year. We had some headwinds with respect to purchase transportation and labor costs.

And there's been some very public wage increases out there that we've had to contend with, but yes Kevin, we would anticipate margin improvement coming into the fourth quarter..

Okay, got you. Obviously I mean like to see the intermodal acquisition you guys are just continue to consolidate that that drayage industry. Tom and maybe as we think about this you guys I believe you're now a top ten drayage provider which is quite impressive how fast you've grown in the past couple of years.

Is your goal from here to be a top five drayage provider? And then maybe along those lines, how does the pipeline look as we head into 2019 for future M&A?.

Yes, Kevin, so good news is the questions you're asking and the conversations we are having are consistent. So and goes back a little bit to an untapped upside to being constructively impatient. Everything we're doing with a Matthew and his intermodal team is looking for exactly what you're describing. We've got a great thing going.

We've got a machine going. We just talked about these five minutes ago how we actually walk the acquisitions up to a level of precision and profitability that the platform had and continues to have. And obviously when you've got a good thing going you do think through how you can accelerate this.

That's exactly what we're doing right now, and there are two dimensions to accelerate. One is getting more deals worked in the pipeline at the same time and the second dimensions, obviously, the size per deal.

We are with the CST team, Ron and Matt and the entire, we're all over making sure that we are looking at both dimensions getting more deals into the pipeline, and looking at the size of deal at the same time knowing full well what Mike mentioned a few minutes ago.

Obviously, as and if and when we have bigger acquisitions like Atlantic then we do have obviously the digestion timing consequences that we talked about, but be assured I mean you got a good thing going, we are very constructively impatient to get more of that going faster. .

Great, well, thanks and good to hear, make sure you keep Matthew busy now okay..

We will..

All right, good.

Well the last question here and Mike you touched on this, you obviously with a broker mile seem to be high and the difficulty recruiting team drivers just a challenges there and Tom you touched on some of the things you are doing outside a driver pay, but I got to imagine as we think into 2019 it's just-- it's going to be a tough road ahead to really recruit team drivers.

And as we think about 2019 is it fair to say given your safety culture that purchased transportation is still going to remain relatively high. And in 2019 just given the difficulty we're seeing in recruiting team drivers..

Kevin, we're going to have to see how that plays out. I don't want to drift into the territory of guiding to levels and purchase transportation for next year..

Okay I got -- I just trying to just kind of think about conceptually, but I don't want to pin you down or anything..

Kevin on the conceptual fund I do want to reiterate though and again this sounds like a somewhat aspirational statements, but we are very, very nerdy about turning that aspirational statement into specific initiatives plans, goals, numbers, building on the most recent trends of actually turning around the driver count, it's been growing the last few weeks.

That's obvious going to have be a month and year plus trend not just a few weeks, but again to me the very simple statement needs to be if you're one of the best if not the best professional home for these drivers, we should find ways and we will find ways to make more of them choose our professional home to be their professional home..

Next we go to line of Ben Hartford with Baird. Please go ahead..

Good morning, guys. Welcome Tom.

Maybe tell us start specific to 2019 are there two or three key focal points on your behalf as you look at 2019 and the composition of the business growth in specific areas? Anything with specificity as you look at 2019 that is high on your priority list as you start at Forward Air?.

Yes, great question, obviously same thing bended. We've been talking internally about in focusing our energy on. So I'm going to be somewhat I guess conceptual but as specific as I can be. So we have four lines of business that we report. We actually are continuing looking for accelerated growth in all of those and obviously the best way it makes sense.

We got the expedited LTL and the intermodal business which we just spent quite a bit of time on, which frankly at a headline level they've been working tremendously well. And we want to get more of that organically and inorganically.

Some of that is a what we call a commercial forward kind of a very, very intense sales and marketing and revenue management effort going also after segments international forward as we mentioned before 3PL initiatives we mentioned before. That we certainly have quite a bit of untapped upsides and where we are under penetrated.

So you should see a lot of focus on continued organic and inorganic growth in those two businesses, expedited LTL and intermodal. For the other two businesses, it really is about scale, it's about looking also for value adds. We mentioned pool before. We've done a remarkable job I think of providing first-class service to retail customers.

We're looking to also bring this to other industry segments. I mentioned as example spare parts, medical telecom. There may be other industrial segments that we should be going after. So --and in TL obviously there's synergies between TL and LTL.

They are different segments; they will remain different segments, but still be looking for synergies and also to some extent we need to check out to what extent that we can actually get more scale to translate better into a bottom line.

If you look at what does this mean if you want to accelerate that growth across all four business segments? We obviously need two things driving that, one is a truly first class commercial and when I say commercial that's sales, marketing and revenue management prong.

I've had the good fortune of spending the vast amount of my professional energy over the last two decades in building growth machines for different great companies, and the second piece is obviously what we call people forward.

And making it more logical, more apparent, and more appealing to the best talent to come here because obviously we can only grow this place to what's possible if we have first-class people wanting to come here, develop here, grow and stretch their franchises here.

So if you look at it's almost like I said the house the whole thing gets bigger, but it has two big prongs, the commercial prong and the people prong, not in that sequence probably order but people obviously always first, underlying that you have rigor and precision with a customer level profitability, with obviously making sure there's a purpose why this place exists in the first place.

And then lastly and most importantly and this is going back to what we talked about before. This has got to be a safe place and that's the single most important thing. Everything starts and stops with a safety culture that's pervasive.

I've been in transportation for a long time; like in every industry but in ours perhaps even in the pronounced way safety always comes first. All people need to come to work the same place in the same way they go home, which is a one piece in good shape and that's underlying everything.

So this gives you the a bit of concept accelerated growth being extremely value driven and then obviously making sure that commercially and people wise be got the horsepower to satisfy that accelerated growth..

Okay, that's really great, thanks. Mike just coming back on the PT question within expedited LTL.

Obviously it's been a tight environment for some time but as you see it is there any reason why the model shouldn't behave it typically does through cycles in that if and when supply and demand in the industry reaches more of an equilibrium and capacity does loosen that that expedited LTL would benefit in terms of the reduction of outside miles and some normalization on that on that PT line.

I know you've avoided specificity but just conceptually is there any reason why we should think that the model behaves any different than it has in the past when capacity does loosen?.

No. I don't see any reason to think that way..

Okay and then on the guidance, the fourth quarter guidance does it include any contribution from Southwest?.

The contribution from Southwest this year would --is tremendously small given the timing of the acquisition. So there will be a little bit, it's not in the guidance, it's going to be very small, given the expected timing in the closing. We might have a couple hundred thousand of EBIT. .

Okay but to be clear there is nothing in the guide as it relates to that. .

No. We didn't know if we'd sign it..

And our final question is from the line of Bruce Chan with Stifel. Please go ahead..

Yes, good morning, gents. Tom, welcome, it's nice to meet you. You're certainly joining the company at very I should say interesting and dynamic time in the company's history. But maybe just a question starting out with you Mike here on the intermodal side, I just want to follow up on some of the margin questions.

I know you've got this sort of layer-cake dynamic, as far as the margins are concerned with that 10% to 12% base, but it seems like we've done materially better than that here in 3Q. So I just want to unpack that margin performance a little bit.

I mean is that kind of what we should expect to see from a fully unencumbered I guess intermodal margin where everything is kind of buttoned up and running at that base margin level as it should be or is there something specific or peculiar to this environment that's really helping to reduce that drayage margin?.

There are a few specific things in the third quarter that ceded the margin. The first that I'll note and you can see this in our cash flow statement is we had a release of an earn out related to the Atlantic acquisition. we relieved ourselves of that liability and that means it goes through the P&L.

So that was about a 100 basis points roughly of margin. So if you back that out, you're at let's say 13.5. The other thing I'll note about the quarter is and you may remember this from prior calls in the intermodal premium drayage space when volumes are high and customers are busy.

They're more likely to use CST for some assessorial services like chassis rentals or storing all boxes --their boxes on our yard. So those assessorial were strong in the third quarter and we have a higher margin profile than the base product of a premium drayage.

So what they are unpacking, it there was a piece that came from Atlantic and the earn out there was a piece that came from incremental volumes and assessorial revenue. But I still think with, to our earlier comments when you peel those back we're still at a solid platform margin.

And I would expect that platform margin to behave as we mentioned earlier on a call..

Okay, great that's super helpful. And I guess just continuing for a moment here on intermodal. I guess on the certainly the positive side we're seeing a nice revenue run rate growth in that business has been very impressive.

And we're closing in on that $250 million revenue run rate that you'd kind of laid out almost a year ago I guess now pretty closely, but I guess on the other side, I've also heard some rumblings from other companies and other carriers out there about M&A growth in that kind of drayage or intermodal space, but I guess just thinking about that in terms of your pipeline have you seen any more competitiveness in that kind of small company market.

Is there may be less kind of favorable properties out there in terms of that top grading of the pipeline?.

Well, it's a big market for starters. And we're keeping our pipeline of opportunities full. Each deal is unique. It has to be a good fit for the seller. It has to be a good fit for us to buy. But within those criteria, we continue to maintain a strong pipeline of potential revenue and we'll keep working through it.

There's always been competition for assets of various sizes in this space. I don't think anything's changed there..

And let me push that to that one piece and we have a lot of I guess credibility and goodwill here. So Bryan Grane, one of the family members of the company, got us into the intermodal business CST is very much still on board with a Forward Air today driving, co driving this business together with Ron, with Matt.

And when these companies that are in the space and are in our pipeline when they obviously talked about potentially graduating from the business and passing it on to someone outside the family, it counts a lot when you actually have someone sit at the table on our side, who says like I've done this.

We from CST are now part of Forward Air and it's turned out to be tremendous for us. So when you're one of these small medium sized family founders of a drayage business, having this type of a conversation with a former founder also still sitting at the tape on being a very happy member of a very well-functioning Forward Air team.

I think it gives us a leg up. so I feel very, very positive about many of these companies and as many to Mike's point out they're coming to the conclusion that this is going to be a great professional home beyond what they found it and built to take it to the next level..

Great, that's really helpful color. And then just one final question here on the pool business because I just can't help myself but I know that's a tough business, it's tough to penetrate new verticals. And I know there's a fairly long sales cycle with some of the new businesses that you've been targeting.

But is there any indication that your sales force has been making progress there? Any updates as far as efforts to kind of diversify business away from the traditional retail? Anything that you can offer there. .

So we've had focus Bruce on obviously those additional verticals. And that's not instead of retail, that's in addition to retail. We've had I think a very successful close just recently and more in the pipeline.

And again Roger and his team, they are tremendously focused on making business and proposition and meaning being first-class for our traditional retail customers taking some of that profitability and efficiency and customer value up. So that we will see better margins than we saw for instance in the last quarter in the pool business in retail.

And I'm very confident we will be seeing better margins there. But now we cracked at the first door open for a non-retail customer. And I think that crack relates to more entries coming in here from non retail in addition to what we've got in retail. So we have a first close there. We're activating it.

I think still in this fourth quarter and that pipeline is very, very closely watched and managed..

Okay, great.

And is this sort of first crack or first foray outside of retail something that we will begin to see in kind of the volume and margin progression through the first kind of three-quarters of next year or is it still very much I guess a seedling at this point that still kind of needs to be nurtured?.

It's a small first step that we're still standing up..

Got it..

But it is progress..

Ladies and gentlemen, that concludes Forward Air's third quarter 2018 earnings conference call. Please remember the webcast will be available on the Investor Relations section of Forward Air's website at www.forwardaircorp.com shortly after this call. Thank you for your participation. And you may now disconnect..