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Edited Transcript of FWRD earnings conference call or presentation 25-Apr-19 1:00pm GMT

Q1 2019 Forward Air Corp Earnings Call

GREENEVILLE May 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Forward Air Corp earnings conference call or presentation Thursday, April 25, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Joseph Morris

Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer

* Thomas Schmitt

Forward Air Corporation - CEO, President & Director

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Conference Call Participants

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* Benjamin John Hartford

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD and Airline, Airfreight & Logistics Analyst

* Jizong Chan

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Seldon T. Clarke

Deutsche Bank AG, Research Division - Associate Analyst

* Todd Clark Fowler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

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Presentation

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Operator [1]

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Thank you for joining Forward Air Corporation's First Quarter 2019 Earnings Release Conference Call. Before we begin, I'd like to point out that both the press release and webcast presentation for this call are accessible on the Investor Relations section of Forward Air's website at www. forwardaircorp. com. With us this morning are CEO, Tom Schmidt, and CFO, Mike Morris. By now you should have received a press release announcing our first quarter 2019 results which was furnished to the SEC on Form 8-K and on the wire yesterday after the market close. Please be aware that during the 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 second quarter and fiscal year of 2019, the expected impact of growth and strategic initiatives, the expected impact of organizational restructuring, the expected impact of FSA acquisition 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'll turn the call over to Tom Schmitt, CEO of Forward Air.

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Thomas Schmitt, Forward Air Corporation - CEO, President & Director [2]

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Thank you, Bob, and good morning to all of you on the call. Before Mike gives us some facts and figures around our record first quarter, let me give you some context for 2019 and beyond. The last couple of calls, if you remember, I talked about 3 priorities. The first one was the successful finish of 2018, second on the continued profitable growth pattern in 2019 and then third, a multiyear very compelling strategy beyond 2019. So the first one, 2018, obviously a check mark; a record year and it almost feels like a bit in the distance past already. So let's spin the focus of this call on Q1 and on the other 2 priorities. So 2019 first. We just finished a record quarter, as you saw in the release. We did see the expected headwinds of slowing economic growth in addition to worse than normal Q1 weather. When you see a foot of snow in the ground -- on the ground in Greenville, Tennessee, you know it's not typical. So it was more than usual. We did do what we do. We kept the main thing -- the main thing and controlled what we control. We executed with spectacular precision for our customers. In fact, our on-time records in the toughest months, thanks to our thousands of people in our buildings and on the road, were absolutely remarkable. When I talked with customers, they told me that, and that's the most important sign for precision in execution. We also compensated for those headwinds through active revenue management -- we talked about this -- and through very disciplined operations. And we became very, very consistent in adding to our high quality driver pool and we are using both traditional hiring methods as well as more scientific SEO, SEM type methods to do that. So this sets us up perfectly now for a profitable business growth pattern for the balance of 2019. Just again, if you look at the intentional moves over the last six months, we got extremely scientific understanding what good business looks like. We drove up the driver count and we also made sure we actually got fairly compensated and fully compensated for the business that we are delivering at high precision. Now it's time -- now that we know even better what good business looks like and having a higher driver count on acquisition basis, it's now also time to drive up the value of volume and a good business, profitable growth using those levers, anything from doing more with large underpenetrated accounts; executing retention and bring back programs and also walking up or out low-margin business; using a very rigorous enterprise selling approach where it's beneficial to our customers; and doing that on a consistent program that we are launching, go-for-business, that's a companywide Forward Air program. So now a quick update on the third priority: beyond 2019. As I just mentioned several times, again, we are a precision execution company. And if you remember, 30 years ago this company started with grounding air freight moves, going airport-to-airport, and for 20 years train that muscle of precision execution, of doing on the ground less expensively, even more reliably, what otherwise would have been air freight. Over the last eight years, we stretched that muscle of grounding airfreight first to attaching pickup and delivery to those expedited LTL moves, picking up the freight before the origin airport or delivering it past the destination airport and increasingly actually going door-to-door. And then over the last 5 years, we actually also stretched that precision execution, of hitting tight time windows for high value goods into our other modes. This precision execution is at the core of who we are, and we're stretching those capabilities to all where they should be. And in essence, we have evolved beyond our roots in air freight and beyond the air in our name. It will always be our base, but it's an end not at all. We have stretched beyond it. We now have applied that precision execution across industrial and retail freight markets, including e-commerce, basically saying when the shipment is bigger than a parcel and absolutely has to get there on time and damage-free, we want our customers to think forward. Choosing us and frankly making them stand out in the eyes of their customers in a value game, not in a lowest-cost-late-entrant-wins game. You do what you do best. We got you covered. Think forward. Think forward for freight moves, think forward for intermodal moves and think forward for direct moves, like we currently perform with our final mile truckload and pool distribution services. To better enable that future, we are also realigning our sales and our operations units. We actually are standing up a shared sales and marketing effort which allows us to compete collectively where our customers are asking us to do that. And the tailored menu is sometimes pulling the best from one business unit, sometimes actually giving a value meal to our customers, that leverages all of our Company. Separating sales from operations in a focused way also allows the operating teams to do what they do best, maximizing their single-minded focus on precision execution, taking up that on-time service level even another couple of notches by flawless execution of focusing on what they do best, in essence, being focused factories at world-class levels. And finally, we are also investing in the people and systems needed to make this future a remarkable reality. With a renewed focus on our culture and our purpose, we want to be the best-in-class workplace that supports our people as well as the communities we serve. We are standing up more comprehensive talent acquisition, stretching development, assessment, reward systems across all of our Company to really be the best professional home for all of our employees and teammates that we've got across the US and in Canada. And last but not least, we also want to be a great citizens -- citizen in the communities we serve. We have thousands of us on the road, in buildings and we are going to make that presence count, whether it is by recently joining Truckers Against Trafficking or whether it's reducing carbon emission, which if you think of it, 30 years ago that was the very essence of Forward Air, taking airfreight onto the ground, reducing carbon emission and obviously we are doing this on an ongoing basis. Trailers (inaudible) a whole bunch of initiatives to getting better and better on that counts too. So, I've been here for about eight months and just love how we're doing the right things the right way, and we are far from done. More coming actually on June 25 on our Investor Day in New York and more coming right now from our CFO, Mike Morris. Over to you, Mike.

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [3]

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Thanks, Tom. On a year-over-year basis, our sales operations and support teams had some notable achievements last quarter. We grew revenue and increased its quality by bringing on a mix of higher-yielding freight. We improved the size of our owner operator fleet, importantly in driver teams. Our LTL fleet count was up 17% at the end of last quarter and is up 24% through the second quarter to-date. Our intermodal fleet count is up 15% over the same time frames. But we also generated leverage on this improved fleet. Broker miles were 19% of LTL miles during the first quarter versus 25% a year ago. Through the second quarter to date, LTL broker miles are down to 13% of total miles. This leverage translated into lower purchase transportation costs, which, as a percent of revenue, fell 160 basis points at LTL, 450 basis points at intermodal and 140 basis points on a consolidated basis. Our improved gross profit was dragged by weather and self-insurance costs last quarter which tempered our operating income growth. That said, our consolidated results set records for any first quarter in the Company's history. And our free cash flow was the highest of any quarter ever at Forward Air. With an improved fleet to support the revenue initiatives that Tom just described, we are confident that our sales, operations and support teams will have more notable achievements as we go through 2019. Let me cover a few additional housekeeping items before we go to Q&A. We implemented lease accounting this quarter. You'll note the new lines added to our balance sheet related to right of use assets and operating lease obligations. In total, this new accounting standard added $133 million of assets and liabilities that had no impact on equity. There was also no impact on our income or our cash flow statements. This pronouncement was considered in our credit facility and our borrowing costs will not rise as a result of the new standard. We've also made a slight change to our LTL operating statistics. Historically, we have shown an attachment rate, which was the percentage of our shipments that had a pickup and/or a delivery leg. We included this disclosure to provide visibility into our growing pickup and delivery capabilities. Since these shipments increasingly involve door-to-door moves, we will begin referring to them as such. But we're also modifying this disclosure to make it a revenue based concept since we typically earn more revenue on door-to-door shipments. Our new disclosure shows the percentage of our network revenue that came from shipments with a door-to-door lag. And by network revenue, we mean all revenue related to moving the shipment through our LTL network, which includes fuel but does exclude accessorial revenues. And we're also excluding revenue related to heavy bulky final mile appliance installations from our definition of network revenue. During the first quarter, 38% of our LTL network revenue had a door-to-door component, which was up 12% over the prior year quarter. Regarding our recently announced acquisition of FSA Logistix, this transaction closed last weekend, and we're thrilled to have the FSA team officially joined the Forward Air family. On a run rate basis, we expect FSA will generate $75 million in annual revenue, $4.5 million in annual EBITDA and $3 million in annual EBIT. We do expect FSA to generate revenue growth in the second quarter, but we do not expect it to be accretive to our second quarter EPS, given the transaction's timing and our anticipated closing and integration costs. For the full year 2019, we expect FSA to be roughly $0.04 accretive to EPS. In anticipation of the FSA closing, we ended the quarter at a higher than normal level of cash despite repurchasing $14 million worth of stock during the quarter. We did not incur any additional debt during the quarter, and we still intend to optimize our capital structure by carrying a more permanent level of debt over time which we do not expect will exceed one turn of EBITDA. Finally, as Tom mentioned, we are planning an Investor Day to communicate the future of Forward Air. It's scheduled for June 25 and will be webcast live. The link to the event will be made available on our website in the coming weeks. That's all I have. So Bob, let's open the line for Q&A.

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Questions and Answers

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Operator [1]

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Thank you. (Operator Instructions) And we go to the line of Seldon Clarke, Deutsche Bank.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [2]

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Hey, thanks for the question. Just in terms of your guidance, you're guiding 6% revenue growth at the midpoint. I think it basically implies a negative EBIT growth in the quarter. Can you just walk through some of the moving parts there by segment, just give us some color around what the -- whether this includes or excludes the impact from the FSA integration?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [3]

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Seldon, it's Mike. Thanks for your question. So in terms of the guidance, we do have an estimate of FSA's revenue in the outlook. However, we're not expecting it to have any incremental EBIT, given the timing of the transaction, given the legal and integration costs, and we've also just completed the initial purchase price allocation study where we're going to pick up some intangible amortization. So we're thinking that's basically a neutral to EBIT for the second quarter. When we get into the third quarter, I think we'll be more fully integrated and more stood up and that'll be a contributor. But we do see revenue growth pretty much across the board, driven by our strategic initiatives, some of which Tom talked about. We think we'll continue to see good yields and improvement on our fleet, but we are being cautious amid kind of a slowing macro, a slowing tonnage environment. We've got stiff comps through next quarter. They abate as we get into the second half of the year. And one of the headwinds which was an intentional headwind that we had in the first quarter, which are corporate investments that we're making to help enable and support our future growth -- we're going to continue to make those investments next quarter. So that's a little bit of color in terms of what's in our guidance. I don't think -- I don't think it's actually totally flat EBIT growth. But that's a little bit of what's going on.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [4]

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Okay. I guess just like if we dug in a little on the LTL specifically, I mean, that's for the FSA acquisition, is that right?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [5]

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Correct.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [6]

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And so -- I know -- understand a couple -- I mean, a number of your initiatives. And I think like that's clearly putting you guys in the right direction. But I'm just curious like why wasn't the operating leverage better in the quarter and what do you expect I guess organically going forward.

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [7]

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Yes, so now -- okay, so your question is now actually back to the first quarter?

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [8]

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Yes. And I guess like -- I mean, is the -- and should that kind of trend continue if we just exclude FSA in the second quarter? I'm kind of just curious if --

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [9]

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I don't think the trend will continue. So let me unpack a little bit the first quarter, and then I can connect the dots to what we would think would carry forward.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [10]

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Got it.

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [11]

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As we talked about in the prepared remarks, we had good performance in revenue, we had good performance on the fleet and good performance on PT. So our gross profit, if you will, performed nicely. Not all of it obviously fell down to EBIT. And the 2 buckets that I would put those items in, first bucket was unexpected stuff and the second bucket, I will call expected stuff. In the first bucket, in the unexpected bucket, we did have weather that was more severe than the prior year. We had a bad debt related to one customer. There was a default. We incurred some legal fees related to the FSA acquisition. And period on period, there is the absence of fuel credit we had in the first quarter of 2018 when the new tax legislation was enacted in December of '17. If you add all that up, that's somewhere between $1 million and $1.5 million . We don't expect those things to repeat in the next quarter. So that was the unexpected bucket that had a drag. The expected bucket is the investments that I described. There is not dollars going into like one particular area that's consuming it. It's actually pretty well distributed across the corporate landscape: IT, safety, legal, HR, recruiting. That's the other bucket that was probably $1.2 million on the LTL P&L. That bucket will probably will continue into the second quarter as we continue to make these investments. We're trying to get a lot of these investments in corporate capabilities out of the way before we get to peak. It's kind of hard to stand up a new corporate capability when you run around moving freight during a peak. So I think that that $1.2 million type number will carry forward into the next quarter. Okay. Do you need a little more clarity?

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [12]

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Yes, it's helpful. I'm just -- I'm curious as to -- I mean, I understand like some of the -- so excluding FSA and you're concern about the macro, if you have those kind of costs rolling off in the second quarter, it just feels like you're baking in another quarter of EBIT decline in LTL, and I just feel you're gaining some traction with initiatives (inaudible) some leverage on the PT side. Like, why shouldn't we see EBIT return to positive growth in the second quarter at LTL?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [13]

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I think we will. But maybe it's not as -- in your model, as remarkable as you would hope. We are being cautious around the tonnage environment, which has slowed a little bit coming into April. And we do have to recognize some of these corporate investments. So I think you're going to see net-net EBIT growth. But remember to pull out the run rate FSA revenue in terms of calculating how much of revenues going to drop to profit.

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Thomas Schmitt, Forward Air Corporation - CEO, President & Director [14]

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The one -- Seldon, the one thing on a somewhat longer-term basis, this is a marathon that we are in, not a sprint. We do obviously this beyond 2019 picture. We are extremely mathematical about this in terms of top line, disciplined operations and what moves down to the bottom line and how much corporate support costs we have. It's our strong expectation that corporate costs as a percentage of revenue, i. e. , your margin question, will significantly actually improve over the next few years. What we are doing right now is very, very intentional, whether it's on the road, whether it's in our buildings, whether it's in decision support, the exact areas that Mike, as you, you talked about. That's very intentional. And yes, you probably will rightfully see that in Q2 as well. What we are doing I think is standing this up -- this Company up for remarkable performance on a multi-year trajectory. And obviously, quarter-by-quarter needs to look solid or better, which it is, but we are running this thing for the long term.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [15]

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Okay. I appreciate the color.

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Operator [16]

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And next we go to the line of Jack Atkins of Stephens. Please go ahead.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD and Airline, Airfreight & Logistics Analyst [17]

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So Mike and Tom, I appreciate all the additional color there on operating leverage. I think that was -- that was very helpful. I guess, Tom, and then for Mike as well, as you think about when you should start seeing some returns on these -- on these investments that you're making to sort of bulk up and stand up back office functionality and sort of improve the performance of the business, when do you think that's going to start sort of showing up? Is that something that could maybe start yielding results this peak season? Do you think you're going to start seeing some more leverage then? Or is that really more of a 2020 type event?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [18]

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Tom, I'll go first and you can chime in. It's a good question, Jack. I think on a lot of this corporate stuff, we're going to see quick returns because frankly we're a little choked right now. And so as you bring in more capabilities from a systems perspective, from a people perspective, your throughput is going to go up, your ability to -- you name the back office process, onboard a driver, qualify a safety requirement, you're going to see throughput pick up very quickly. And so I think as this -- I think we'll feel positive effects of this in peak and I think it will just kind of continue into 2020. None of these investments are super major like where it's millions of dollars in a system that's going to take years and years to pay back. A lot of these are kind of already needed and the returns should be relatively quick. Tom, can you--

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Thomas Schmitt, Forward Air Corporation - CEO, President & Director [19]

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Yes, I mean, so first of all, on your first statement, Mike, the speed of return. We are -- I mean, certainly I am, and that's getting into the DNA of our entire team here. I'm very constructively impatient, Jack. So we are going to go at a pace that's stretching us, but we're obviously going to be reasonable about it. But having said this, having done several of these profitable revenue and profitable growth initiatives in the past, I kind of have a sense that we're talking about months of them kicking in, not years, and so that's to your specific question, Jack. And the second thing, some of those investments, just to put a little bit more light behind it, they are just about making us absolutely first class in all areas that we need to be first class. A simple example would be something like making sure that we provide our drivers on the roads with the best technology that helps them actually understand what's good and safe behavior looks like, including cameras. So we are obviously making sure we're getting all of them in place. That's a great coaching and teaching device. And that's an investment we're making, which obviously will go through CapEx and then through depreciation, through our P&L. So some of these are stuff that you don't see when you look at the earnings release, but that's happening in the background because, again, we have only one aspiration, that this place is all they can be and this place can be world-class. So -- but to your specific point on the revenue -- on the profitable revenue, yes, so this is a marathon, but you should see the first results in months, not years.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD and Airline, Airfreight & Logistics Analyst [20]

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Okay. That's great. That's great to hear. And then I guess for my follow-up question, I think it's very exciting to see the FSA acquisition and nice to see that going to have -- that will have some -- a nice impact in the second half of the year. Could you just talk more broadly, Tom, when you think about your final mile strategy over the next couple of years -- I know you've got a little bit of final mile capability when you closed the Towne acquisition a couple years ago, and FSA obviously adds a lot to that. When you think about the opportunity set there over the next, call it 3 to 5 years within final mile, can you sort of talk about your vision for that slice of the business?

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Thomas Schmitt, Forward Air Corporation - CEO, President & Director [21]

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Yes. So it's a bit like -- in the best possible way, it's a bit like making Groundhog Day happen, which is we had a great day and now we are making it happen all over again. What I mean specifically by that, 5 years ago, February 2014, Forward Air, we bought a platform company; that's CST in the intermodal freight space. Then in the subsequent years, Jack, we figured out kind of what exactly do these assets look like that we should be looking for, we should be going after, we should be integrating, we should be standing up quickly. And we came up with a grading sheet. The team around (inaudible) did an amazing job making that happen. And now they've done it eight times, where they actually bought -- we bought a platform, saw eight specific tuck-in acquisitions, some bigger than others -- Atlantic is the best example for bigger one -- and now, we are literally on -- we have a machine going. And that machine, we are going to expand. We're going to look for more deals at the same time, even slightly bigger ones as long as they fit those criteria. So you take that example of that perfect day in the movie Groundhog Day and now we're actually making it happen again here in the B2C space, where we have the same DNA of stretching our muscle, of hitting tight time windows for a very critical delivery, in this case, it's into your home, and then having a value-added service around it, in this case it's installation. So we just bought a platform company. So 5 years later, new Groundhog Day, new movie, and we bought a platform company in this space that stretches our muscle that we trained for 20 years in airport-to-airport, hitting tight time windows, for something that's bigger than a box with a value added service at world-class execution levels. FSA, I can tell you one thing. I just went to one of our largest customers with them this week. They are tremendous at what they do. And again, the most important testament is not me saying that. It's one of the most challenging best companies on earth telling us that we have the best scorecard, the best track record in that space for them. So we bought a terrific platform company and now we're going to do the exact same thing that we did before. We use all our muscle now in that space, and we're going to stand it up. So what should you be seeing, Jack, you should be looking at the movie that played out over the last 5 years in CST and then eight tuck-in acquisitions, and you should expect an Encore here, and it's a bit like Godfather, where I think Part II was the one that won the Academy Award. So it's going to be a race between the 2 of them, which one is going to be the more beautiful story. But it's the exact same thing: platform, tuck-in, more of that where we basically look for a pattern, and we're standing up that pattern.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD and Airline, Airfreight & Logistics Analyst [22]

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That makes a lot of sense, and I appreciate the movie references, Tom. That -- that was great. Thanks again for the time, guys.

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Operator [23]

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And we go to the line of Todd Fowler of KeyBanc Capital Markets.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [24]

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Great. Thanks. Good morning, everyone. Tom, to your comments in the prepared remarks about how you view 2019 for profitable growth, to me, it sounded a little bit like there was going to be a bit more of a focus on volume growth going forward. It sounds like that you've done some yield work over the past several quarters and identify where you can grow profitably. Is that the right takeaway from your comments? Or am I maybe misinterpreting what you were explaining for this year?

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Thomas Schmitt, Forward Air Corporation - CEO, President & Director [25]

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Yes. I think, Todd, you -- we're on the same page. You picked this up correctly. The only thing I would want to qualify, this is an and, not an or, so that a yield management focus -- we are not done with that yet. So we stood up obviously some of the surcharges. We're becoming more surgical. There's 2 more adjustments coming up actually in 2 weeks. And so that's going to continue. We're going to be extremely focused on providing value that makes our customers and their NPA scores with their customers stand out. But we're also going to be extremely tough in those conversations, making sure we're actually going to get our fair share of that value that we helped them create. So that's going to continue, to your question. At the same time, we, literally, this month, we are launching a go-for-business initiative, which is not entirely but is more focused on the quantity of business in addition to keeping, going with the quality of the business. So this is where, from a timing perspective, we intentionally sequenced it that way for the reasons I mentioned in my remarks upfront. We wanted to make sure we understand almost like scientifically what good business looks like, which we do better now. We wanted to make sure we have the high quality drivers in sufficient numbers, which we now do. Now it's time to basically double team and add the volume focused initiatives to the quality of business initiatives. And again, as I said before when Seldon asked his question, having done some of these before, they don't kick in overnight. But they're also not years away in terms of impact.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [26]

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Okay, good. Yes, that's helpful. And then just to follow up, I think that a couple of the questions you're going to be getting at kind of the margin profile for the expedited LTL business on a more normalized basis and when I think about that business because I can't go back 30 years, but I can go back a period of time with Forward Air. Historically, there had been the hallmark where that business operated very profitably kind of a low [80] OR. In the last several years, we've seen that OR move higher, and I understand there's some transitory costs, weather and some other things in the first part of this year. But how do you think about the profitability of the expedited LTL business on a normalized basis at this point?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [27]

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Todd, I'll start with that and Tom, you can chime in as you see fit. Yes, it's true when you look at the data that the profitability, the margin of LTL has come down over the past several years relative to the longer-term history, particularly if you look back to the 2004, 2005 heyday. I often get the question of has something structurally changed. Is there -- is it impossible for the business to put up that type of performance again. And honestly went looking for the answer to that question and couldn't come to the conclusion that it was no longer attainable.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [28]

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Okay.

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [29]

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What has happened, though, is that the business has gotten bigger and has gotten more diverse and has made some investments to grow in different capability sets while continuing to serve the freight forwarder community. And as you see those investments taking root, they will take some time until they fully mature and have the effect on margin. But you also -- as a bigger company, it's my opinion that you become a little more exposed to the macro and -- it's a -- as a bigger firm, these tonnage dynamics, these macro dynamics have a greater effect. We have a nice tailwind to the business in retail oriented freight. That's my language, the retail descriptor. And e-commerce and some of the secular trends around retail freight tuck in very nicely with an expedited LTL company with service characteristics as outstanding as ours. But I think to really help get that margin profile back, we're also looking to bring in some heavier dead freight, and we've talked about this on prior calls. Bringing in some of that heavier dead freight and furthering that density on top of the density that we already have I think would really make a difference in terms of the probability of the LTL company putting up the kind of numbers that you saw in the mid-2000s. I'll point to the second quarter of 2016 when the LTL company put up -- I believe it was an [82.8] OR. That shows it's possible. That was not that long ago. So with the revenue management initiatives that Tom's talked, with the better mix of freight, with the solid cost controls -- if you get a good driver market and you don't have 12 storms in a quarter, yes, it's possible. I don't think it's impossible.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [30]

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Okay. No, Mike, I appreciate that. We've thought about that -- I know we've talked about all those things too. I mean, it is helpful to get the perspective that, yes, it's not a structural thing but understanding some of the pieces that are different today than what they were 15 years ago and also the timing of when you can see some of that improvement. So I appreciate the perspective there. I'm going to pass along. Thanks for the time.

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Operator [31]

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And next we go to the line Ben Hartford of Baird.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [32]

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Hey, good morning, guys. Interested in obviously the moderation and purchase transportation expenses this quarter. In your mind, Tom or Mike, to what extent was it just the broader spot market softness that we all are aware about now versus some internal progress that you guys have been making from an owner operator recruitment point of view? What do you think was the dominant contributor to the moderation in PT, particularly -- I guess, specifically referring to expedited LTL?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [33]

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Ben, I'll start there, and Tom can chime in. I do think we've changed our game from a recruiting perspective. We've adjusted our tactics and taken a new approach, but not a completely new approach. We modified the goodness in our existing approach and put a few other things on top of it to (technical difficulty)

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Operator [34]

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One moment, please, sir. We -- gentlemen, we have lost host site. One moment, please. Thank you for your patience. We are attempting to reconnect to the host site. One moment, please.

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [35]

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Thank you. Hey, Ben?

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Thomas Schmitt, Forward Air Corporation - CEO, President & Director [36]

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Ben, are you still there?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [37]

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Bob, are we connected to the lot?

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Operator [38]

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Yes, sure, one moment, please.

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Thomas Schmitt, Forward Air Corporation - CEO, President & Director [39]

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Ben, are you there?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [40]

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I think he (inaudible) green light is indicating they can hear us.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [41]

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I'm here. Can you guys here me?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [42]

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Yes. Sorry, man, I--

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [43]

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That's all right.

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [44]

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I think I forgot to pay the phone bill.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [45]

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You're (inaudible) corporate.

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [46]

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So, the line just cut off.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [47]

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Sure.

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [48]

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So, I'm not sure where I cut off, so I'll just rewind one second. Better recruiting, losing capacity in the truckload market certainly helps us with better recruiting to increase the driver count. But some increased work on the front end, from safety and qualifying drivers, I heard from the teams that the quality of the owner-operator relationships we have right now is some of the highest that's ever been. And so you have a very high quality driver taking extra good care of that freight. That I think was a big part of it. Something else to keep in mind is a chunk of this is related to pickup and delivery. As you recall, we were standing up a modified pickup and delivery model using owner operators. We'll lap that initiative towards the back end of this year. And so quarter-on-quarter, we're getting leverage on pickup and delivery as well as line haul.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [49]

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Okay.

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Thomas Schmitt, Forward Air Corporation - CEO, President & Director [50]

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And let me actually add a couple of points because I'm really, really proud of what we're doing here on the driver front, not only recruiting but everything around making this a great professional home for them because I think, Mike, the way you answered the question hits the point precisely. When you ask about PT going down, I would exactly start where you start, Mike. This is about our driver count of owner operators going up there for us requiring less PT. And for instance, we just did an employee engagement survey, but we also did a survey of all of our independent contractors. So we actually literally asked all 2,500 of them how they feel about this professional home of theirs and serving us as Forward Air. And the number one positive is we like our jobs. And so they like being an owner operator, they like serving us as their customer. And then we are standing up -- our HR team is doing that with Kyle and Ryan and team. They are standing up a driver board, where we actually on a regular basis -- first session is coming up in a couple of weeks -- actually, I think next week. We're asking our drivers help us make this the best possible place for you, whether it's our own Company drivers or for the most part our owner operators. So there's a tremendous focus both in terms of recruiting but also making it an ongoing great home where they're telling us back we like, we love the predictability of our home time. We love several other aspects. And so frankly, PT going down is all about us making it a great professional home for our owner operators and our Company drivers. That's why PT is going down.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [51]

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I know you're 8 months in at your tenure, Tom, at Forward Air. So some of (inaudible) in the Towne acquisition from our standpoint or at least our understanding is that Forward Air service levels had not been kind of Forward Air-like since then and I know weather was a challenge this quarter and you'd be dealing with elevated outside miles over the past year. So as it stands today, what is your perception around service within expedited LTL? Is it good? Is it insufficient? Is it great? How does that tie in with owner operator recruitment? And I guess when you talk about Forward Air being a precision execution company, having high service levels is existential to that. So could you provide a little bit of perspective around where service sits today? How important the owner operator recruitment initiatives are? And is there opportunity to improve service with an expedited LTL and then perhaps that's an accelerant to some of the longer-term growth initiatives that you've been touching on?

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Thomas Schmitt, Forward Air Corporation - CEO, President & Director [52]

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Yes, Ben, actually -- almost seems like you've been sitting in our leadership team meetings. So just this past Monday, Chris Ruble, COO, the executive leadership team and I, we had this exact conversation looking at the correlation between on-time service and our driver count owner operators as well as employee drivers going up. So there is a beautiful direct correlation of us having a much higher chance of providing new record level or even record level on-time service with company's drivers and owner operators who know us better, right, rather than going to having to go to purchase transportation. To be very clear, these people that we sometimes access and tap into are doing a very, very good job. But it does help to understand as well as our owner operators and our Company drivers do. So specifically, if you look at the last several months, us having gotten better with a higher driver count and looking at our on-time service levels, the Q1 service levels as well as Q4 are some of the highest in our history. And they could -- this is always -- when you look at our dashboard, which we do on a weekly basis and look at on-time service obviously in those dashboard sessions, that our numbers are telling us that. But frankly, Ben, what's much more important to me, I see customers every week, and sometimes several of them, and consistently they have been telling me how much of a difference the on-time service level feels to them, how much different it feels to them now versus for instance a year or 2 ago. So I can't replay the past but I can certainly make very certain with the team here they're doing a first-class job of -- that pride that we have in that precision execution actually translates to what our customers perceive and it clearly is happening. So the stats are telling us on-time service levels, Q4, Q1 remarkably high levels, near record, and I'm not satisfied. I think that move that we are making towards focused factories that actually just nailed that precision execution will even add to that. But it's been a phenomenal service in the toughest conditions that we've seen in a while. Let me talk about the Q1 weather. The stats and, most importantly, our customers are telling us that we actually have been performing phenomenally.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [53]

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And then that kind of bring that all together. The GRI strategy, the consistent pricing strategy that you introduced -- or are introducing to customers, can you talk a little bit about the receptivity to that? How the conversation has gone? What have been the points of pushback? What is your level of confidence now that you can institute a regular pricing methodology to customers?

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Thomas Schmitt, Forward Air Corporation - CEO, President & Director [54]

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Yes. Hey, Ben, this is -- I think we should but hire you. This is great thinking. So that beautiful kind of cycle between having our stable high quality supply of first-class drivers, our on-time service levels and then our ability, frankly, to your point, having these types of tough conversations with customers, saying, we are creating value for you and your customers by delivering those service levels at another 2 percentage points higher and further apart between us and the next best competitor. And that's exactly, that investing in those types of service level capabilities and these types of high quality drivers enables us to say like, hey, we're creating value for you. We're investing in that. So we do need to actually also make sure that we get our fair share of that. That's a beautiful virtuous cycle that we are creating, which makes me extremely confident in those conversations. Specifically, Ben, I would say, and I haven't done the counting on a piece of paper, but roughly speaking of the top 20 customers, over the last six months, I probably have seen 12 to 15 of them, and we've had this exact conversation about CRI. And remember, this is one of those and I say like this -- whether you're religious or not, but every year there's a certain number of milestone events. One is called Christmas, one's called Easter and one's called a GRI. And these are certainties. And now we have to earn those certainties and that's exactly what we're doing with his on-time service level. So the conversations have been very positive. I mean, customers would love to get more for less, but they do understand that there's something about investing in that type of high-quality service. And it frankly also helps them if they know there is a GRI every year and it's at the same time of every year; it helps them also plan. So it makes it actually more predictable for them for planning and budgeting purposes also. These conversations have been tough conversations. Our sales team is doing a phenomenal job of articulating that value proposition, getting through these tough conversations and trying to ending up with a GRI that is coming in on May 6 this year, so we're talking about 10 days from now. It's going to have a very, very high take rate because frankly we earned it.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [55]

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Good. I appreciate the perspective. I'll turn it over to somebody else.

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Operator [56]

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Now we go to the line of Bruce Chan of Stifel.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [57]

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Yes, good morning, Tom and Mike. Hope both well. Just a couple of quick questions here on FSA. I guess, right now, the plan is to run the last mile portion and then your traditional LTL business out of a different network footprint. And I'm wondering as you look out into the future, whether you have any plans to merge those 2 together and how you sort of balance the potential density synergies of a combined network dense, maybe some of the potential service degradation or dock congestion issues from doing so.

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [58]

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Hey, Bruce, it's Mike. Let me start with that question. Right now, the real estate that you run the business out of is often dictated by the customer contract itself. And some customers want a dedicated facility and other customers give you the flexibility to co-mingle. I think there is an opportunity currently we're come co-mingling is allowed to explore it and perhaps pursue it in certain markets, where operationally, you're not going to clog up the dock or create inefficiencies. But I think there is a viewpoint that over time, as this service requirement grows because more and more people are ordering things online or whatnot, that you will invariably see more flexibility around co-mingling which fits in nicely with the locations of our terminals near population centers, given our airport footprint. Another synergy that I would like to point out comes from pickup and delivery. The delivery for our LTL freight, if you look at during a week, certain days are busy and certain days are less busy. That overlap with the final mile delivery, they don't land on the same times. And so there is some opportunity to have a broader relationship around pickup and delivery with some of the contractors in markets where we have a lot of volumes. So I think you got an operating leverage potential over time with respect to the density running through your real estate footprint, but I also think there is a pickup and delivery synergy that could generate some purchase transportation leverage as well.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [59]

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Yes, that's an interesting point. And I'm just wondering in terms of having a 2-man team delivery or liftgate delivery, how that changes your, I guess, mix of P&D service providers? Or does it?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [60]

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Well, I mean, yes, I mean a lot of the P&D we do right now is going to be in a straight truck. It really depends on the freight characteristics. The point is, if that owner operator who is doing final mile work is really busy on a Thursday or a Friday because the appliance buys that were made over the prior weekend are now showing up for installation, if that owner operator is less busy on a Monday and that's when we're delivering a lot of freight that got line-hauled over the weekend, that's good business potentially for that owner operator and it strengths our professional relationship with them.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [61]

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Okay. And then on the CapEx side, I don't know if you gave a number for the year. And then just in terms of the allocation between the existing business and what might [either] come from FSA, any breakdown there would be helpful as well.

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [62]

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Yes. So you may recall, if you look at the earnings release, way in the back on Page 11, in our additional guidance data, we've indicated full year projected CapEx of $34 million. It's not envisioned that FSA will require hardly any CapEx. They are -- and now, we are, an extremely asset light operation. Facilities are stood up as needed to serve a contract and stood down if that contract concludes. So in terms of the distribution of our CapEx this year, it's -- the bulk of it is probably split between trailers and normal trailer replenishment of the fleet to keep the fleet at our optimal age and we've got a lot of technology investments taking place at LTL and at corporate. That's both systems themselves and the capitalization and the salaries of the people who build those systems.

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Operator [63]

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Now we go to the line of Scott Group of Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [64]

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So, I'm not sure if I missed this. Did you give the monthly tonnage -- April tonnage?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [65]

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No. I can do that right now. So for the first quarter, daily tonnage was down 0.5%. In January, it was up 0.6%. In February, it was down 1.0% and in March, it was down 0.8%. And then with respect to April to date, tonnage per day is down 4.2%. There's a little bit of Good Friday noise in there because Easter was in Q1 last year. If you kind of calibrate for that, the tonnage is probably down 3.1%.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [66]

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So what's your take on the deceleration in April?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [67]

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Things have slowed down. I mean, I think it's more of a macro sense. We hear it from our customers. We've seen a little tonnage deceleration and we've been adjusting to it. We are hearing that the pipeline could build into May and June. We need to see it happen. But I think there has been some softness in the marketplace at the start of the quarter.

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Thomas Schmitt, Forward Air Corporation - CEO, President & Director [68]

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And let me just add one piece, Scott, to that. Two parts to that. The first one is, we are -- as I said before, we are very intentional about selecting and growing with good business. So in some of these cases, the quality of the business, if it's not good enough and we -- if you can't work with the customer showing them the value proposition, we actually, whether it's in some form of [VPL] process, more automated or whether it's a conscious conversation, there is business that we're actually saying, this is not good business for us. And so you see probably some of that happening also. The second point I want to reinforce is, again, we are starting up an engine where we are very consciously ramping up the volume that we're going for, finding, keeping, growing good business. Now that we have the confidence level that we understand what goodness looks like extremely surgically and that we also understand the kind of those levers that we can be pulling -- again, I've been doing this in the past. It's not rocket science, but there is a little bit of a machine to it and that machine we are deploying going forward. So I think there is -- there is -- yes, there is a market happening around us, and there's also a lot of intent from our side what we're actually de-selecting and now increasingly going forward what we are selecting.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [69]

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Okay. How big is the GRI in May?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [70]

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It's up to 4.9%.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [71]

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Okay, great. And then just lastly, just strategically, as I think about M&A, what do you think is more likely? Intermodal or final mile deals? And then any update on the plans for pool?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [72]

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I'm sorry. To just kind of align with -- and maybe it's on our end (inaudible) kind of breaking up. Just want to make sure I heard your question.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [73]

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Yes.

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [74]

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I think your question was, M&A intentions at intermodal and final mile?

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [75]

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Yes. I guess once more. Where is your focus more, on the intermodal versus final mile, for future deals? And then any updated plans on pool?

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [76]

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Yes. So I think there is no intermodal and final mile are both of focus. The transaction sizes that we currently have on our radar screen aren't going to be so capital intensive that we have to pick. We think we can find a lot of this as it arises with free cash flow. We have a lot of dry powder from a liquidity and a leverage perspective if we need to go there. And so we wouldn't say one is going to win out over the other. If the scorecard is met, if the transaction can be done, then we're going to do that deal. I think the next part of your question was, is there any update on pool. We don't have any actions in place for a transaction related to pool. But what we do have is all business units have to present business cases around growth and around return. And as Tom has joined and as we've gone through strategic reviews over the past six months, the entire portfolio comes under a lens and we're looking at each business unit and making sure it fits the return criteria that we expect to be in this portfolio. Pool is no different than any other business unit in that regard.

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Operator [77]

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There is no one else in queue at this time. Please continue.

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Michael Joseph Morris, Forward Air Corporation - CFO, Principal Accounting Officer, Senior VP & Treasurer [78]

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I think we're good.

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Operator [79]

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Okay. That does conclude Forward Air's first quarter 2019 earnings conference call. Please remember that this webcast will be available on the Investor Relations section of Forward Air's website at www. forwardaircorp.com shortly after this call. You may now disconnect.