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Edited Transcript of FWRD earnings conference call or presentation 26-Jul-19 1:00pm GMT

Q2 2019 Forward Air Corp Earnings Call

GREENEVILLE Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Forward Air Corp earnings conference call or presentation Friday, July 26, 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, Senior VP & Treasurer

* Thomas Schmitt

Forward Air Corporation - Chairman, President & CEO

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Conference Call Participants

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* Jizong Chan

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

* Kevin Wallace Sterling

Seaport Global Securities LLC, Research Division - MD & Senior 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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Ladies and gentlemen, thank you for joining Forward Air Corporation Second 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 Schmitt; and CFO, Mike Morris. By now, you should have received the press release announcing our second quarter 2019 results, which was furnished to the SEC on Form 8-K and on the wire yesterday after market close.

Please be aware that during this conference call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the company's outlook for the 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 the FSA and OST acquisitions, 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 risk and other factors that may cause actual operations' results to differ materially from the results discussed in the forward-looking statements. For additional information concerning these risk 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 - Chairman, President & CEO [2]

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Thank you, John, and good morning to all of you on the call. Before I turn it over to Mike Morris, our CFO, I do want to give a quick check-in on our profitable growth journey. If you remember, on our last call, I talked about our priorities and 2 that stand out are: nailing 2019, and the second one is getting a compelling beyond 2019 multiyear picture together and getting ready and in game shape for that picture.

So last month, many of you were actually there. We had our Investor Day in New York, and we gave specifics on that beyond 2019 picture, and I want to give you just the headlights -- the headlines and highlights of that. So the first thing is strategy. We were very explicit about our strategy, in essence saying, if it's bigger than a box, think Forward. When it really matters to you, think Forward. It's a bit like the UPS golden package or the FedEx absolutely positively overnight. We want to own the space for that type of critical shipments for everything that's bigger than a box. And we were very explicit about that. We started this company 38 years ago, airport to airport, hitting that tight time window every single time with precision execution. And then we took it to pickup and delivery, we can talk about that a bit more today, and then into other modes also into distribution centers, malls and more recently also into homes.

The second thing we talked about in the Investor Day in are beyond 2019 picture is a clean structure. Companies expect -- our customers expect to deal with one Forward Air, and we put a complete collectively sales and marketing organization together. It's all under one Chief Commercial Officer, Matt Jewell. And we did the exact same thing on the operations side where we do have focused factories, however, they do adhere to one consistent set of priorities and principles under our Chief Operating Officer, Chris Ruble.

The third thing that you saw real time in New York via the 4-hour Investor Day was our leadership lineup, and I couldn't be more proud of that team. Obviously, Mike Morris here is with me; I mentioned Matt Jewell and Chris Ruble; we also had our General Counsel, Michael Hance; our Chief People Officer, Kyle Mitchin; and our new CIO, Jay Tomasello with us. So very proud about having the right strategy, structure and the right leadership lineup in place. And the most important part obviously is we're tag teaming with thousands of our teammates on that journey, and I know how they are delivering every single day.

Finally, this is an earnings call, so we also made a commitment in New York to a top and bottom line growth. We said, in essence, what we expect and what you should expect is a CAGR of GDP plus 10%, roughly, both on top line and bottom line for the medium term. So that's an aggressive, continuous, profitable growth journey that we expect.

Now if you ask yourself, how so? Well, that's the theme of untapped upside that we put forth at that Investor Day. We believe, based on a lot of research that we have access to and that we've done, that of the addressable market that we are operating in, we only own about 5% share today. So there's a lot of untapped upside, a lot of runway, and we're going after it organically primarily in the LTL space and inorganically, as you have seen recently, Intermodal and obviously also B2C final mile.

So having said, that's the picture going forward with a commitment to double-digit beyond GDP top and bottom line growth. How are we doing right now? Mike is going to give us a bit more details, but let me just give you a couple of headlines. On the organic growth side with LTL, we're doing exactly what we said we would be doing. Our door-to-door shipments, that's stretching our muscle into pickup and delivery beyond airport-to-airport, those shipments have been up 14%. Our door-to-door revenue is up to 40% of our LTL network revenue, and we are growing with new verticals, 3PL stand out, International Forwarders stand out. And if you just take the 3PL's shipments are up 65% and billable weight is up 100%. So we are continuing to rely on domestic forwarders, and we're building out segments such as International Forwarders and 3PLs, as I just mentioned.

When we talk about our shipment characteristics, they're also improving. Door-to-door weight per shipment is over 700 pounds now, and the average length of haul is almost 1,000 miles. In very simple terms, heavier and longer is better.

And on the inorganic side, we are obviously committed to continued and accelerated M&A. And just to give you a couple specifics on this one, as you know, we just closed OST. That's getting us into the Baltimore market, gives us more presence along the Atlantic Coast in the premium Intermodal drayage space, and we're actually just thrilled to have the OST team members join team Forward Air and make them part of our family.

And on the FSA side, this the B2C M&A deal that closed in spring. This has been a beautiful story since we closed. In fact, our joint final mile team has won 4 new markets totaling over $10 million in run rate revenue since that close of FSA.

And I like saying it this way, we're far from done. We remain active on M&A and you also have to look at, yes, as and when freight cycles slow down, there are actually also some advantages to that. We may not like all of that slowdown, but it actually should help us on the M&A front with some of the valuation multiples compressing. And we do see that slowdown in some areas. On the organic side, Intermodal, clearly, we're seeing a slowdown; airport-to-airport, we're seeing a slowdown; and still what we also are seeing, especially in the most recent weeks and days, when we don't see pie that's increasing in size, well, then we got to do that I talked about doing, which is increasing profitably our slice of that pie. That's what we're doing with our grow-forward initiative where we're very surgically going after profitable business in the segments that we, for instance, mentioned with 3PLs and International Forwarders specifically.

So in sum, we've got a strategy, we've got a structure that makes sense competing as one operationally and commercially. And we have the right leadership team, and most importantly, thousands of us executing with high precision every single day. So I like where we're headed, and I like the momentum we've got.

And with that, a few more specifics on both the results for the second quarter and the first half, the momentum, especially also on the inorganic side, and then also some logic that we deploy when it comes to our capital that we allocate across our businesses. So let me take this to Mike Morris, our CFO, who is the expert in most of those areas. Mike?

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

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Thanks, Tom. On June 25, we filed an 8-K describing a $5 million vehicular reserve that we recorded in the second quarter under our self-insurance program. For your modeling purposes, let me provide some clarity as to how this reserve hit our P&L.

On a consolidated basis, the entire $5 million is captured in the insurance and claims line on our income statement. From a business unit perspective, LTL recognized $1 million in its insurance and claims line since this is the self-insured retention level for the affected business unit. LTL pays corporate and internal insurance premium for coverage above $1 million, which is why the remaining $4 million was recorded in corporate. The impact of this $4 million corporate reserve can be seen on the income from other operations line on Page 4 of our earnings release. In every case, consolidated business unit or corporate, insurance and claim activity unrelated to this reserve would impact the final amounts recorded for the quarter.

Without minimizing the severity of events that can lead to this level of reserve, if one wanted to understand our second quarter performance excluding the reserve, our operating income would have been about $4.1 million higher, which is adding back the $5 million reserve net of its impacts on incentive compensation. At that level of adjusted consolidated operating income, our operating margin would've been 10%; our incremental margin would've been 12%; our year-over-year operating income growth would've been 5.5%; and our EPS would've been $0.89, up 7.6% from the prior year quarter.

Let me continue by providing a quick update on our integration of FSA. As you'll recall, we closed this final mile acquisition in April. Overall, the integration is going very well. On the revenue side, the combined sales team hit the ground running, and you heard Tom mention some of our recent successes.

From an operations perspective, our teams have continued to provide high levels of service during the integration process with no major hiccups. One operating item worth calling out, which we discussed during our last earnings call, is the synergy we're starting to realize in pickup and delivery. In 3 markets, our LTL organization has begun using final mile contracted service providers to help handle peak LTL pickup and delivery needs, particularly on busy Mondays. This strategy provides additional revenue to our final mile providers while helping us maintain operating leverage on this LTL freight. We expect to expand these combined pickup and delivery activities into more markets in the future.

On the corporate side, our integration of FSA is taking a bit longer, which we expected given that we are a public company, but overall, is progressing on target. While we're on the subject of acquisitive growth, let me provide a few comments about our acquisition of OST. As Tom mentioned, we're thrilled to have the OST team join Forward Air and open up this key port for our drayage customers. On a run rate basis, we expect OST will contribute $32 million of revenue, $2.5 million of operating income and $3.5 million of EBITDA. For the third quarter, we expect OST will contribute $6 million of revenue, but no additional operating income given closing and integration costs.

Finally, regarding our second quarter capital allocation, we spent $27 million to acquire FSA and repurchased $24 million of stock. Our share repurchases have reduced our year-over-year share count by 3.1%. We incurred $10 million of additional debt during the second quarter, and our leverage at the end of the quarter was roughly 1/3 of a turn of EBITDA. Over time, we intend to optimize our capital structure by carrying a more permanent level of debt, which we do not expect will exceed 1 turn of EBITDA.

With that, John, 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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(Operator Instructions) First go to the line of Jack Atkins with Stephens.

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Unidentified Analyst, [2]

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[Wade] on for Jack. First of all, great job in a tough environment out there this quarter. First couple on the LTL segment. Tonnage comps in LTL are getting a little easier in the third quarter but the yield comps are a little harder. What are you guys seeing thus far in July for both metrics? And then maybe could you talk about what the guidance assumes for both in the third quarter?

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

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[Wade], I think you're asking the question of what's been the tonnage to date in July for LTL, that's the first part of your question?

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Unidentified Analyst, [4]

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Yes.

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

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Tonnage per day has been down negative 4.4% thus far in July. The comps do abate relative to the stiff headwind we've had in prior quarters. In the third quarter of '18, overall, tonnage per day was up 1%. That's a much easier comp than what we've faced the past couple of quarters. In terms of the tonnage that we're anticipating, I think it goes back to some of Tom's comments where we will continue to push on the growth on door-to-door and will have to see where the macro takes us in terms of some of the legacy airport-to-airport business, which Tom mentioned in his opening remarks has been a little under pressure.

From a yield perspective, I think we'll see probably less on the yield side than we have in the past couple of quarters. It'll still be positive, but -- we have some mix shifts in our business, I think you'll probably see a little less yield growth than we have in the past couple of quarters.

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Unidentified Analyst, [6]

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Okay. That's great. And then following up on LTL, you kind of already touched on it. Excluding that charge, looks like margins would've expanded year-over-year there. We would've seen higher single-digit EBIT growth. Is that the right way to think about it? And then is that the right way we should be thinking about it in terms of run rate headed into the third quarter?

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

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Yes. The charge definitely impacted LTL to the $1 million SIR that they took. Some of those compensation effects a good -- I shouldn't say it's a good guy, but the lower incentive compensation would actually accrue back to them. So net-net, the marginality is not very much changed at LTL as a result of the $1 million SIR that they took.

I think in terms of what to expect going forward, it's really going to be driven by your view of the macro, and I'll tell you this is a challenging environment to forecast into. We feel very confident that we're going to get growth in door-to-door in the initiatives that Tom described. Remember, we've got some final mile growth in there. FSA's revenue is a big part of the revenue growth that we're forecasting in LTL and as a consolidated entity. It is not at the marginality that it will be in the next couple of quarters. We're still integrating and standing this up. That's going to pressure margins a little bit. And then where we see the macro take us with respect to airport to airport and airline could put a little pressure on margins as well. So I think it really comes down to your view of the macro and whether you think things are going to abate in terms of the overall market and overall macro or whether you think there's going to be continued pressure. That's kind of vectors at play, if you will.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [8]

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Let me -- [Wade], let me just add 2 points to the ones that Mike made. The first one is a somewhat tactical point but reinforcing something we talked about in the last few earnings calls. We've gotten very, very rigorous with understanding the profitability of our customers, of specific industry segments and also of specific lanes. So while we're getting a lot of headwind, and that's the unknown, it's a lot 5% down, it's a lot 15% down in specific pockets where people shift modes, where people consolidate and take service degradation temporarily for cost gains. And but -- so we do know we can make up some of that by very surgically pricing for lanes where we're underutilized, and that's exactly what we're doing with some of the customer segments that were talking about also 3PLs is the one that stood out most. We're watching obviously, Wade , our tonnage day to day, and we are seeing some of the fruits of that dynamic pricing that we're doing.

The second point, frankly, is a much more -- in a big old sense much, much more important point. We did talk, and Mike you talked obviously in your opening comments, about a reserve we took. I mean the one thing that everybody on this call and, most importantly, everybody on the Forward Air team needs to understand and does understand, when we're talking about a reserve and we're talking about taking a few million dollars and putting them aside, this gets you to the topic that's most important, and that's safety. We're spending rightfully a tremendous amount of energy led and orchestrated by our Senior VP of Safety, Matt Casey, on making sure every single person comes to work safe and goes home the same way they came to work safe. And frankly, we're just somewhere between frustrated and just shocked when we have a slip and it doesn't work out perfectly and we actually are not 100% safe. So let me just make very certain, this is an earnings call, but the single most important thing and the thing we always talk about first is safety. And we spend -- even with our Board earlier this week, that was the #1 deep dive. So we can talk about financials and customer service profit for the rest of this call and we should, we are a for-profit enterprise, but I want you to understand that there's a human component that always comes first and foremost.

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Unidentified Analyst, [9]

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And real quick last one. Could you talk just a little bit about what you're hearing from your customers as far as how peak season could look?

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [10]

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Sorry, [Wade], what we hear from customers about outlook?

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

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Peak season.

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Unidentified Analyst, [12]

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About how peak season could look.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [13]

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Yes. It's actually interesting. So the general statement -- and again, I mean we're basically taking a bunch of impressions, and I probably do about as many customer calls as you could possibly imagine, I think last week, I'm between 3 or 4 customers. We went to some one-on-ones, some in groups, there's tens of them that we covered. The short answer would be -- and I'm not sure there's precise logic behind this, [Wade], the Q3 sentiment is much more cautious and much more kind of conservative than the peak season in Q4 sentiment. So if you want to get it in the headline, people are kind of hesitant about Q3. Perhaps a dip, perhaps that's just a very, very short-term dip, and fairly positive and bullish about Q4. So perhaps if you want to put it this way, somewhat moderate Q3 and a pretty solid Q4, that's the sentiment that I'm picking up from customers in different segments.

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Operator [14]

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The next question is from Scott Group with Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [15]

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We got the July tonnage. Can you give us the months in 2Q for the LTL tonnage, just so we have it?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [16]

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Yes. In April, we were down 6.1% tonnage per day; in May, we were down 7.5%; and in June, we were down 4.8%. And just as a point of -- this is -- Scott, just to round out the answer, sorry to cut you off. As a point of comparison, in the second quarter of '18, the comp was up 8.6%.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [17]

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Okay. Helpful. Okay. So I want to understand the guidance for the third quarter a little bit because if you back out the charge in 2Q and then the charge in 3Q, sort of you're going from a high $0.80 range to a high $0.70 range 2Q to 3Q. We don't typically see that drop off. Is that just what you were talking about, about customers being cautious in -- about the third quarter? Or is there something else from a cost standpoint or something changing 2Q to 3Q?

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [18]

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Yes. So let me start with very specific items, and then Mike, I think, we're going to tag team this one. So Scott, the first thing is there are very specific things that we I think also pointed out that are happening. So if you look at the guidance where we have revenue going up by 9%, and EPS, if you look at the $0.76 versus last year being flat, that doesn't sit right, right? So now a couple of items that make up a good part of that is the one that Mike talked about just a few moments ago. Whenever we have an integration of an acquisition, in this case, it's OST, the first -- and it depends on whether they are on the same operating system or not. The first 2 to 6 months is when you run the cost of integration and when you incur kind of the dip that gets you to a better place ultimately. We have that in Q3 full force. And so you get some revenue lift from OST and you get 0 profitability in Q3. We expect quite a bit of profitability, as Mike mentioned obviously in the medium and long term, starting in Q4.

The second thing is, and we also pointed it out in Q3, we are -- we have, over the last several months, done a review and, to some extent, also a reset of making sure we have the right structure and then the right people in those seats going forward. There is still, if you look at the notes that we sent out, there's still transition- and severance-related charges that are in Q3. I expect that we -- that the team that we have in place now is our teams that we're taking forward, and that's what I mentioned also when I talked about the Investor Day. I feel extremely confident and proud about this leadership team. So -- but we do have cost of transition that also go into Q3.

And then the last point before I turn it over to Mike. So between the OST integration that's revenue accretive but not profit accretive yet in Q3, between the transition cost on the leadership front and what we just talked about, overall, us just having to be realistic about the size of pie short term, frankly, hitting us, to some extent, where our slice of pie, our market share game, our dynamic pricing game still is catching up with the negative headwind will lead to somewhat of a cautious Q3 outcome. So again, between very specific activities and initiatives that we're taking very consciously and between tailwind with our initiatives not quite fully compensating yet for the headwind that we are seeing, the math adds up to what you just pointed out and what we just published. So that's my take on kind of putting the puts and takes together. Anything else, Mike, that I did not say?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [19]

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No. We're -- we've got acquisitive revenue driving a lot of the growth that does not have the profit characteristics it'll be going forward. We've got growth in door-to-door that's still building density, and then some caution in the guidance around the macro climate, which is going to tug at other parts of our business.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [20]

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So that's all really helpful. So you guys just gave us long-term double-digit annual earnings growth, so you must have some visibility to when it's coming. When do you think we get there? Is it -- it's not there. Do we get there in fourth? Do we get there next year?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [21]

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We gave a medium-term outlook, Scott. I mean a lot of it -- as we said during the meeting, a lot of it will depend upon the shaping of the overall macro climate over the medium term. We do definitely feel like we are heading down the right path, which is building density in verticals that let us exert our operating leverage in LTL, that's a key part of it, and then as Tom talks about building share in other verticals and other modes that give us an inorganic growth push.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [22]

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We also should look at -- Scott, I mean we were last year at 9.2%, and we're going to go to GDP plus 8% to 12% going forward in that medium-term perspective. So I mean we are within a fairly limited range. It's not like we're looking to go from low single digits to double digits, we're looking to go from 9.2% to GDP plus 8% to 12%, so that's the journey. And we do have -- and that's a DNA trait that we share here. We are very constructively impatient, so sooner is better than later.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [23]

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Okay. Very helpful. And just last one quickly. So on the Truckload side, the rev per mile and cost per mile both fell sequentially from the first quarter, any signs of either of those starting to move in the higher direction in third quarter?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [24]

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Yes. The -- with Truckload spot rates down 20%, it's a pretty difficult operating environment. I think it's really just going to depend on where the overall Truckload macro evolves. And as we mentioned earlier, we have some caution in our guidance around that aspect of the macro.

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

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The one thing, this is more a qualitative thing, but it's important, Scott, having all 4 kind of operations factories in the same operations team does help. So between specifically Truckload and the LTL, whether it's on covering loads or other operating synergies, I mean there are things that we are obviously looking to do while we're experiencing those very soft spot rates.

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Operator [26]

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Next, we'll go to Todd Fowler with KeyBanc.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [27]

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I guess just going back and looking at the second quarter, adjusting for the insurance reserve, you would've been above the high end of the guidance. And the revenue trends were a little bit at the lower end and the macro didn't feel great. Do you just have a sense of what was different in the actual 2Q results versus your initial guidance when we adjust out the reserve? And was there anything unusual there that benefited you that we wouldn't see going forward?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [28]

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No. I think part of -- and I'll be completely transparent in the answer, part of the variance that you're touching upon was our success in guessing what the decline in the overall range would be. We did our best with the information we had, but as we got into quarter end, we learned a little more. The other part of it is we did have stronger LTL performance than we expected, and we had a couple of good guys on other insurance-related matters not related to this reserve, other matters that were helpful.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [29]

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The one thing I should say in terms of perhaps also kind of guessing correctly, on the actual business side, on the revenue growth side, we're kind of executing the game plan that we talked about where we said like we're going to put -- kind of find key big spend initiatives, growing more business in other industry verticals, doing more with underpenetrated large accounts, going for smaller accounts that are actually highly profitable and do more with them, retention programs, cross-selling in some cases, which we're doing much more. So this is a playbook that I know how to kind of use, and we're using it. And we do know pretty exactly when it comes to getting compensated fairly on the surcharge front or with GRIs, kind of what the take rate will be. That's more almost like a scientific math exercise.

With those initiatives that I just sketched out, we kind of know the speed and pace with which they'll take. And so it may sometimes be a month or 2 slower versus faster, but they are working. And so that's why I'm also very, very bullish on -- when we talk about top line growth going forward, these initiatives and what I call the slice of pie game is going to be very effective. It's the playbook that we are putting in place is being executed very well by our sales teams, and we do have a program manager with our VP of Growth, who also has done this before. So again, I feel very, very good about -- we're not in the surprise business, we're actually executing precisely what we -- what the game plan and the playbook tells us.

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

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No, understood. And Tom, to that point, in your prepared remarks when you talked about the pie shrinking, is the higher-level way to think about that, that you're trying to -- the tonnage environment isn't as conducive, you're focused on more profitable freight, and so if we see tonnage declines, we maybe wouldn't see as much variability in the margin as what we've seen historically. Is that ultimately kind of the end game with what you're going at with that comment?

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [31]

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Yes. It's a bit -- I mean so this is a bit of sausage making, Todd, where I can't exactly tell you kind of at what pace which of the impacts is going to kind of add 2 percentage points here or take 2 away. So what I mean specifically, the -- some of our customers are giving up service that they medium and long term need for their kind of value proposition with their customer for cost savings because they are cautious in the current environment. In some pockets, that costs us 5%, 10%, 15%, in some cases, even up to 20% of the current business. So that I do know, I just don't know whether it's 5% here, 8% there or 12% there. I also do know that the pricing initiatives are worth a certain number of percentage points, and I know these grow-forward kind of find, keep, expand initiatives are worth double-digit percentage of revenue over the 1- to 2-year term. I just -- but between those different pieces, it's just a bit of -- that's why it's called a guess or a guide or a forecast, it's a bit of a mathematical assumption game. Is this going to be minus 8% and that's going to be plus 6%? Is this going to take 2 months to kick in or is it going to be 3.5 months?

Overall, the guidance that we put forth on the Investor Day, something that Mike and I are very, very confident in because it's a math game that we know how to play out and we have a team that executes tremendously well. So I'm not sure that gives you much more color, but the only thing I'm telling you back is, we know all the impacts, the puts and takes, we just don't know the exact percentages going this way and that way respectively and the timing of those. And that's where, for Q3, we had to be somewhat cautious because we are seeing the headwinds, we are seeing the tailwinds and the fruit of labor that we're putting in, we just know it's going to take a few months for some of them to bear fruit, and that's why Q3, we're a bit more cautious. And in the medium-term guidance that we gave in the -- on the IR day, we are rightfully very, very confident because we know it's going to play out that way.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [32]

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No. Understood, and that's helpful. I mean I guess I'm just trying to put it together in the context of what we're seeing with tonnage and then I think what most people would agree was relatively strong margin performance here in the second quarter, so I was just trying to square some of those things.

Just for my follow-up, Tom, in your response to the previous question about the sequential cadence with the third quarter, I'm sure you don't want to give fourth quarter guidance at this point or thoughts into 2020 or specific thoughts into 2020, but for some of the things that you laid out, are those things that you see as impacting 3Q? And I'm not talking about the macro things, I'm talking about some of the company-specific integration and costs. Or do those have tails into the fourth quarter and you get beyond those into 2020? Just how long do we expect some of these integration costs to be in the numbers? Is that something that's going to be one quarter? Or do we have more of a tail than that?

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

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I'll start, Todd, and Tom, if you can...

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [34]

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I can correct you afterwards.

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

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Okay. Great. The one cost that we talked about last quarter, we indicated would carry through the year, is the investments we're making to upgrade our corporate capabilities. We pegged that at, call it, $1.5 million a quarter, something like that. And that's going to carry through the rest of this year as we upgrade our systems and build out our platforms to accommodate our future growth and play a little catch-up relative to our past investment.

The acquisitions tend to have an integration cost of a quarter, especially if you do the transaction in the middle of a quarter. You're going to pick up some legal fees and things like that, some integration costs, and then you'll pick up some incremental amortization of intangibles once you figure out that math.

The acquisition-related ones, FSA is largely done. They cleared that hurdle last quarter, actually, produced a little margin. That'll start to get ramped up. OST will last quarter, and then that should start to get ramped up. So those are the acquisitions we've done. Barring any new ones, I think all this should be cleared out by the end of the year.

Did I get anything wrong?

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

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The only thing I would be more -- no, I mean obviously when it comes to numbers, I'm not going to do a beauty contest with you. The -- I would say specifically to the integration of the -- of OST and FSA, I think, Mike, it's fair to say that Q3 should see the bulk of that being like...

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

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Yes. OST for the third quarter, FSA is done.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [38]

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Yes. So Q4, I mean that's really talking to that part of the question of what we did so far acquisition wise, that should be processed, so to speak, within Q3 and should not impact negatively Q4.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [39]

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Okay. Got it. So we can make our assumptions about what the environment is going to look like. But it sounds like from a company cost standpoint, it's more of a cleaner sequential ramp going forward after 3Q at this point?

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [40]

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Perfect. Yes.

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [41]

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Yes.

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Operator [42]

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Next, we go to Seldon Clarke with Deutsche Bank.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [43]

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I just want to ask a longer-term question. Are there any other logistics services that you're considering offering, whether it be shared distribution model or postal injection, anything along those lines, whether you do it through M&A or by leveraging your existing infrastructure?

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [44]

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So I'm going to go first, and then Mike is moonlighting as a Chief Marketeer sometimes also so you can go second. But seriously, on the -- I do believe, and this goes back, Seldon, to what I talked about before, which you also saw on the Investor Day, after markets that we actually defined as the space that we're addressing today, we believe in the U.S. we have 5% market share. So that's airport-to-airport getting stretched into pickup and delivery. That's why I said we have 40% of our total LTL network revenue today in a door-to-door environment. However, collectively, between our Intermodal, between our LTL, pool and TL business, in the premium space, we only own about 5% market share. So there are extensions within that shoebox that we are definitely going to get into. I mean for instance, we've been saying there's nothing that tells us that our terminals in LTL should be confined to airport or near-airport locations, and you will see some of that playing out where our lanes, and beginnings and endings of journeys could be outside airport areas and will be at some point soon. So that's definitely a stretch that we feel very, very comfortable with.

But again, if we have a profitable business model with a double-digit margin commitment in spaces that we know how to tremendously execute and we only have 5% of the market share, my sense is that we should be going for these other 95% with as much rigor, precision, pace and constructive impatience as possible, and that's the best way to create maximum shareholder value. And again, I mean we have made quite a bit of stretches with the B2C space now being tripled in terms of our own presence with the FSA acquisition. I believe let's focus on keep the main thing, the main thing. Build out from 5% to 10% to 15% to 20% market share in the areas that we know to nail at double-digit profitability levels. So the short answer would be, I think we've got enough goodness to go after within the space that we started occupying and that we started sketching out on Investor Day a bit more in detail.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [45]

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Okay. That's helpful. And then getting back to LTL, if you go back and look for the last several quarters, your tonnage growth has significantly outpaced the industry. And I realize the characteristics -- the mix characteristics are a little bit different. But obviously, more recently, start to see a little bit steeper declines. And you talked about growing with your international 3PLs and your door-to-door service. So like what is the kind of key reason for that driving the recent weakness? Like what's offsetting the growth you guys are talking about? And when do you think you should expect to get back to positive LTL volumes?

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

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I'll start, and Tom, you can chime in. I think Tom touched upon it earlier is we obviously have the growth initiatives in door-to-door. We're still building density in that. It's important to note, and I think this goes back to an earlier question, we're not compromising the freight characteristics to get that -- get to that objective. I mean we're going after heavy, dense freight, but we're in the early innings of that growth initiative, making a lot of progress. The broader macro can tug at some of the legacy businesses, it can tug at the domestic forwarder, it can tug at airlines, and so it's really a tug-of-war between the two. One, the legacy business has a bigger base. So if it goes down a few percent, that mathematically is a larger number than a smaller base which is growing more than a few percent. So it's really that tug that's kind of the challenge in terms of looking into the third quarter in particular. I think that's a little bit, Seldon, of what's been going on over the past quarter.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [47]

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So it's nothing to do with freight collection or anything like that, it's just the underlying demand?

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

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I'm sorry, nothing to do with...

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [49]

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With freight collection, culling freight, anything like that. You're not foregoing your existing business to pick up some of the other heavier goods?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [50]

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Not in a material respect. I mean sometimes when you -- you know we did some GRIs and we had some targeted price actions around odd-sized freight and whatnot, but no big picture, it's just the macro pulls at certain parts of our business while we're growing others. Looking through the cycle, we think they're going to be additive to each other as we put density on top of density and grow as a network.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [51]

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Yes. I mean perhaps, if you step back a little bit, Seldon, the one thing I would say is if -- so we are making conscious decisions to focus on premium services that we provide and get compensated fairly for that. As and when in the short term some of our customers, as I said before, choose to forego service position for a lower cost, we're holding firm, and we are surgically looking for profitable business to complement and fill out capacity that we still have available. At the same time, we're doing what the best companies in our industry and other industries do, which means we hold firm when it comes to pricing. We want to be compensated fairly for the service that we provide. And again, even if we just look at this earnings call cycle and you look at the types of companies that actually did what they said they would do and they made or beat consensus, there's something that's common to us and those companies, which is we're very disciplined about sticking to our playbook, sticking to firm pricing and getting compensated for the level of service that we provide, making sure that we work very closely with our customers so that they can actually also get compensated from their customers for that service. So you'll see some of that going on. And when you have macro headwind, yes, that's sometimes putting you short term into a little bit of a challenging situation, but I'm very, very confident that we are playing that slice of pie game extremely effectively and we will see that build.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [52]

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Okay. That's helpful. And then just kind of a quick one, my last question. Given all the moving pieces with insurance, how should we think about just corporate cost for the back half of the year?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [53]

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I would just keep in mind the incremental spend that we've talked about of about $1.5 million a quarter as we round out the upgrade in our corporate capabilities, like we talked about in prior calls.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [54]

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Is that incremental or just the run rate?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [55]

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It was year-on-year growth, so incremental. But it's kind of a -- it's not going to be repeating at that level. It's just a onetime step-up relative to prior year, and then growth is more merit-driven type of stuff after that.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [56]

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Let me build that out, perhaps building on, Mike, what you just said. So over time, to be very clear, we expect corporate cost as a percentage of total revenue to go down, not up.

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [57]

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Yes. That's the point.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [58]

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Got it. But I guess just stay at a similar percentage for the remainder of this year and then come down in 2020 and beyond.

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [59]

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Yes. Once we stand up the automation and get process improvement and things like that, then we can grow without adding more cost.

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Operator [60]

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Next, we'll go to Kevin Sterling with Seaport Global Securities.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [61]

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Tom, can I ask a big-picture question for you, if you don't mind? And I hear you on the macro and you talk about the slowdown and we can all see that, but -- and you talk about a little bit of a slowdown in your core airport-to-airport business. But if I step back and think conceptually of that business and kind of what we're seeing going on in the marketplace with this move to expedited freight; with this move to supply chain speeding up; Amazon obviously continues to push the envelope for speed; conceptually, I would think that business should do well because it essentially is an expedited service offering that will be attractive to a lot of your customers. And maybe that's on the come, but could you help -- kind of help me bridge the gap conceptually how I'm thinking about that business. With your expedited service offering and supply chains get faster, I would think, over time, that business might be able to buck some of the general freight weakness. Maybe I'm not thinking about it right, but if you could help me there, I'd appreciate it.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [62]

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Actually, that's a very quick answer. Yes. You are thinking about it right. So the -- perhaps a bit more color on that answer is what -- what's happening with supply chains in terms of kind of more transparency, like I mean you and I have all -- we look at kind of our smartphones and we see exactly kind of where something is along the way and then we get the picture or confirmation of like, "Oh, here's the picture of where it was delivered." So that level of transparency, the level of reliability and the level of speed, all are moving in direction that actually is working very, very well for us. So -- I mean what you do typically see especially when there's conservatism, hesitation about the robustness of the economy, this is where people make trade-offs that, I believe, given where supply chains are headed, which is exactly, Kevin, what you're talking about, it is that faster, it is that more visibility to where's my shipment, it is that higher reliability where what you expect to happen actually happens every single time. This precision execution at a high-speed level, which is the supply chain trend overall, is playing exactly towards our strength. So yes, do you see a little bit of a peak and valley with the economy getting more hesitant and slowdowns happening? Yes, you do. However, these medium-term trends that you sketched out and I just reaffirmed are playing to our strengths in a tremendous way. I like where we're sitting and I like where we are heading with that.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [63]

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Okay. Yes. No, that makes sense. I was just thinking big picture. I don't see this dynamic changing at all and with your expedited service offering, I'd imagine longer-term you're just going to be well positioned. So okay.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [64]

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You and me share that belief.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [65]

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Okay. Well, great minds think alike, right?

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [66]

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Yes. Maybe a bit presumptive but I know where we're heading.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [67]

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Yes. I'm sure Mike is chuckling when I say that. Door-to-door initiatives that you've talked about and your local pickup and delivery that you are now offering, are you able to cross-sell these services and actually be able to maybe win new business that you hadn't won before? Maybe pick up new customers and even grow the existing customers? How is the cross-selling activity looking?

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

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Yes, it's a great question. So in our -- there's 2 things that work well towards more cross-selling. One is actually the content focused on it. So I mentioned before, these grow-forward initiatives that our VP of Growth, (inaudible) is working with, the operations, the sales teams, the finance team, the pricing teams, certainly, that is a part of his small group, the cross-selling is an explicit part of expanding business. So again, grow forward has a find, a keep and an expand portion. Cross-selling is part of the expand portion with the dashboard and expectation of the outcome. We have our top 25 largest customers where we have strong relationships in one business unit, and we're building it out to include also other business units. We have conversations very much kind of planned and executed with those large medium-sized accounts about what Forward Air, overall, can offer to them. So content-wise, very much on it with an expectation and a dashboard and a metric that actually supports that. Structurally, this goes back to what I said in my opening remarks, the way we pulled all of our sales and marketing acumen together under one Chief Commercial Officer area, actually makes that cross-selling easier because now we have all the sales and marketing team members being part of the same team with Matt Jewell having the lead. So again, both the content focus and energy is there and mind share is there and the structure now supports that more. And very specifically, there is a cross-selling list of targets, there's a cross-selling list of services that go well together and there is a number that we're shooting for.

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Operator [69]

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We have a question from Bruce Chan with Stifel.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [70]

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Just a question here on FSA. Mike, I know it's still early in the process, but maybe you went through this in the diligence and got a better feel for it as you have been integrating the business. But what kind of long-term margin levels are you expecting out of that last mile? We don't really have a lot of public comps to really look at.

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [71]

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LTL like. That's what we had in our Investor Day, Bruce, LTL like margins. That's how we operated the business that gave us conviction to grow with FSA.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [72]

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Okay. That's helpful. And then just remind me, do you have any plans to integrate those 2 networks down the line in terms of your facilities?

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Michael Joseph Morris, Forward Air Corporation - CFO, Senior VP & Treasurer [73]

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Yes. It is obviously subject to the customers' requirements. But I think looking medium term, it makes a lot of sense for us and for the customer to get scale economies of having this freight be shared with other freight through our terminals and through our pickup and delivery, but that requires the customer's agreement. We believe, over time, that's where this market will evolve, but right now, it's per the customers' requirements, which does not have a lot of that going on but that is our intention and hope going forward.

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Thomas Schmitt, Forward Air Corporation - Chairman, President & CEO [74]

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And I mean in addition to that hope it's an expectation that we have, right? So there is a -- Bruce, there is obviously an intent why the B2C business why we actually put this mentally and also financially from a reporting segment perspective together with the LTL business, there is a reason for that. Also I can assure you that our operations team and our COO, Chris Ruble is equally fascinated as I am about synergies. So we put all these operations eggs into one basket for that reason also. So the answer is yes, we should go there and we will go there.

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Operator [75]

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Ladies and gentlemen, that concludes Forward Air's Second 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.