Ladies and gentlemen, thank you for standing by and thank you for joining Forward Air Corporation’s Fourth Quarter 2016 Earnings Release Conference Call. Before we begin, I would like to point out that both the press release and webcast presentation for this call are accessible on the Investor Relations section of Forward Air’s website at www.forwardaircorp.com. With us this morning are Chairman, President and CEO, Bruce Campbell and Senior Vice President and CFO, Mike Morris. By now, you should have received the press release announcing fourth quarter 2016 results, which were furnished to the SEC on Form 8-K and on the wire yesterday after market close. Please be aware that during this conference call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the company’s outlook for the first quarter and fiscal year of 2017. 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. Today’s presentation will include non-GAAP financial measures, including adjusted income from operations, adjusted income before taxes, adjusted income taxes, adjusted net income and adjusted diluted earnings per share. These non-GAAP financial measures exclude those items that we believe affect comparability. The reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our fourth quarter 2016 earnings press release. The company appreciates your attendance on today’s call and your review of the fourth quarter 2016 press release, including Bruce and Mike’s comments and the guideline – and the guidance information provided therein. To make the most of your time, you will have all given Forward Air this morning, we will move directly to question-and-answer session.

[Operator Instructions] First question is from the line of Jack Atkins with Stephens. Please go ahead.

Hey, guys. Good morning and thanks for the time. Mike, I guess, let me – if I can start with a couple of questions around the guidance, so sort of what you guys are seeing so far in the first quarter. Can you give us a sense for quarter-to-date volume trends in the expedited LTL business and sort of what does the first quarter guidance assume for volume and core yield growth in that segment, if you could share that?

Sure, Jack. Good morning.

Good morning.

For the first quarter of 2017 period-on-period, we are assuming flat LTL tonnage and a little bit of – a total system yield would be about flat as well, with little compression in line haul offset by fuel surcharge and pickup and delivery.

Okay. And is that similar to what you have seen so far in the first quarter?

Yes. I mean, if you step back and look at the – a bit perhaps a broader answer to your question, if you step back and look at the overall picture across the portfolio, there is two things going on in our forecast. The first is we are expecting revenue growth across the board, but we are remaining cautious about how much operating leverage we can achieve on that in what remains to be a sluggish freight environment. So we are being careful about how much incremental margin we think we can achieve on that. The second is we have some unique year-on-year effects in the first quarter related to income and expense from other operations. We had some things that were moving favorable in the first quarter of 2016, the comparable period and those things are moving unfavorable in the first quarter of 2017 in our forecast. So those are the two main drivers: core business; revenue growth; some caution around how much incremental margin we can achieve on that in a sluggish environment, where capacity is still lose and then kind of the unique year-on-year effect and other income and expense – I mean, the income and expense from other operations.

Okay, that’s helpful, Mike. And just sort of to drill down on that last point for a moment. Could you maybe talk about sort of what’s driving that unfavorable comparison this year in the first quarter? And is that something that you would expect to sort of linger on for a couple of quarters or is that more of unique to this one quarter?

It’s unique to this one quarter. In this line, we have a variety of things. The first is we have some actuarial estimates for potential future loss development. Those were trending favorable in the first quarter of ‘16. We had some accidents in 2016. So, our expectation is those will trend unfavorable in the first quarter of ‘17. We had some favorable talent facility adjustments in the first quarter of ‘16 that are absent in the first quarter of ‘17. And then in the first quarter of ‘17, we have got some employee separation costs that didn’t exist in the first quarter of ‘16. So, this is kind of a unique circumstance for this quarter. If you look at the first quarter of ‘16’s press release, this line generated income of $270,000. If you look at where this line has been in other quarters, third quarter of ‘16, it was $1.5 million of expense; in the second quarter of ‘16, it was $1.4 million of expense. And those are more where our expectations would be around this line. And so, if you think of that swing, it could be upwards of $1.8 million of variance period-on-period, which is anywhere from $0.03 to $0.04. We don’t know where some of these things will land, but that’s a little more color as to what’s going on in this line.

Okay, that’s very helpful, Mike. Thank you for that. Shifting gears for a minute and sort of thinking about 2017 more broadly, Bruce. Can you kind of help us think through some of the targeted yield actions that you guys are planning to take in the LTL business this year? I know you all seem to be a little bit hesitant. At least that’s what you have said in the past sort of push a broad-based GRI, but you are doing some more targeted things. Can you kind of help us think through the overall impact that you think that’s going to have in terms of yields or yield-like revenue in 2017?

Well, we feel at the moment, Jack and this is subject to change as we go forward, that we are going to hold where we are and not come out with a GRI. That obviously could change as the year goes on. We have done some tightening in terms of what we call spot rates or what you could view as an outsider as temporary rates. And the net impact of that is to drive our yield up. For two weeks now, year-over-year, our yield has improved. So we are pleased with that. But until we feel really comfortable with the market and the fact that we see growth in the market, we will hold our typical rates where they are today.

Got it. And are there other things that you could do, whether it’s adjusting your DIM factor or – like you have done in the past or are you going after some ancillary charges on some of the heavyweight, more e-commerce leverage stuff going through your network? Are those some things that you can maybe tackle this year, which could have a positive impact whether it’s – I know DIM flows through tonnage, but some of the things would perhaps float the yield as well, correct?

Yes. We are happy with where the DIM is now and think its fair both for us and for our customers. We are always looking at ancillary and we define ancillary as do you have or does this business cause us additional cost? And if it does, then we are going to come in and hit it with an accessorial charge. And that’s typical how we do business everyday, not just for the current period. If we see things change, in other words, we get into cost situations that appear to be more and more the norm, then we will attack that area with an appropriate pricing relief for us.

Okay, thank you. And then last question and I will hand it over. But it looks like purchase trends in the expedited LTL business stepped up, a little bit as a percentage of segment revenue versus where you have been running for – where you ran for a good bit of 2016. Do you expect to see some inflation on that line in 2017? And are you seeing any inflation in your cost per mile with the owner operators?

No inflation at this point. What you see in Q4 with our PT typically is the result of the holidays. So if you go back 4, 5 years, that’s what you are going to see and then we have to shut the network down and bring it back up. We get our system out of sync, similar to when a blizzard hits New York City, you can’t get the planes in and out. It takes the airlines a few days to get back and it costs them a fortune. So the same thing goes on with us, not to that degree, thankfully. But we anticipate, as we go through the year, that we will review where we are monthly with our owner operator base. We will wait and see what impact ELD has on the entire industry’s owner operator fleet and then we may have to adjust. Today, we don’t think so, but that could be coming down the road.

Okay. Bruce, Mike thanks again for the time.

You’re welcome, Jack.

And next, we go to the line of Jason Seidl with Cowen & Company. Please go ahead.

Hey, Bruce. Hey, Mike. How are you guys?

Good. And you?

You know what bearing with the snow coming down in New York City right now. Couple of quick questions for you guys. I guess, switching to intermodal a little bit. You guys seem to have a lot of success in what was arguably one of the tougher quarters for the industry. Can you talk a little bit about what’s going on there?

We saw little bit of uptick there, not a great amount, but we saw little bit of business come back. Interestingly, the core business of picking up and delivering intermodal containers has remained pretty stable for us in terms of our profitability. What has changed is we no longer have the amount of storage of containers that we used to have, because it’s sluggish, the business of intermodal is a little bit sluggish now. That is extremely profitable business for us. So when it goes away, you will see what happens to us in 2016 where we lose a little bit of our margin. But our core business is exactly the way it was. We have a great team there. They do a great job. We are looking forward to them really expanding their reach this year way beyond where they are today and we are excited about intermodal.

Okay. And switching to pool, you guys talked about a bunch of new business wins coming through there and helping out the top line. How do you think about your base business ex those wins? How does the demand look there?

Surprisingly good. We went into the fall, the peak season and they truly have a peak season, thinking that we were watching pretty closely and would it impact peak and it did much better than we anticipated. Now part of that is because this segment of our industry is losing a number of our competitors. So during the quarter, we lost two competitors. So that helps us. The one thing about our financial strength is we can stand there and battle and get through tough times. So, we are happy with where they are. They brought in two accounts during the quarter, which is unusual to do in the fourth quarter. Both of them are what we call integratable, so they fit into our existing network, which means the margin is much more solid and will remain so as we go forward.

Okay. And finally your driver count in the truckload premium, company going down here, double-digits, owner operator picking up the slack, is that what we should expect going forward?

Yes.

Perfect. Gentlemen, thank you for your time.

Thank you.

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

Good morning. It’s actually Vanck Zhu on for Scott. Yes, I just have a few questions on my end. I wanted to follow-up on Jack’s question on the guidance. And yes, it sounds like, I mean, there is 48% revenue growth and I guess ex-special items, EPS is only growing a little bit less than that. I was just wondering when do you expect to kind of go return to growth, is that kind of a second quarter event as you start to lap, I guess, the severance costs in 1Q or just trying to get a sense of where we can see kind of the operating leverage from the revenue growth?

Well, we would hope to see ramping up in the second quarter and then continuing throughout the year. That remains to be seen. Part of our reticence on predicting is little bit of a sloppy economy and it’s difficult to sit here for any of us, to sit here and say it’s going to be X, Y, Z. So as we gain and hopefully, this occurs sooner rather than later, more and more confidence in the macro economy, you will see us get much more aggressive, but today on the early part of February, we are not about to go there.

Okay, okay. And just reviewing the quarter again, just looking at the expedited LTL line haul yields, just wondering what’s kind of driving the year-over-year declines there? It seems to have gotten worse relative to third quarter wondering why it fell 1.7% year-over-year?

Hey, Vanck, it’s Mike. So, couple of things there. First in the year-over-year period, we did not have any price increases in the fourth quarter of ‘16 compared to the fourth quarter of ‘15, because the revenue management actions we took related to the DIM and that won’t show up in yield. We also had some shorter shipment distances. We saw supply chain regionalization, which is a secular trend, but it’s facts are being felt, more fulfillment centers, more DC centers. And so the shorter length of haul is going to suppress the reported line haul yield. Those are the two main drivers.

Okay. And do you expect kind of the reasonable kind of heavy shorter haul, is that going to continue throughout the year or is it kind of a long-term secular trend or is it ahead of you, especially is it a more fourth quarter type event?

No, no, no, it’s going to be a continuing trend. As you see, it’s what I call the Amazon impact. So, 2 years ago, they had, what, 10, whereas now they have 31 or whatever. Every time they build a new DC, then that length of haul is going to get shorter and shorter. So that’s going to be a continuing trend. We modified our network to handle that and to take advantage of it.

Okay. And I guess just one more for me. Looking at the TLX side, I saw in your release that you said that you signed on a couple of new – sounds like you on-boarded some new business. It seems like a tough environment out there. I was just wondering if you can provide some additional color on, I guess, new business that you on-boarded in fourth quarter?

We have – the TLX growth has been strong. We have been growing in a couple of different segments, growing – providing the line haul services for common carriers. It’s been good, strong volume driven growth. It’s just that from a profitability perspective when it comes on board. Sometimes we will pick up a little more PT than broker driven purchase transportation that we normally would as we adapt to the incremental volume and kind of claw it back to equilibrium we normally run at. So, it’s growth – it’s just in that particular quarter, the profitability wasn’t at our target, because of an increased use of brokers as we got used to the lanes and the volumes.

And they also took a big hit on an accident.

We did have an accident flowing through the insurance and claims line.

Okay. And roughly, how much was the insurance?

I don’t want to quantify how much of the change was related to the accrual, but there was one in there.

Okay, got it. Okay, thanks for your time guys.

Thanks for your time, Vanck.

Next, we go to the line of David Ross with Stifel. Please go ahead.

Good morning, gentlemen.

Good morning, David.

Just a follow-up in the length of haul question, what is the average length of haul there at the expedited LTL division?

It’s right at 650 miles.

And I guess how much is that down year-over-year? Is it down...

Year-over-year, it’s not down that much. If you go back 5 years, it’s down probably about 15% to 20%.

Okay. And then the average shipment size, that’s been trending down as well. Have you seen that bottom or do you expect that to also trend down further in ‘17?

Actually, that reversed a little bit. So we are not seeing that going down quite as bad as it was.

That’s good. And then with capacity, you talked about it still being loose and not looking to take that GRI this year in the LTL business, but you did take out town. So I guess I am surprised that it’s not a little bit better or more favorable on the pricing environment?

I think you have to think David, about our customers. So if they are unable to get rate increases from their customers, then it’s hard for them, if they want to stay in business, to pay us more. Are there lanes where we can jam increases in and just say too bad, without question, there are. But long-term, that is not a good method to follow. So we will look at the GRI, it’s not off the table. We will look at it every month during our management sessions. And if we feel it’s something that we need to do, if we have to have an increase for our owner operators or some other cost impact, we will certainly go back there and get an increase.

So as a follow-up to that would be, what is the cost outlook in ‘17 for the expedited LTL division, are you going to be able to keep costs flat and that’s why there is not really a rush for the GRI or are costs going up and you are just going to have to figure out how to get it somewhere else?

Our nature is there is always a rush for GRI. But at the same time, we have to be realistic. On the other hand, we think costs this year will remain very stable through the first half. And then we are going to be like everybody else and that’s watching what the impact of ELDs will be on not only us, but everybody else and does it dry up capacity. So we are comfortable on the cost side through the first part of the year. We will wait and forecast the second part of the year, probably sometime in July or August.

And then the last question really is if you were to take a 3% rate increase, do you think you would lose a lot of business and if so, where would your customers then go to get their freight moved?

They could go a number of different places. They use LTL carriers. They could go to other of our regional competition. We have got one somewhat national competitor. So there are places for freight to go.

So just to clarify, you are saying it’s still a price over service environment out there?

Depends on the customer and I am not avoiding your question, but it does. In many cases...

I get it.

Yes.

Alright. Thank you.

You’re welcome.

And next we will go to the line of Todd Fowler with KeyBanc Capital Markets. Please go ahead.

Great. Thanks. Good morning. Bruce, I mean maybe just a couple of comments about the quarter in general, especially coming off of the third quarter, where things have been a bit inconsistent and then the fourth quarter a little bit of strength, I guess I am just curious, maybe a little bit more of a high level, as to what you saw in the fourth quarter different from what you saw in the third quarter and kind of just your perspective on the freight environment right now?

The first quarter, we thought was good, it wasn’t great. We continued to see, as we talked about some capacity, loose capacity issues. That tightened up in the latter part of November going into December. So we were happy with that. The pool business was better than we had anticipated and we were happy with that because that’s a density driven business. The LTL or our Air Expedite group, we saw the normal Amazon influx of business that has a pretty big impact on their cost. It’s good business, but it kind of changes the way we do business for a quarter. We anticipated that, we are ready for it and we handled it, I thought in a pretty good way. So overall, the quarter came in at the higher end of our expectations and we were pleased with that considering where we are in economy. As we are today, our comments would be, we are off to a decent start, we still feel a little softness, we have worked hard on yield in terms of getting it up on a year-over-year basis and we have been successful to-date. We are working hard on developing our 3PL customer list and developing business from them. We have had success there. So we are certainly not in an exuberant time, but we have got a lot of good projects going forward or initiatives, whatever you want to call it. And we are excited about the year.

Okay, good and I appreciate that. I might have missed some of that in the prepared comments. That was a joke, Bruce.

Actually, you are on the ball today.

You got to be on time for these calls, I guess. I mean if I was going to get a cup of coffee, I would have missed a lot. So, just a couple of other follow-up questions, so I think in 2016, you talked about the Expedited LTL ORB around an 86 range and you were there and you showed some margin improvements, with some of the mix shift that’s happening within that business and in the freight that you are moving, what’s the expectation for the margin profile in the LTL business going forward?

Well, obviously we want to continue to push that improvement. And we think we can if we have the right circumstances. The big thing for this year Todd and we will touch on this every quarter because it’s critical, is our big cost bucket and that’s purchase transportation. As I stated earlier and Mike stated, we are concerned what happens to that market of owner operators as we get towards the end of the year. So that’s going to be the big driver. Can we improve on an 86, can we get it down to an 85, it will depend on the yield market. Are we getting good yields, are we being forced to go lower, so it’s kind of business as usual with the big unknown what’s going to happen to the owner operator fleet.

Bruce, what do you have to do with the owner operator fleet to potentially get out in front of that and I am guessing it’s probably monitoring first and I wouldn’t – maybe we will take proactive measures, but does that come down to compensation packages for the owner operators or how do you stay in front of that so you are not caught flatfooted in the back half of the year into ‘18?

We will – again, it’s a constant monitoring. We are actually out looking at pay packages as we speak. I don’t know if we will do anything in the next few months or not, I doubt it. But that’s part of what we do. We have an aggressive recruiting group. So we are out trying to get everybody we can get. When we are – when we look at what we provide versus what other carriers provide with a couple of exceptions, if you are an owner operator, you wouldn’t have a home with Forward Air. So we are going to do our best to protect that image to help us get through the year.

Okay. And then just two last ones, percent of miles that were owner operator versus outside network in the fourth quarter?

For Expedited LTL?

Yes, Mike.

They did very well, continue to get greater owner operator utilization. We were 88.6% in the fourth quarter of ‘16 versus an 87% number in the fourth quarter of ‘15.

Great, okay. And then just the last one, what are the thoughts on the truckload expedited margin longer term, I think you have talked about a 90 OR [ph] in that business and I understand that there are some costs associated with on-boarding new business here in the fourth quarter, but when I look at where you were throughout a lot of ‘16, it would suggest quite a bit of margin improvements get down to that target, what’s your expectation near-term for ’17 and then maybe, thoughts longer term on that? Thanks.

You’re welcome. We anticipate them return to where they were in the early part of ‘16. We anticipate them to get to the 90 OR as we go through the year. We have got a couple of issues we are dealing with there that, if we were successful in dealing with them, that will get us to a 90 OR pretty quickly and hopefully even better. So we are pleased with where they are. But we do have work and that’s why we get paid.

Okay guys. Thanks for the time this morning.

Thank you.

And next we will go to the line of Ben Hartford with Baird. Please go ahead.

Hey guys, it’s actually Zach Rosenberg on for Ben. Thanks for taking our questions. Going back to a question earlier on pool, it seems like pool was a margin bright spot during the quarter and after a couple of challenging years into the growth and associated start-up costs and last quarter you discussed a shift in strategy focusing less on the growth and more on generating operating leverage during this quarter and I am just wondering, given the revenue, still at the healthy 11%, what type of growth should we expect as digestible or phrased differently, if there is a growth bogey above which improving margins becomes more challenging?

Yes. Our outlook there is, we can grow and we do have a growth factor pulled in this year that’s a double digit growth factor. But we have made it very clear that we will take our existing asset base, our existing infrastructure and we will chain that and we are not going to go out and add a lot of cost to bring on new business where you are basically swapping dollars. So we are taking our existing network. We are going to maximize, optimize, whatever words you want to use, our ability to get a profit out of it. If there is an opportunity to grow beyond that, then it has to stand on its own, in terms of an ROI. So we are excited about where they have come from because it has been painful in the past, but I think they have a pretty bright future.

Do you have some kind of margin improvement target internally or just generally, if you are not comfortable giving a number?

We do have a margin improvement internally.

Okay. Moving on, looking at the Intermodal segment, I know you have been looking for some M&A opportunity and looked at some deals, can you talk maybe, what deals you guys have looked at or if there is anything in the pipeline there, any kind of opportunities for acquisitive growth there?

Yes. I think we will have opportunities. We don’t get into discussions of individual opportunities. We will tell you our goals. Our goals are we need to expand geographically. Today, we have a solid, a really good operating network in the Midwest. We need to expand that, take that management expertise. And again, I have said it before, and I will continue to say it, it’s one of the best management teams I have ever been associated with. So we will approach it from a geographical standpoint initially and then respond to the market. As you know, there are days when you can make acquisitions and there are days when you can’t and you do a Greenfield startup and do it on our own. So we will attack it from both angles.

Got it. Anything that’s come up that you have taken a look at recently or are the multiples at the right place for that right now?

You know that things always comes up in that market. So it’s pretty much business as usual.

Got it, okay. And turning back, you gave specific color for the LTL – expedited LTL segment for volume and pricing that’s baked into the guidance, but can you talk through maybe some numbers or framing around the other segments as well for first quarter or 2017?

It’s revenue growth across the board. That’s about as much color as I think we can give.

Got it, okay. Thanks for the time guys.

Thank you.

And our final questioner in the queue is David Campbell with Thompson, Davis. Please go ahead.

Good morning everybody. Thank you for taking the questions. I think you mentioned in the very beginning that first quarter, your assumptions are in the LTL expedited flat yields and flat tonnage, but then you said you would have revenue growth across all lines, so what – can you please explain that, how do you get revenue growth in the LTL tonnage?

Sure. So if you think of tonnage, you are talking about pounds moving to the line-haul network. We would expect some compression on line-haul yield, given the environment that we have been talking about. We are counterbalancing that and driving net growth, we are experiencing a growth in our complete product, our pickup and deliveries as it relates to our increased penetration of 3PL accounts, which have higher complete attachments to them. That’s driving revenue growth beyond line-haul. And then we are also experiencing quarter-on-quarter higher fuel surcharge rates that would drive top line revenue growth. And Bruce mentioned earlier about actions we have taken with respect to minimums, accessorials, some of the other things. So we believe we can generate revenue growth in a flat tonnage environment. The reconciliation is that it’s coming beyond the line haul revenue category.

And then some of your other businesses will have full distribution growth and this outlook is good for revenue growth, so I guess you will get some revenue growth in the other sectors?

Yes. We think we will have revenue growth from the other sectors as well. I just – the question is how much operating leverage we can achieve across the portfolio, given the sluggish environment.

Right, okay. Thank you very much.

Thank you.

Thank you.

And we have no further questions.

Okay.