Ladies and gentlemen thank you for joining Forward Air Corporation's Fourth Quarter 2017 Earnings Release Conference Call. Before we begin, I'd like to point out that both the press release and webcast presentation for this call are accessible on the Investor Relations section of Forward Air's website at www.forwardaircorp.com. With us this morning are Chairman, President and CEO, Bruce Campbell; and Senior Vice President and CFO, Mike Morris. By now, you should have received the press release announcing our fourth quarter of 2017 results, which were furnished to the SEC on the Form 8-K and on the wire yesterday after market close. Please be aware, during the conference call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the Company's outlook for the first quarter and fiscal year of 2018. 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 and results to differ materially from the results discussed in the forward-looking statements. For additional information concerning these risk and factors, please refer to our filings with the Securities and Exchange Commission, and the press release and the 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. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our fourth quarter 2017 earnings press release. Now I'll turn the call to Senior Vice President and CFO of Forward Air, Mike Morris.

Thank you, Justin and good morning to everyone on the call. Before we get to Q&A, we would like to update you on a few strategic and other items. On the strategy front, our LTL group is continuing to make investments in drivers and expanded capacity to provide our current customers with dependable, expedient and readily available freight movements. To grow its customer base, our LTL team has also begun serving the expedited segment of the 3PL market, which we believe is a $2 billion addressable opportunity. It's still very early stages, but we have implemented local pickup and delivery at the terminals that will initially participate in this initiative, and we have our tariffs floated in roughly 150 transportation management systems. We're excited about being in a position to provide sustained service to our current customers while penetrating the 3PL market to selectively supplement our existing density with heavier weight shipments. Our Truckload business is implementing the McLeod operating system, which will help us grow by improving our load visibility and real-time decision-making. The drive-in business in our Truckload group has been migrated to McLeod, and we've begun to convert the refrigerated business. We are also enhancing our focus on growing our non-pharmaceutical refrigerated offerings as we see a strong secular growth trend for this mode. Our Intermodal group has completed the integration of Atlantic and Kansas City Logistics. We are now a top 10 drayage provider, with an annualized revenue run rate of $175 million. We have a strategic road map of organic and inorganic investments, which we believe can grow this business to a $250 million run rate in the next two to four years. Finally, while our Pool Distribution group continues to strengthen its position in retail where it does all of its business, we are…

Sure. Thank you. [Operator Instructions] First it looks like we have the line of Jack Atkins of Stephens. Your line is open.

Hey guys, good morning. Thanks for taking my questions.

Good morning.

So I guess, Bruce if we can sort of start out and talk about the Expedited LTL business, you referenced higher purchase trans cost in the quarter which I don't think is that surprising given what we've seen in the freight markets. But can you just sort of talk about the percentage of your miles there that are outside, versus on your owner-operators. And then sort of how we should be thinking about that as we move through the year? Are there any specific initiatives that you guys are going to be sort of going after to help reduce that number?

Yes, let me have Mike give you the exact number.

Sure.

Thanks Mike.

Yes, Jack, so in the fourth quarter, brokered power was 21.8% of miles relative to 10.6% in the prior year fourth quarter.

Let me kind of run with that. What we look for and what we expect from our team, is to you get that number between 8% and 10%. If you look historically, that's where we've been, sometimes little bit better, sometimes a little bit worse, but never quite this high. The initiative to improve that is unbelievably all encompassing. We have every person in our company working on adding drivers. That's very difficult to do in the fourth quarter, but in the first quarter we've had some reasonable success and we see that momentum building. And every time we add more and more owner-operators, then we're able to drive that number down. So as we go forward in the year we expect that to go back to normal ranges. Forward Air, especially our Expedited LTL group is an ideal place for an owner-operator, no loading, or unloading, et cetera. So we will really look forward to a lot of success there.

Okay, that's helpful. And then sort of thinking big picture about Bruce your freight markets is as you're seeing them today obviously you've got a lot of experience in the industry overall. And certainly it seems like the last six months have been really unusual in terms of how rapidly the markets have covered off of what was a pretty soft pace overall. And so as you are thinking about spillover truckload in the LTL, how that may impact? Plus the secular growth story of e-commerce and demand for expedited transportation overall, how are you thinking sort of bigger picture about demand for your expedited services in expedite LTL services in 2018?

So if you take 45 years of experience, I have never seen a market flip like this when it did in the fall of 2017. I've never seen this type of market where the carrier is in a position – or in advantage, it’s better way to put it, since the regulation of Motor Carrier Act back in what 1981. It’s unbelievable the change has gone on. All of that having been said, the market is very good now, very frothy. We’ve had a very strong start to the year, we’re very pleased with it and we think that continues. And then if you add on to that, what Mike said in his opening comments about our entry into the expedited side of 3PLs. We think we're poised for a really good year.

Thanks, that’s great to hear. We've seen fuel move up quite a bit, not just year-over-year, but I guess, as you look back over the last six months, I know there's a lot of leverage in your Expedited LTL business to fuel both positively and negatively as it moves higher it's a positive, I think, historically. How should we think about the fuel surcharge impact to the business today versus a year ago? Is that a tailwind to profitability?

Yes.

Okay.

Yes, the quick answer yes.

Got you. Last question, I'll turn it over, I don't want to hog all the time. But when we think about expedited truckload, obviously a very challenging quarter there, it has been challenging several quarters there. What can you do to improve the profitability there? It seems like there's going to be opportunity to drive higher rates as we go to the bid season this year. And what impact that could have on the operating income of your expedited truckload business in 2018?

Well we're hoping it's going to have a very positive impact. We really ran into the same issues a lot of other people have run into.

Yes.

One is you have long term contracts that are very difficult to flip quickly.

Yes.

And then you have the other side of that equation where you – this is an important customer or customers, we don't want to go in gouging. We want to have a long-term strategic relationship with them. But at some point you got to say this doesn’t work.

Yes.

And our team has gone out, we are as rapidly as we can re-pricing. In a few instances we've had to walk away from business. So to get truckload expedite really where they need to be, that's number one. Number two is obviously we've got to bring on more of our own power because the purchased power is very expensive. So they are two initiatives, it's never fun to have to fight back from this type of position, but the other side of that is it's very clear what they have to do and it's very achievable.

Okay, and then just following-up on that quickly…

Now you said that was your last one.

You know I’m a sell-side analyst, I'm always going to stretch it, Bruce. So just following up on that, though, when would you expect to see the contractual rate renewals really start to bear fruit in the P&L? Would it be more like the second quarter, I think, we see them in the first quarter.

We will see it in the first quarter.

Okay, thank you again for the time.

Thank you.

Next we have the line of Bruce Chan of Stifel. Your line is open.

Yes, thank you operator and good morning gentlemen.

Good morning.

Just a few questions for me here. The first since this may be our last opportunity to get these stats from you guys, on the equipment side I see that LTL company power follow the trend that it's been following for last couple years and declined. But then on the lease equipment side it looks like you've more than quadrupled there over the last year and nearly doubled sequentially. Can you may be talk about what's driving the decision versus – to lease versus own? I'm assuming these are operating leases and that you're not getting bonus fee benefit there and do you expect shifting the mix towards the leases here?

The big thing that – decision that when we make up the lease versus owned is not can we afford a truck because obviously, we can. But our concern is the maintenance of that truck. We don't want to go out and invest in 50 maintenance facilities that are existing facilities across the U.S. So as we get more and more into the PU&D side of the business, our decision was the best way to go at this moment and this could change, is with leased vehicles so that we don't have to be concerned with maintenance.

I think that makes a lot of sense. And just a follow-up to that, I don't know whether you can disclose and whether your provider is Ryder or Penske or someone else there?

No I really don't want to do that.

Fair enough. And then just my final question here, given how strong the peak season seems to have been in terms of retail, and then some of your efforts over the past year or so to focus on operating leverage in pool, I guess I'm a little surprised that the performance wasn't bit better there. Now it looks like some of the cost increases were fairly proportional across the Board. So was there anything in particular that was may be driving the costs higher?

He had one extraordinary expense, Mike touched on it on, and he's next, where we had an unusual disposal cost of bode equipment. And then he had a couple of other unusual things go on in the quarter. So while that's disappointing the fundamentals of the business remain the same.

And just to put – Bruce just to put some numbers around that the equipment disposal charge was about $350,000 and the other unusual item is we had about $300,000 of adverse development for some legacy vehicle liability claims from a prior year. Those are some numbers around the two things that Bruce is referring to.

Great, that's very helpful. Thank you both.

Thank you.

Next we have the line of Ben Hartford with Baird. Your line is open.

Hey, good morning guys. Mike, maybe I'd come back to your prepared remarks. There was a comment, I think, you made about operating margins 50 basis points to 100 basis points lower, is that specific to Expedited LTL or is that overall it – was that in reference to?

Overall.

Overall, margin. And when we think about this is it fair to say, safe to assume that the impact is going to be well that 50 to 100 basis points drag is that applicable to Expedited LTL, as well.

Yes I mean it actually apply to all four segments obviously in different proportions. With Expedited LTL and the nature of its fuel surcharge that's probably the biggest impact you'll see from a segment perspective. But it does exist in various varying degrees across the other segments.

Sure, okay. So just focusing on Expedited LTL and operating leverage there, you've got this accounting change, but underlying profit assumptions are no different. Can you level set what you think an appropriate margin profile, maybe peak to trough, is in that segment now? We've got a number of things change over the past several years with the inclusion of Towne, you've got complete in there. And then you've got this accounting change. So it feels like from a decade ago, a lot has changed relative to the high watermarks. How do you think about the margin profile peak to trough in Expedited LTL? And maybe develop some of the initiatives that you had alluded to as well and how we should think about mix there too?

Well I think the incremental margin profile for Expedited LTL is going to be similar to what it's been over the past few years. While there is an accounting change with respect to grossing up fuel when you see our releases going forward starting with the first quarter the prior period will be shown pro-forma for the accounting effect. So when you look at the two periods next to each other you will have an apples-to-apples. You just don't, right now until we get to the conclusion of our first quarter. Expedited LTL is bigger, it's more exposed to the macros than it was historically. But it still has the potential to put out 30%, 40% operating margin in a good environment. And especially as we start to make some headway in the 3PL and other initiatives we have, that should bring up the way for shipment, I think you'll continue to see the same potential for incremental profitability quarter-on-quarter for Expedited LTL.

You said 30% to 40% I assume that’s incrementals?

Yes, so I mean if you look historical I'll look at Bruce a little bit, I think, the zone of incremental marginality is call it 15% to…

45%.

45%. I mean it depends on how many things you can get right in a given quarter. But if you look back to, for example, the second quarter of 2016 those business put up like an 82.8 [ph] OR. I mean those conditions still exist today. There isn't anything fundamentally different that would prevent the business unit from doing that, it's a bigger business unit now and so they matter a lot more than they might have five or ten years ago.

So let me add to that Ben. Really we're looking at two issues within the Expedited Group. One is recruiting drivers and getting our purchase transportation down which is really as high as it's ever been. And we're starting to see that occur. So the good news is we don't have a bunch of problems, we only have one problem and we're totally focused on that. The further good news is the growth is beyond all expectations. I mean they're doing a terrific job. And that's going to really bear fruit, especially when you look at the incremental margin it brings on.

And Bruce the problem that you alluded to the near-term pressure on the PT side, that's a temporary – that's a timing issue, problem, right? It's not anything fundamental or structural?

You are absolutely right.

Yes. The growth opportunity so Mike maybe just provide a little bit of context or update in terms of how you expect the cadence of the development of the Expedited portion of the more classical LTL market to develop? What reasonable to expect in 2018? And you alluded to the $2 billion market size, how will you judge success over a – I don't know, three-year to five-year period?

I think we'll judge success by seeing our weight per shipment trends increase. We're expecting, given the regionalization of supply chain to have our length of shipment decline over time assuming that secular trend continues. So if we have weight per shipment growing from getting selectively bringing in some heavier weight shipments into the network, that should help counter that from a yield perspective and help keep a good margin profile for the business. Internally we'll be looking at the traction we're getting as we enter this currently, largely, unaddressed market and seeing that we get the kind of heavier weight shipments that we're looking for.

Okay, two more. Bruce you probably has bought Towne a couple years ago, but in a difficult environment the legacy, I don't know if that's the proper term, I'll use it, the legacy Expedited LTL kind of core airport-to-airport market, I think, dynamics there are well-known, you guys are a market leader, but growth has been relatively constrained. So the question there is do you feel like that there is untapped potential from the Town acquisition that you can realize now that the underlying industry fundamental backdrop is a better, one. And two, what is the reasonable market growth rate for that legacy airport to airport business?

Well between you and I, I don't even think about Town anymore.

Okay.

It’s just not relevant, we've got that behind us. So we look strictly at what you said in the second part of your question, what can we do, what are we able to achieve as we move forward. What was at one time what we considered to be a very slow growing market has changed and part of that’s obviously due to the macros, part of it due to kind of the change in the supply chain process. So we're excited about what we can do. That's further supported by what we did in January, which from a weather standpoint, was kind of a tough month. So where we kind of dismissed and dismissed is probably the wrong word where we deemphasized the LTL Expedited growth in the past, it’s absolutely at the top of our list.

Good. Last one on the acquisition front Mike any update there you talked about having completely integrated the two deals in the Intermodal side, what’s the pipeline look like there on the Intermodal side, specifically?

We think there's a pipeline of upwards of $300 million to $400 million of potential revenue. I mean M&A is a little fickle as you know. Hard to predict but the pipeline is what it was previously minus the two deals we got done.

Just finally as I said $300 million to $400 million you talked about kind of adding $75 million in revenue in aggregate over the next two years to four years. Obviously that pipeline far exceeds that. So is that just potential prospects and you feel like the likelihood of being able to drive the incremental $75 million is high, but the addressable set is much bigger than how we should think about that?

Yes, and remember once you buy, you have to integrate it. So that takes a little bit of time. But if things go as we expect, we think we can do better than the $75 million because we have such a good team at Intermodal and they are very capable of doing it. So you know that's a lowball, conservative. And we think there's more obviously based on what Mike said in terms of what we've identified.

Perfect, thanks for the time guys.

You're welcome.

Next we have the line of Kevin Sterling of Seaport Global Securities. Your line is open.

Thank you guys. Good morning Bruce and Mike.

Good morning.

Just following-up on the M&A question are you seeing valuations move up as well or they kind of stay where they were maybe a quarter or two ago?

I haven't seen a noticeable change. Still opportunities and evaluations kind of fluctuated, depends greatly on the company and the deal. So it's really hard. It's not as bad as it was what ten years ago when it was 12 times and 13 times unless you have a really stupid buyer. So it's reasonable, is what I would put it.

And Kevin one thing that hasn't changed is our discipline around value, that's unchanged.

Good, good. No, no, you guys always stuck to your knitting, so it's good to hear. I think Bruce you mentioned you guys walking away from some business just because it wasn’t price right or when you tried to raise prices the customer baulked. But kind of given the tight capacity environment and efforts in this system, just curious if you're seeing this? Or you may be seeing some of these customers come back, they’re like hey let's talk again because we just can't fund capacity. Are you getting any of those instances [ph] in the business? You won't quit…

Not to over emphasize that point, but the emphasis there was we simply can't continue to haul the freight at this price.

Right.

And if you force this, then we will walk away. Obviously we don't want to do that. And in almost every case the customers have been very understanding and have been very accommodating. And so we've been able to work through it and avoid that showdown because anytime you’re getting a showdown, it's not good.

Good, that makes sense. And speaking of the price, I assume we'll see another GRI this spring and will it kind of be typical what your GRI percentage you’ve implemented in the past, is that right?

Yes, if you recall, we’ve started recently going with a fall GRI.

Okay.

So that's probably what you'll see again this year. You may see between now and then some, what I call tweaking of prices. But when that becomes known, we'll let you.

Okay. And one last question I guess just to follow-up up on that, Bruce. In the other market, you said it's crazy you've seen in 45 years. And it's probably the craziest I've seen in my 15 years of covering transports. Maybe now is a way to think about maybe help offset some of that expensive outside power that you might have to deal with particularly during peak season and other you get volume surges. Could we see multiple GRIs? I know you talk about tweaking, but maybe multiple GRI throughout the year to kind offset some of this higher cost?

So on the Truckload side, you're always evaluating price on a daily basis. In the Expedited LTL, we evaluate, we talk about pricing every month to make sure that we're priced where we need to be based on what we're experiencing in the market. So our goal is not to run our customer out of business in terms of just putting up huge price increases. Our goal is to respond to the macro conditions. And I think, so far, we've done that well, especially on the LTL side. We will continuously watch that. And so the day may come, as you pointed out, where we'll do multiple, but we don't see that today.

Okay. I've got to believe your customers they have a good pulse on the market. They understand what's going on. Is that right?

Sure. And they’re kind of in the same boat as we are in the Truckload side where they are locking contracts.

Right. Okay Bruce and Mike I really appreciate your time this morning. Take care.

Thank you.

Next we have the line of Todd Fowler of KeyBanc Capital Markets. Your line is open.

Good morning Bruce and Mike. This is Conor Sweeney on for Todd this morning. How are you guys?

Good, you?

Doing well, doing well. I just kind of want to start with the Expedited LTL business here. Can you may be discuss the decrease in the weight per shipment year-over-year here in 4Q? Maybe it seems a little surprising given the uptick in industrial markets. Can you speak to that, please?

Well remember going through a transition in the supply chain. So I think you're going to see more and more. I don't think the shipment size are going to be much lower, but it has changed. The other thing that occurs for us in the fourth quarter is the influx of the Amazon business, and that's all minimum. So you'll see that every fourth quarter. Assuming we handle that business, you'll see our shipment size drop. You should see it come up in Q1, Q2 and Q3.

Okay. Now that explains it, very helpful. And then maybe moving over to yields. I know in 3Q, yields kind of have impacted by mix. Can you may be speak to yields in 4Q 2017 maybe ex mix and what underlying yields are?

So our system yields ex fuel was flat quarter-on-quarter. We did have the GRI pushing it upwards, but a continuation of a shorter length the haul driving it down from regionalization and supply chain. Mix, so you asked for ex-mix. So I’ll answer ex-mix.

Okay.

Flattish, but then you do have mix in there, which is the growth in our door-to-door offerings that has varying weight per shipment and length of haul characteristics that are going to work their way through the math. What I will tell you is when we look at things look at things adjusted for these on a revenue per ton per mile basis, it's still attractive business.

Okay. That’s helpful. And can you may be just give us the tonnage comps, multi-tonnage comps for LTL?

Yes. So tonnage per day was up 11.9% in the quarter, October was up 12.0%, November was up 11.3% and December was up 12.3%.

Okay. Could you may be speak to January trends here, how January finished?

January, January is looking pretty good. Our tonnage per day was up 10.5%.

Okay. And maybe switching over to Intermodal. I know we talked about the acquisition pipeline, you're bringing on $75 million of incremental revenue. Now that the two previous acquisitions are kind of closed, do you anticipate – what level of margin improvement do you anticipate from 2017 and 2018 here?

Yes. So we knew when we made the acquisition of Atlantic that we had some work to do on the margin side. Unfortunately, that's not something you can do day one. It just takes time to get it done. They're well on their way. They have a good program in place. And we'll see that margin improve. We have seen improvement, and we'll continue to improve in 2018.

Okay. And then just maybe one or two quick questions on modeling. I know the additional leverage, Mike, maybe you can speak to what your expects for interest expense here in 2018?

Yes, I mean, it's obviously going to be driven by how much extra leverage we put on. But maybe a safe starting point is interest expense up, call it, $500,000 from where we were last year, so maybe $1.5 million, $1.7 million, somewhere around there. But we really need to see where we take the leverage based upon our capital needs through the year.

Okay. Alright guys that’s kind of all I had this morning. Thanks for taking the questions.

Thank you.

Thank you.

Next up we have the line of Tyler Brown with Raymond James. Your line is open.

Hey good morning guys.

Good morning.

Hey Mike, so I'm hoping we could talk a little bit about the 3PL push and LTL. So you mentioned that you've uploaded your tariff into, I think, to 150 TMSs. But I'm just curious, do you have any idea how much of the $2 billion addressable market those 150 clients represent?

I don’t.

We don’t know an exact. Obviously, we went to the largest ones.

Right.

Because they're the bigger opportunity. But to give you an exact number on that would be misleading.

Okay. And then on the P&D operations, what percent of the terminals are up and running? And do you expect that to increase? Or you're kind of good where you are here?

If I remember correctly, and I'm looking at Bruce here, there's like here, there's like 91 dots or 92 dots on that network. I think the number of dots that are up and running now is probably 70.

Which is basically done because the others just simply, they are small towns don't have a density.

Right, right. Okay. And then – but to be clear, from a 3PL door-to-door perspective, you are effectively open for business.

Correct, yes.

Okay. So I know it's early, but did that push any discernible impact tonnage late in the year? Or is it more of a this, next, 2019, 2019 story?

I don’t think it would. Given the volumes that the business does right now, I don't think you would see anything discernible as a whole. But I think you would see anything discernible as a whole. But I think you should see it the cross time as we ramp up.

Right, okay. And then can you remind me specifically what the characteristic differentials are on 3PL versus traditional airport-to-airport?

Well I can tell you what our goals are.

Okay.

Our goals are 1,000 and 1,500 pound shipments brought selectively in lanes where we could we could use the density. And then you would compare that to what's in our release in terms of our weight per shipment which reflects everything else.

Right, okay. But 1,000 to 1,500 would be that kind of the traditional or 3PL-type characteristic?

If you look at our average shipment size versus a normal LTL, it's been this way forever. We're much smaller. So part of what we're driving here is to get that larger shipment. First of all, it's normal in the business. And second of all, that's what we want to handle to help improve our density, especially in certain lines across the U.S.

Right, okay. And then I think just turning quickly to Intermodal. So I think you are a top 10 dray provider at this point. But I'm just curious if you could talk about what you're seeing in terms of tightness specifically in the market, and in particular, exempt long-haul dray market?

Well, first of all, we have seen that market tighten up, which we went through the first at least half and three quarters of the year last year, where it was a very loose market, now that's reversed. So that – put that aside. On the effect of ELDs on the longer haul, I can't sit here and tell you what that is. I'll be happy to talk to some of our people and see if they've seen anything. I can tell you if it'd been dramatic, we would have heard about it. And I would also tell you, as you well know, that if you mandate ELDs and say it’s December 18, and then you say, we're not going to enforce until April 1, we have not seen any actions yet. Come April 1, you're going to see a lot of action.

Okay. So how should we think about that? Is this a bigger opportunity, or is it headwind? Do you think you'll take share as the market tightens up? Or do you think it's going to just really pinch you on the PT side?

I think we have a good opportunity to take even more share. I think we have a good opportunity to protect our pricing and raise it because they simply won't be able to get some of it moved. Now that's not across-the-board, but there's a portion of that business that's going to run into rough times.

Okay, and it's still specifically international and staying away from the domestic market at this point?

Yes.

Okay. And then lastly, Mike can you give an 2018 CapEx unless I missed it?

It’s on Page 12 of the release. We’ve tried to put some supplemental modeling information in the back.

Okay.

Just to let you know, in general, if you go to the back of the release we got $46 million back there.

Okay, perfect. Thanks guys.

Thank you.