Thank you for joining Forward Air Corporation's Third 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 third 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 fourth quarter and fiscal year of 2019, the expected impact of growth and the strategic initiatives, the expected impact of organizational restructuring, the expected impact of the FSA and OFT 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 risks 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 risks and factors, please refer to our filings with the Securities and Exchange Commission and the press release and webcast presentation relating to this earnings call. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. And now, I'll turn the call over to Tom Schmitt, CEO of Forward Air.

Thank you, John, and good morning to all of you on the call. As you remember in July during our last earnings call, we just came fresh of our Investor Day in New York. And in New York, we committed to our, what I call double-double, a double-digit annual revenue growth rate and double-digit margins in the medium term. With a strategy behind it, that's basically around when it's bigger than a box think forward and driven by organic growth in LTL and targeted M&A in intermodal and final mile. This truckload and pool being strong stretches, truckload being a complementary service to our LTL service and pool going deeper into retail and also additional verticals; structurally, we supported this whole thing with a very, very clean approach commercially and operationally one consistent set of rules, one vigorous set of guidelines, and KPIs, and most importantly with the right team and the right leaders at the table. So in September, I add another milestone be at Forward Air, perhaps less so, but I personally definitely so, I had more near here with Forward Air, I'm still close to a rookie year. And with a strategy, a structure and a team in place, and the year behind, we -- it's probably a time where whenever honeymoon there was it's over, it's show time, it's time to execute, and we are executing. In my mind, precision execution for our customers and internally is happening. If you look at the third quarter and the release that John just refer to 9% year-over-year revenue growth, 10% excluding the reserve operating income growth, and we are just getting going with our precision execution machine. So let me show you a few proof points, how we got to these types of numbers and how this machine…

Thanks Tom. During our Investor Day last June, we provided commentary around the role of final mile in our medium term growth strategy for LTL. Specifically, we described final mile evolving over time into more of an integrated model that builds pickup and delivery and terminal density within our LTL network. We also discuss the near term impact this could have on LTL margins, as our final miles growth will likely involve acquisitions, which could dilute the underlying margins from our LTL operations. During the third quarter, we saw this effect. As disclosed in our release, purchase transportation was 45.5% of LTL revenue last quarter. FSA our recent final mile acquisition is still being integrated and diluted this margin by 160 basis points. Excluding this FSA impact, purchase transportation would have been 43.9% of LTL revenue, reflecting the significant leverage we generated on our owner operator fleet. As Tom mentioned, over the past few months, we've been exploring a deeper synergy between our LTL and truckload operations which could help drive organic growth, build line whole density, and lower purchase transportation costs within our LTL network. We're still evaluating this potential opportunity, but if we determine that it makes sense to run as one combined fleet, we may also determine that we should consolidate truckload into our LTL segment if that best reflects how we operate the business. Like final mile, consolidating truckloads dilute margins from our LTL operations until it becomes more fully integrated. But also like final mile, truckload can drive medium term benefits by enabling organic growth, enhancing density and lowering unit costs. We will continue to evaluate this potential synergy as part of our ongoing strategic review for truckload and we'll keep you apprised of our progress. With that, John, let's open the line for Q&A.

[Operator Instructions] And first go to the line of Scott Group with Wolfe Research. Please go ahead. Scott Group your line is open, if you are on mute possibly.

Hey thanks, morning guys how's it going.

Morning, Scott.

Can you guys just start with maybe just some of the monthly tonnage trends any comment on LTL and then just a view of the pieces of a fourth quarter revenue guidance.

So, I'll take you -- the tonnage per day for the third quarter was down 5.1% over the quarter; in July, it was down 8.4%; in August, it was down 2.1%; and in September, it was down 5.1%. But Scott I will point out that this particular quarter both third quarter '19 and third quarter '18, we're pretty heavily impacted by some GAAP adjustments that were required to make to our reported tonnage. It gets down to the day of the close of the quarter and the comparable period and the current period; and with some Saturday and Sunday calendar timing, it led to some larger than usual ship to deliver adjustments. Our tonnage was still down but just to give you another mark for the quarter on our daily system reports which don't have these GAAP adjustments made. Our third quarter tonnage was down 3.4% as compared to the 5.1 we have in our release, just to give you a little more color there.

Okay, that's helpful and then the early view on October.

Yes, hang on a sec. Through October our tonnage per day is down 1.9%.

Let me just add., Scott, little bit of color to that. If you look left and right, what the numbers that we just mentioned, the best in the industry specially also keeping pricing discipline, we saw some of what we just told you about in terms of numbers over the next quarter. Our initiatives winning business back that makes sense for us and going after underpenetrated segments are starting to actually make the numbers work the way we intend for them to work. So, those deltas that we just talked about I expect them to get smaller not larger versus previous year as we go into fourth quarter and beyond. So, the trend is definitely going the right direction where we use our surgical intelligence to win a larger slice of the pie and we're going after the most tasty slice of the pie.

Okay. The accident costs that you talked about in the release. Is that in one of the segment? Or is that just sharpen the sort of corporate line?

Well, yes I was going to pause for a sec, so we took a modification to a reserve for a preexisting claim then we filed an 8-K on that claim on the 21st of June before we entered our IR day. If you need more color and I'll answer your question but we did provide a lot of commentary on the last earnings call about where it hit and I'm referencing that so that I can be really clear. The business unit had a $1 million self insured retention, which he has already exhausted. And so, the effect of that $1 million SIR was felt in the LTL business when the reserve was put up at the end of the second quarter. The overage is in other because that's where we have our internal insurance company providing coverage to the business units. And so therefore, with the extra 2.5 that is in corporate other, because that's the body that has to take this incremental reserve, we have brought our reserve as a company up to the full extent of the self insured retention that we have with our outside side insurance carriers.

So, the initial impact in the second quarter in LTL, the second impact in the third quarter in corporate?

Initial impact in the second quarter 1 million to LTL 4 to corporate.

Okay.

Then in the third quarter, the next 2.5 is sitting in corporate.

Okay. Everything you guys are talking about with truckload and LTL sort of together on an opportunity. I guess, where we're going to see that? Is that going to show up in truckload results or an LTL results? And then when do you think we're going to start to see that and when we have the opportunity?

Yes. So, the answer is actually, you will see it in both and it's hard to predict where you see it most. So let me just tell you there's a positive effect from during business kind of more together that his fault. For instance, when you recruit, and you interview people and you basically appeal to both LTL focused drivers and truckload focus drivers. And one conversation just makes those conversations I see fewer and more efficient and effective from an outcome perspective. So, we have practices that actually lend themselves to synergies, including recruiting people. But when it comes to the actual business success, that's where it becomes a bit harder. So taking it, let me give you an example, we added 10 more lanes going from most of the Midwest and the Northeast to California. And we were able to do that, because suddenly between truckloads out and LTL beg, planes made sense. When you look at both businesses together that didn't make sense individually before, because it would have been at truckload out and perhaps an empty dead haul back or would have been LTL move in California to the Northeast, but then backhaul as a consequence you have that is completed. Now we have to see it in and out. Now the pricing, we have obviously, we'll surgically adjust so that when we attract both sets of moves, but in some cases the pricing might be tremendously helpful to the LTL profitability and not so much in truckload profitability, but the overall move is tremendously positive for us and it wouldn't have happened without looking at both sense of moves together. Some are long way outstanding, obviously we are pricing for profitability that's appropriate at the same time, we are looking at some of those moves combined and in some cases LTL may benefit a bit more in some cases truckload, that's also why Mike said, we are deeply exploring the potential impact of those energies going forward. So, we're doing more and more and obviously we're going to come to a conclusion at some point what that means for the segments. But what we saw so far is tremendously commercially appealing and frankly also do a process perspective appealing. The reason that we have a record number of team drivers, which is the single best resource to have in this business definitely is not coincidentally somewhat linked to our ability to recruit those driver forces together.

So, Scott just kind of walking down the P&L, you have you know, increased revenue opportunities by taking loads you might not otherwise take. So you should see an improvement in revenue over time. You have improved line haul density, and a lower cost per mile if you can avoid using brokers and get your trailers more fully packed. CCPT and then we believe that if we can keep making this work will actually use less trailers. And so you might see an improvement flow through on the depreciation and amortization line. We're still exploring as Tim Parker and his teams have done a wonderful job this past quarter and really showing them potential as a model. And as part of looking holistically strategically across the portfolio, we're hopeful that we can come to the conclusion that this is something that can enhance the leverage potential of the law.

Right. And I guess, so I guess -- the question, I guess that is when because if we take a look at the fourth quarter guidance here, we've got good revenue growth, but sort of flat as pretax income, I think so, price and margin contraction. Where do you think we start to see consolidated margin improvement?

Well, we're going to have -- as we talked about in our call. We are going to have some improvement in the underlying platform margins, a little bit drags by acquisitive growth. We won't lap FSA until next April. We've got OST to lap inside of intermodal. And it takes a couple of quarters to grind those margins up. If we haven't made any decisions on truckloads that was something that would also take a couple of quarters to implement if we concluded that we need to do it. But we very much believe that, we're on the trajectory towards the things that that we discussed and it was unfortunate we said to vehicular reserve last quarter. But if you strip that out, our results were actually a lot better than the earnings release would have suggested, and we were very close to double digit revenue growth and double digit margin.

Our next question is from Ben Hartford with Baird. Please go ahead.

Maybe just coming back to, Mike, I think the granularity you probably provided in expedited LTL, PT was helpful. I know you've had some initiatives there to rebuild that owner operator fleet. Is there any way to splice out that leverage that you have had that you have experienced ex-FSA on a year over year basis? How much of that is just due to the natural operating levers that develops, as spot pricing does often versus some of those internal initiatives to rebuild that owner operator fleet? And to that latter point, what do you have in store for 2020 to help continue some of those initiatives?

Well, I think that the operational excellence had a lot to do Ben, with the leverage. I think if you look year-over-year and you strip out FSA with the comments I made. I mean, I think we're looking at 300 something basis points and improvement in that operating leverage and our owner operator fleet is the best I've ever seen it and from the people who've been around here for a long time it started to sound like it might be the best we've ever had. Recruiting is definitely stepped up its game. Kyle and Brian have done a wonderful job with their teams there. As I mentioned, Tim Parker and the line haul group reporting on to Chris Ruble have really taken advantage of that fleet and have put a tremendous amount of leverage potential in the model. We're going to just keep hammering away at it as we get into the fourth quarter and as we get into the beginning of next year, my teams are at near record highs and are approaching where we really like to see them as a percent of the overall fleet. So, we'll just keep working, but I think a lot of it was execution than versus the evolution of spot price.

And then Tom, maybe for you specifically on the expedited LTL side, seems likes the models kind of walking that fine line of some still macro headwinds and pressures to core customers against the initiatives the broader TAM expansion market initiative that you've been talking about. When do you think that this unit can, that the segment can consistently get to positive tonnage growth? And maybe as an addendum to that your year end to the ten year, if you could provide a little bit of perspective on what you are able to accomplish over the past 12 months? What do you want to accomplish next year specifically for the expedited LTL segment and some of these growth initiatives that you have underway?

Yes. There's three things going on at the same time, the first thing is like you mentioned Ben, which is the macro. So there's probably some level of headwind and again whether you talk anticipation of a minor recession or at some point possible the presence of a minor recession. So that's going to be worth a few percentage points, the wrong direction versus the last few years a few percentage points in the right direction. So that's one piece. The second piece is much more important it's what we can control and that's obviously us winning back some business and going after additional business, and we're doing that using this intelligence of being much more conscious and aware of the profitability of specific customers in a specific range and segments. That knowledge we actually are putting into work and I talked about this go forward initiative of being extremely surgical intelligent. We just reviewed it with our Board of Directors on Monday and Tuesday, and I think there was lot of just confident enthusiasm in the room about us being able to really go after business that makes tons of sense, pun intended for us. But so in terms of timing my sense has been we'll be pleasantly shocked by how us putting these pieces in place between identifying the customer set certainly core customer base domestic forwarders and the additional segments I talked about 3PL international forwarders, airlines. Knowing who they are engaging heavily with them, making sure they understand the value propositions better. That takes a few months and so to your point Ben the last year we put a lot of emphasis on getting closer to these customers and prospective customers, getting the surgical intelligence of the tools in place, and now the last few months…

Mike, just to hone in on revenue per 100-weight within the Expedited and LTL with industry rate pressure, perhaps as we look into 2020's bid season, with some of the mix headwinds and some of the new business might bring offset by some opportunities perhaps with the legacy business. How do you think about revenue per 100-weight directionally during 2020? Can it remain positive given some of the industry pressures and some of the likely mixed headwinds?

I think it can remain positive. There's just still a size differential between a magnitude of the legacy business if you will, and the magnitude of the address the markets that we're entering. So if we have to compromise and yield get heavier weight fright in our new markets. That would be a poll on yield, but still a small relative number compared to the legacy. So Tom as indicated in several of our prior calls or pricing philosophy. So I think that kind of tug that you've seen the past quarter, I think, it will be the same kind of tug as we get into 2020, where if you have some macros slowing the legacy, it's still mathematically bigger and then if you have to give any yield of some of the growth stuff, it's not big enough yet to where moves in year-on-year that'd be my handicapping of how 2020 evolves.

[Operator Instructions] We'll go to Todd Fowler with KeyBanc. Please go ahead.

This is Zach on for Todd. Just kind of want to shift to pool. I noticed you guys added a couple terminals during the third quarter and Tom I know you mentioned your prepared remarks just referencing some on-boarding new business and some struggling competitors. Just wondering, if you give us some any color on that how we should think about that going into 2020?

Zach, first of all good to have you on the call; on Pool, the one thing that we consistently have been saying is this value proposition of hitting very tight time windows and what I call precision execution for something that's bigger than a small box applies to pull the same as it applies to the rest of open. So this business fits our narrative extremely well in our D&A extremely well. What we obviously also said is we also need to make this business perform from a profitability perspective in the range of where we aspire to be as forward areas. And that's goes back to the double-double commitment medium term from New York. So we've been stretching. And obviously it's very clear that a profitable revenue and growth is what drives the pool business profitability. So the revenue line has been going up. We've been tremendously -- I think talked about pricing discipline. We've been tremendously clear with our customer base that we are providing the best service in the business to them. We're investing into our business and into the drivers and into the operations. And we need to be compensated for that and the rates are reflecting that. So what you should be seeing Zach is, continued growth of the core business, continued pricing discipline. And both of that and the operational execution that Roger Gallows and his team have been marvelous will also get more and more of that to the bottom line. So, I have a very, very strong financial outcome expectation in all our businesses. And again, we're stretching them to the next possible so that they stand up to the Forward Air kind of expectation, which is to be excellent in all we do and the results reflecting that. So, I would expect that this is to go further north.

Great, that's helpful. And then it's just shifting to I know it's probably a little early on, but 2020 CapEx expectations, I guess, directionally how are you guys thinking about that? I know, Mike, you mentioned there's been some technology spent during the year. But I guess just what your thoughts on 2020?

Yes, Zach. We're still doing our plan. But I think we have a decent picture give or take a couple million bucks where it's going. In terms of CapEx, if I could just take a step back. We've become a lot more efficient in our utilization of our assets, particularly our trailers. And the operations teams have done a really nice job at learning to do the same and more volume on a lower trailer base. We have some incremental investments over the past couple of quarters of -- sorry, past couple of years and trailers to work through some old vintages in the fleet. Those investments are over. We had really great trailing fleets and we're using it very well. That's been the driver in the reduction in our CapEx, which has been an important part of us putting up record free cash flow. But don't think that we're not investing in things. We're actually investing in everything that like we can handle. It's just, we don't need to make investments and trailers as much as we do. So, you know, $30 million $35 million bucks in today's dollars is the type of number that I think you'll see on a net basis that you'll see next year. Somewhat similar, but what we're doing is shifting a lot of the investment into technology and information technology. Whereas in the past technology might have been 15% of our CapExnow, it's probably 25% of our CapExbacks. A lot of what we need to do to accomplish the strategic objectives we've laid out is to just keep the pedal to the metal on tech spending enhancing our customer facing and user facing experiences and giving us better decisions support the better understanding of our own data to drive better action. So you're going to see probably at similar net CapEx type number give or take five million bucks next year but what you will see is a shift to a lot more IT CapEx.

And with that, we have no further questions in queue.

Thank you.

Thanks Chad.

You're welcome. Ladies and gentlemen that concludes Forward Air's third 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.