Forward Air Q1 2023 Earnings Call Transcript

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May 2, 2023

There are 6 speakers on the call.

Operator

Thank you for joining Forward Air Corporation's First Quarter 2023 Earnings Release Conference Call. Before we begin, I'd like to point out that both the press release and web presentation for this call are accessible on the Investor Relations section of Forward Air's website at www dot forwardaircorp.com. With us this morning are CEO, Tom Schmidt and CFO, Rebecca Garberich. By now you should have received the press release announcing our Q1 2023 results, which was furnished to the SEC on Form 8 ks and on the wire yesterday after the market close. Please be aware that certain statements in the company's earnings press release announcement and on this conference call are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements which are based on expectations, intentions and projections regarding the company's future performance, anticipated events or trends and other matters that are not historical facts, including statements regarding our expected Q2 2023 and fiscal year 2023.

Operator

These statements are not a guarantee of future performance and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such 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. During the call, there may also be a discussion of financial metrics that do not conform to U. S.

Operator

Generally Accepted Accounting Principles or GAAP. Definitions and reconciliations of these non GAAP measures to their most directly comparable GAAP measures are included in the press release issued, which is available on the Investors tab of our website. And now I'll turn the call over to Tom Schmidt, CEO of Forward Air.

Speaker 1

Thank you, Alan, and good morning to all of you on the call. I want to take you back to 3 statements I made on the earnings call 3 months ago. The first statement was I said Q1 will be tough also. It was. Secondly, I did finish the call last time saying we still expect 2023 EPS to top 2022.

Speaker 1

At this point, I have to say this will not happen. 3rd statement was our drive to be the best in high value freight holds, and that is very much still the case. Let me just unpeel all of those three statements a bit, and let me start with the first two, the quarter and the year. If you remember, on the last call, we reviewed an earnings bridge, an EPS bridge, where we had revenue initiatives and cost containment initiatives, Forward Force and Forward GameShape, and we believe based on our own expectations in our modeling that the revenue and cost management initiatives would actually make up for the headwinds that we are facing, are both on a sluggish economy front and fuel coming down. Three specific points.

Speaker 1

We had modeled a 5 percentage point in the books that were actually worse than minus 5%. If you remember, Q1, as you saw in the release, minus 12%. 1st part of April was minus 10%. We are at minus 5% now, now for the last couple of weeks and still going. So better now, but not in the 1st 4 months.

Speaker 1

Secondly, there's a very, very important margin driver and that's pieces per shipment. And that pieces per shipment remains suppressed. We are currently down 16% lower pieces per shipment today Q1 than we were a quarter a year ago. That is the issue of fewer shipments coming in and the shipments that do come in are still lighter. And lastly, fuel has come down faster than what we expected and faster than the Washington Institute had predicted.

Speaker 1

As a result of all those headwinds, when we do the EPS bridge reconciliation, we had to revise our target of beating last year. We're now looking at a target of $6.20 to $6.60 EPS for the year. Let me go to the last part of my statement that I made on the last call, that statement was our drive to be the best in high value LTL still holds. And that is true. Our Go Forward program is actually fundamentally working.

Speaker 1

This program, let me just remind you, is high value freight, price appropriately operated with precision execution and made accessible to an increasing group of customers. Let me take those four points in turn. 1st, high value freight. I did point out the growth of our higher value freight categories including events, medical equipment on the last call, we went for the 4 top categories from 18% to 29% of our total freight mix. That continues.

Speaker 1

While slightly below for the quarter in March of this year, our weight per shipment was very much in line with last year's boom March. And here's the good one. For the entire quarter, the weight per piece is actually up year over year by 12.7%. It's heavier, more nutritious, more valuable freight that we're moving. The second part of go forward was pricing appropriately.

Speaker 1

Quarter, that's Ford Airport to Airport and Door to Door, respectively, compared to last year's Q1. Revenue per ton mile ex fuel in my mind is pound for pound the best metric for what we get paid for, for the same effort expended. And that metric is up. We're getting paid more for the same work that we planned a year ago. The 3rd component of our flow forward is operated with precision execution.

Speaker 1

Here the point that comes in is our customers have been telling us that on their scorecards, thanks to the industry research work by SJ Consulting and Ship Matrix, we now know what those customers are telling us for a fact. We are the best in hitting tight time windows. We have the lowest damages in the industry. We also continue operating with precision caption in our day to day operations. We have record low outside miles, ensuring that our independent contractors who know us and our customers best are the ones that getting most of the miles available.

Speaker 1

The 4th piece of go forward after high value freight priced appropriately operated with Precision Execution is making it accessible to a larger customer base. I said recently that our direct shipper LTL from Q4 of 2022. So, go forward is actually fundamentally working. Now, I do realize, before we open it up for questions, it's hard to fully appreciate a go forward strategy that is working when we have a de facto miss for the quarter and we're guiding down for the year. And still, everything our remarkable teammates and independent contractors are doing tells me that when shipment count in size starts normalizing, we can expect to deeply benefit from it, some this year and way more beyond.

Speaker 1

And with that, back to you, Alan, and we're going to open it up for questions.

Operator

Thank you. The floor is now open for questions and comments. To the queue and you may remove yourself from the queue by repeating the 1 then 0 command. If you're on the speakerphone, we ask that you please pick up your handset and make certain your phone is can mute it before pressing any buttons. You may ask as many questions as you would like before we move on to the next caller.

Operator

Webcast. Our first question will be from the line of Jack Atkins from Stephens. Your line is open. Go ahead.

Speaker 2

Okay, great. Good morning, Tom. Good morning, Rebecca. Thank you for taking my questions.

Speaker 1

Good morning, Jack.

Speaker 2

So I guess, Tom, I guess if we could maybe start with April, it feels like there's an improvement in the second half of the month, certainly on a year over year basis. Is there anything that you can maybe walk us through in terms of helping us to understand what's driving that? Are you seeing is it a comp issue? Are you seeing are seeing improvement in the number of pieces per shipment. Just kind of help us maybe get a better handle on why the second half of April was better than the first half?

Speaker 1

Yes, Jack, everything you just said, Apogee, at face value is correct. So it's been about 2.5 weeks when there was a kind of several percentage points improvement in our LTL tonnage. As I said, if you look at the first couple of months of the year, frankly, actually even including into March, it was the same very, very sluggish volume environment that we had in November December, 1st part of April was a tiny step up and then the last two and a half weeks was So what happened here? We are working with our best customers and tremendously closely. Our sales team has never been more engaged in getting more slice of the pie.

Speaker 1

Some of those customers are seeing a slight improvement in the traffic coming in from Asia. And frankly some of them we're working with harder to make sure that their customers are appreciating the type of high value freight movements that benefit from 0 damages. One thing, Jack, I mean, they're doing a better job, our larger customers that know us extremely well, to take the sales leaders with them to their customers. I personally have been on sales calls where the customers has come with us and go to the end customer. This is $10,000 of high-tech equipment, they have zero propensity for damages.

Speaker 1

And that type of, I think, energy is starting to play out more and more. 2 weeks, Jack, don't make a trend yet. I do believe from everything we're seeing on a daily basis, it's fairly consistent. So that's why frankly we have probably been somewhat conservative. We have not always been conservative in the past about Q2.

Speaker 1

That what we're seeing is real. It's an impact from us working with our best customers that know us extremely well, making a more compelling case for winning more high value freight together with us. And then we also have a sales leader that joined us 6, 9 months ago, Erica Toller, will help us building the small and medium sized businesses that actually are not using our value added intermediaries. And that's are starting to kind of take off too. We're now into the 200s of customers.

Speaker 1

They're active in shipping. Earlier this week, I looked at customers who know us well to win more high value freight with us, together with also ramping up those smaller companies that do not use intermediaries is starting to work. So I think that's what we're seeing, Jack. 2.5 weeks is more than a few days. It's not a trend yet, that what we're seeing is real.

Speaker 2

Okay, got it. So I guess just if I can follow-up on the 2Q guide Terry, Tom, it sounds like the idea was to maybe expect some improvement from a seasonal perspective, but are relatively muted versus what you would normally expect to see from the Q1 to the Q2. I guess, could you maybe expand on the idea that you guys are being a little bit conservative with the outlook?

Speaker 1

Yes. So when you say somewhat muted, I mean, you and I And Rebecca, we might be looking at the exact same thing. So Q1 to Q2, we're showing a small step up. It's about 15% or so, EPS step up between the actual Q1, once you take the reversal of that benefit accrual out, That's on the lower end of what we had seen. Last year Q2, just to remind you, may not be the best comparative measurement.

Speaker 1

Last year, Q2 had 2 crazy things going on. It was the most pronounced amplification of freight boom. April last year was crazy. June last year was crazy. Certainly something I had never seen here before.

Speaker 1

Secondly, fuel was at pretty much all time high levels last Q2. So the 204 we had last year is probably not the typical benchmark. So I would not look at the guidance we just put out at around 130 to compare to 204. It's up 15% from Q1. And I would say, personally, I believe this is on the conservative side.

Speaker 1

I don't want to speeding what we put out to be better than missing it. But at the same time, this Freightoo session now has probably been going on for about 6 months. A typical recession lasts about 9%. So, you would somehow think, which is also what's built into our model that the second half will see some of that benefit, but I would be somewhat cautious for the Q2 still.

Speaker 2

Okay, okay. Got it. And then I guess for my last question, just kind of focused on that second half ramp. I mean, if I look at the bottom end of the range And I take out that $0.24 accrual reversal. It looks like you're assuming a over 50% improvement in earnings in the second half versus what the first half including the guidance would assume.

Speaker 2

I guess, what gives you the confidence to say that you're going to see that type of step up? That's much more significant than normal second half versus first half improvement. Is it the macro getting better? Is it your internal initiatives really kicking in? What is what's driving that, Tom?

Speaker 3

Yes. So let me do

Speaker 1

a little bit of math here, Jack, and And you're pretty good with that too, so we can go do a bit of mental ping pong here. So if you look at the

Speaker 2

course I'm a history major, so I'll defer to you on the math.

Speaker 1

Okay. I think you've given yourself not enough credit. But no, seriously, so if you look at the Q1, Pound for pound, the Q1, as you just correctly pointed out, is $113,000,000 Typically, our Q1, you multiply it by to get for the year because the Q1 is the 1 quarter that it gets doesn't get on the metal podium from a typical sequential perspective. So if you take 113 times 5, that gives you 565. Now what I do believe is that we should be fairly confident in saying what we saw in the Q1 is the absolute bottom of the freight recession.

Speaker 1

April second half is better, even April first half was slightly better. And November, December were edging to go bad, that they were not as bad as the Q1 collectively was. So if you get to 565 by doing the typical multiplication by 5 of a first quarter, which would be a completely normal thing to do, I would sure expect that when you multiply at the absolute bottom of the freight recession, you should be able to multiply it by slightly more than by 5. So the 620 to me is not a stretch, because again multiplying this quarter by 5 should be less than what reality will bear out.

Speaker 2

Okay. Well, I hope this is the bottom of the freight recession. And I know that to your point, it certainly you would hope that things would get better in the second half. But I'll turn it over to others. But thanks for the time, Tom.

Speaker 2

Thanks,

Operator

Ms. Moore, your line is open. Please check your mute feature.

Speaker 4

Sorry about that. I didn't hear that my line is open yet. This is actually Joe Haffling on for Stephanie. Good morning, Tom and Rebecca. Thanks for the question.

Speaker 3

Good morning. I just kind of

Speaker 4

wanted to quickly follow-up on that sort of second half recovery thesis. I'm wondering sort of what are you hearing from your customers at this point about how they're thinking about the second half? And is this kind of how you're framing a second half recovery? Is what you're hearing from your customers? Or is it kind of based on your thought that timing wise, the 9 months versus it's already being sort of 12 months in, is kind of how you're thinking about

Speaker 1

Yes. In contrast to our previous conversation partner, Jack, I'm not a history major, so I wouldn't go just by the 9 months. No, in all fairness, every single customer interaction and every single business partner interactions that we have, we always go into the pipeline of our customers. We talk with them about it. What we're hearing is that deliveries from Asia to our customers are expected to get closer to a normal size and normal frequency by the end of this quarter.

Speaker 1

That's not what every single one of them is saying, but if you had to get a kind of a mean or expected midpoint, that's what we're hearing from the vast majority of them. We see a little bit of that already happening. Some of our customers actually even just yesterday had a differentiation between, for instance, imports from the Middle East versus imports from Asia. But the mean expectation that we are hearing is that by the end of this quarter, shipment sizes and the shipment frequency should start normalizing with some of the inventory rundowns getting closer to conclusion. I know you guys, Joe, you actually put out a piece of research earlier this year that said, some of that may go into the second half of the year.

Speaker 1

The inventory kind of depletion may not be complete by the end of the second quarter, which is also why we assumed some sluggishness still in the second half, but significantly more activity than in the first half. So we were looking to get that midpoint between are seeing the recovery, but not overestimating it.

Speaker 4

Appreciate that. And then is there anything that you would call out from an end customer areas that are seeing kind of particular strengths or weakness that's surprising you right now?

Speaker 1

The one thing on the strength side is the one thing that we really, really should be benefiting from. Remember, when we talk about focus on high value freight and where we came from over the last 2 or 3 years kind of patio, wicker furniture out, medical equipment in, medical equipment and some of those higher industrial goods are less discretionary or more resilient than more discretionary consumer goods. So, that's what we're seeing. We're seeing some more firmness on the medical equipment side, on the high-tech side and on the kind of less consumer goods side. The second thing that I always like pointing out events.

Speaker 1

Events are going very, very strong. Our trade shows, our concert business is exactly where we expected it to be, significantly up. So I think in some pockets of life experiences, even consumer experiences and goods are picking up. Overall in the less discretionary space, medical equipment is the best example. We see very, very good trends.

Speaker 1

So, I do believe that, again, people are spending their discretionary income not on the 3rd refrigerator and second dishwasher, more on live events. And on the industrial side, we do see good improvement and that would medical I would put medical equipment into that non discretionary bucket also.

Speaker 3

Perfect. And then I hate to squeeze

Speaker 4

the third one in, but Rebecca, if you could walk us through the share repurchase activity in the quarter, tell us where the authorization stands right now? And maybe, Tal, if you could tell us what you're thinking about capital allocation and M and A, what looks interesting to you?

Speaker 5

Sure. Yes. So we did repurchase during the quarter was 475,000 shares is what we repurchased. That leaves us with we do we were authorized in the number of shares were left with 1,800,000 of shares still outstanding under that repurchase program, which using the share price as of last night is about over 186 $1,000,000 left that we have available to repurchase. I'll let Tom kind of talk through where we stand from an M and A standpoint, which will drive caption are share repurchases for the rest of the year.

Speaker 1

Yes. And the one thing and I think one of the reports that came out last night or this Joy, it may have been yours. I have to admit I didn't track statements by analysts, did point out that our share repurchases was an all time record for a quarter. We bought about $50,000,000 worth, which is the equivalent of the 475,000 shares that you just mentioned, Rebecca. So we clearly made a choice putting more of our capital into that repurchasing bucket in the Q1.

Speaker 1

We will continue doing that. And at the same time, we are very, very fortunate that even in a depressed freight cycle, we are very, very cash flow strong. We will be using that cash flow for continued enhanced share repurchases. We also will continue using that cash flow for tuck in acquisitions that make perfect sense for us. The 2 primary areas continue to be, expedited LTL.

Speaker 1

Landair Express was a great addition to our team, JMP Hall 2 years ago was a great addition to our team. We also organically did open several LTL stations and terminals will continue doing that. We just opened a significant sized one in Chicago area. That's the third one that we have in Chicagoland now. So if you look at it this way, share repurchase is enhanced, but still following organic growth, LTL terminal expansion and very, very specific tuck in acquisitions.

Speaker 1

We did a phenomenal job, I think, with the Intermodal drayage team to really fill out some of our geographies in the Pacific Northwest, Edgemont, in Mobile, Alabama and Memphis, Chickasaw. So again, if you put on the podium, clearly, you'd have organic growth. Think of LTL terminal expansion like Chicago, tuck in acquisitions, Think Chickasaw, Edgemont in Intermodal drayage as well as Landair Express. And third would be share repurchases. That's the gold, silver, bronze.

Speaker 3

Perfect. Thank you so much

Speaker 4

for all the time, Doug. I'll get back in the queue.

Speaker 1

Thank you, Joe.

Operator

Will go next to the line of Scott Group with Wolfe Research. Go ahead.

Speaker 3

Hi, this is Jake on for Scott. Thanks for your time.

Speaker 2

Hi, Jake.

Speaker 3

Hey, Tom. So revenue per hundredweight ex fuel declined slightly year on year in the Q1. What's causing that? And do you expect that to continue just looking forward into 2Q? Yes, Jake.

Speaker 3

And this is

Speaker 1

the the answer is yes. This might continue slightly, not a hell of a lot. What's going on here? And this is the issue why we report like everybody else does revenue per 100 rate and it's still not the best metric. Our length of haul has been getting shorter, and that's intentional.

Speaker 1

When we do shorter lengths of haul, we actually have an opportunity to use solo drivers, not only team drivers. Team drivers are terrific because they enable one load and then a baton handoff of basically only at the end of the trip. And in between, drivers take turns driving and sleeping. But sometimes when we have shorter distances, we can afford to use solo drivers, which are more can be economical and frankly easier to recruit. We love both equally solo drivers and team drivers, but solos are easy to recruit and we can use them on shorter cameras more than we can on longer distances.

Speaker 1

So we actually have a very active tactic in place to go more after shorter lengths of the haul. I don't have in front of me, but if my memory serves me correctly, we went down in length of fall by 6.7% year over year. So So when you look at the revenue per 100weight ex fuel, that does not reflect that. It's basically if you look at what I called out for revenue per ton mile ex fuel. That's actually the less used, but the much more powerful metric because it takes the shorter distance are out of the equation.

Speaker 1

Revenue per 100 weight is agnostic to distances. So when we go shorter distances, it shows a smaller number because we charge less for it, but that's an imperfect metric. The quality of that revenue actually continues going up and revenue per ton mile is actually a metric I think we should be using much more.

Speaker 3

Yes, that's all helpful. And just a quick one, could you give monthly tonnage in the quarter and then, I'm not sure if you gave a consolidated April number, but if you could give that as well, that would be helpful.

Speaker 5

Yes. So for January, our tonnage our daily tonnage was down about 16%. For February, we saw some improvement. It was down only 9%, and for March it was down to 11%. So and then for April, we have not given a consolidated number, but the blended between the 12% that we talked about and the 5% gets us roughly in about 8% decline year over year.

Operator

Captioning now to press 1 then 0 on your telephone keypad. We'll go next to the line of Chris Coon with Benchmark. Go ahead.

Speaker 3

Hey, Tom. Hey, Rebecca. Good morning.

Speaker 1

Good morning, Chris.

Speaker 3

Tom, Rebecca, last quarter you guys went cap, the headwinds and then some of the efficiency measures offset some of that headwind. Are those efficiencies basically the same,

Speaker 1

it's just the headwinds are a

Speaker 3

bit more? Maybe you could just kind of touch on that briefly. Yes. So what we did and

Speaker 1

I think, Chris, if I remember correctly, you did a really good job of recapping that in your follow-up write up. So Yes, we are talking about that exact EPS bridge. And just to remind those of you who actually have not been familiar with that conversation, what we did do over the last 5, 6 months, we looked at last year and where we ended up on an adjusted 7.18 EPS. When we looked at 2023, we were at least foresightful enough to say the sluggish economy and fuel coming down as which was the expectation by the Washington Institute will cost us somewhere in the neighborhood of $1.50 EPS. And then we came up, as you know, Chris, with those revenue initiatives, which we call Forward Force, we came up with these cost management initiatives, which we called Forward GameShape, and we said like how much do we expect those to be worth for this year, roughly speaking, Forward Force and GameShape were kind of equal halves.

Speaker 1

So each one of them made up about between $0.70 0.85 guidance respectively, and so we thought that between all of those initiatives on the revenue side and cost management side, we would have enough counter activity to make up for the headwinds of fuel and sluggish economy. What we saw and this is what we just talked about at the beginning of this call, we're updating obviously these EPS bridges on a monthly basis. Stefan Birchenmeijer runs our pricing and analytics takes the whole headwind and the sluggish economy headwind was heavier than what we expected. And therefore, also some of the revenue initiatives, specifically the ones doing more with our core customers, both airport to airport as well as door to door, were negatively impacted. So if you think about these initiatives, some of the ones on the revenue side because of this large economy are kind of in red territory.

Speaker 1

Most of the ones on the forward game shape side, cost management, efficiency management are actually green and working. If you take the actual volume component out, which is obviously a huge component right now temporarily, the quality of everything that's underlying that EPS bridge is working. And that's what my third point this morning was in my remarks. Go forward is in essence actually working. However, the deep suppression of the volumes that we see right now is pulling the impact of it down.

Speaker 1

Okay. Is that getting to your point? I mean, we can actually and I think we have a follow-up call with you. We can walk you through the individual components, but think about the revenue initiatives, forward force, every single one of them, that's actually impacted by the sluggish economy, LTL more with more customers, domestic forwarders and airlines, LTL more with door to door customers, 3PLs, international forwarders. That's deeply read.

Speaker 1

And then we have even on the brokerage more truckload brokerage that's also deeply read. So the ones that are impacted by the sluggish economy, they show red. The ones that actually are less impacted by that, more trade shows, they don't show red. And then all the ones that are in the lower half of those initiatives, they show actually very green because we do do our cost management. We do do our efficiency management.

Speaker 1

Outside mouse being at record low levels stands out as one that's super green. So this is where I feel very, very proud of our team. Like they're managing going forward the way we intend to, they have just pulled down more than we had expected, and that's how bad. We perhaps should have been more conservative on that, but the execution of go forward is alive and kicking.

Speaker 3

Okay. All right, Tom. Thanks. Yes, we'll talk later. Thank you.

Speaker 1

Great. Thanks, Chris.

Operator

And we have no further questions in queue at this time. You may proceed.

Speaker 1

Okay. Well, Alan, thank you so much. And also thank you to those of you who listened in and who have been partnering with us, not just as thought partners, but also as action partners, making this a remarkable company, work the way it does. We are, in a freight recession. We are not out of it yet.

Speaker 1

And I look forward to having calls when we actually see all of the go forward high quality freight priced appropriately, operated in a very, very clean precision execution environment and made accessible to more customers and working even are with our existing partners, happen at full throttle. We'll get there together. Thank you for your support and for the business partnership. And I think with that, Alan, we're concluding this call.

Operator

Thank you. That concludes Forward Air's Q1 2023 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.

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