Forward Air Corporation

Ladies and gentlemen, thank you for standing by and welcome to the first quarter earnings call 2020. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. If you have a question, please press 1 then 0. If you require assistance during the call, please press star then 0. As a reminder, this conference is being recorded. Thank you for joining Forward Air Corporation's first quarter 2020 earnings release conference call. Before we begin, I'd like to point out that both the press release and webcast presentations 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 Schmidt and CFO Mike Morris. By now you should have received the press release announcing our first quarter 2020 results. which was furnished to the SEC on Form 8K and on the wire yesterday after the market closed. Please be aware that 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, about the effects of our business efforts in response to COVID-19, including the impacts on each of our businesses, the suspension of our expected 2020 guidance, the future plans of our pool business, steps to bolster our liquidity, the company's outlook for the second quarter and fiscal year of 2020, including expectations for revenues, tonnage, and free cash flows, the expected impact of growth and strategic initiatives, and those other 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 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. And now I'll turn the call over to Tom Schmidt, CEO of Forward Air. Please go ahead, sir.

Thank you, Roxanne, and good morning to all of you on the call. First things first, I do thank all of our teammates and our independent contractors I've never been prouder of you. Whether you're in operations buildings, on the road, working from home, you are moving America forward and you're keeping lives and livelihoods going. So thank you for that and especially thank you for doing this with our own brand of precision execution at the same time. We are operating with a kind of CDC plus standard across all of our operations and we're supported, you are supported by a thousand of us who within a few weeks moved to productively working from home. So that's what I call precision execution in these times. And another first, Mike and I, we typically sit across from each other in our Atlanta support office for a call like this one. Well, we do sit across from each other on our virtual table now. We're both safely working from our Atlanta homes, just a couple of miles safely distancing from each other. From the health of our people, which always comes first, let me talk to the health of our business. As you can imagine, late 2019, early 2020, we've been preparing for a slowing economy months before you or I could even spell COVID-19. As imports were going down, there were signs of a freight recession. The price of fuel was going down. So we were getting ready for a slower economy. And then COVID-19 showed up. This black swan, which impacts so many teams and it impacts our forward air team tremendously. As you know, we have heavy ties to air freight from Asia, heavy ties to ocean freight from Asia. Typically, those things work tremendously well for us. Well, not the past couple of months. And through our retail pool business, we have heavy ties to the mall business. We did win over the last couple of years in a shrinking retail mall pie. 2019 actually for our core business was better than 2018, but it's hard to win in a temporarily non-existing pie. And we are moving for the most part, business to business, non-essential goods. So this COVID-19 tragedy, that's a human and humanitarian tragedy first and foremost, did impact us tremendously. Now, fortunately as a leadership team, Once a quarter, we have sessions where we always look to reset, refresh, look around the corner, think about next practice. In fact, our next session scheduled for May, which will be a virtual one now, was our Black Swan session, where we were about to go through all the scenarios that we weren't even conceiving could exist and could happen to us. And, well, in all fairness, that session came a bit faster than planned, and it became much more real than planned. On the positive side, that DNA of being agile and acting fast that we learned as a team still serves us well in these days, tremendously well. We have an asset-like model to begin with. We did flex down quickly. We did cut costs across the board, and we also deferred capex surgically where it made sense. We also, as Mike will talk about in a few moments, flexed up our liquidity significantly. and most importantly, behind the scenes, we did what first class companies do over the last several weeks and months. We calmly, firmly moved forward with steadfast confidence. If you remember last year in New York, we had an investor day celebrating 25 years on the NASDAQ and we unveiled our Beyond 2019 strategy. We are firmly executing the strategy. We implemented our expedited trade segment, Truckload and LTL collaborating better than ever, recruiting together, selling together, route planning together. Locally, pickup and delivery LTL and the final mile business are working together. They're sharing facilities. The first one, Savannah, just opening up. And they also route together. So on a light installation day, the final mile driver might also have three pickups or three drop-offs of LTL pallets. Our truckload business, we're stretching in addition with enhanced brokerage. So all across the board, our expedited freight circuit really collaborating in a way that we conceived a year ago and we're executing firmly now. Final Mile, thank God for our dual growth approach between organic and M&A. It's working beautifully. Final Mile, we had two acquisitions last year. and we also are growing organically just recently a big win in a key Texas market. I also, when I talk about Final Mile, I should talk about the human side. An extra shout out to our teammates on the Final Mile team, the contractors, our own teammates who safely go into your homes right now, installing highly functional fridges, washing machines. And I can tell you my own personal experience last six weeks, Thank you very much. would venture a bet that they'll get there again. So a lot of organic M&A growth collaboration, exactly the way we conceived it last year, firmly executing forward. Our support teams have never been more focused. From consistent customer management, CRM just implemented, we are executing, to joint backbone processes across all of our business units, we are deploying first First class standards across the board. And the most important enhancement in the support teams obviously always is on the safety front. We never had fewer trucks without an in-cab camera on the road ever, which means most of our trucks on the road have a tool in place that's huge for safety and it's a great coaching tool as well. and on the revenue side, we are consistently leveraging our fastest network, although it's bigger than a box, reinventing the game, going to essential goods more, small medium enterprises, B2C, new verticals, warehousing. Right now, we're still mostly a non-essential B2B company, non-essential goods B2B company. As I said, however, what I just mentioned really reinforces nowhere is it written that this is all we shall be. My final point before I turn it over to you, Mike, in the release, we did say we are evaluating strategic options for our pool business. To be very clear, pool does fit our narrative. It's bigger than a parcel letter. It's going to these malls. It has to get there in a very tight time window. It's fashion goods in many cases. Every day late means a selling day lost, and there's only about 20, 25 days, so many of those highly fashionable goods. Fast network, precision execution, all that fits our narrative. However, what we did determine in our Beyond 2019 strategy process last year, the asset intensity of the pool business does not fit the high-velocity, asset-like character of our portfolio. It's different than expedited freight. It's different than intermodal that way. So we have been in a sale process supported by Raymond James for several months. We were interrupted by COVID-19 and we're resuming that sale process fully. We will continue serving our current pool customers. We'll look for additional pool customers with the first-class service that our customers deserve. We're stretching into other verticals We did start last year, hospitality, industrial. We keep doing that, running a first-class team and growing this business as we are getting it ready for the next owner. We have a clear intention to turn an absolutely first-class business over to a next owner who will take it to the next level. All up, we are executing our game plan with precision execution. We are moving firmly forward and with tons of confidence. So with that, over to my virtual roommate here, Mike.

Thanks, Tom. As a result of our strategic intent to divest Poole, we will begin reporting Poole as a discontinued operation, starting with our second quarter earnings release and 10Q filings. For those on the call who are not familiar with the discontinued operation, It is an accounting term that describes how we will report pools financial results because of our commitment to a divestiture. In the real world, it does not mean that we are stopping or discontinuing pool distribution activities. We will continue to serve our current and additional pool customers as demand improves, and we will make investments to enhance pools profitability and ready it for an efficient separation. As discussed in our earnings release, we have suspended guidance in light of the significant uncertainty created by COVID-19. But let me offer our perspective on the months to come. We expect that April will be the most challenging month. Reduced U.S. demand for nonessential freight and its flow-through effects to air and ocean freight volumes will adversely impact expedited freight and intermodal revenues. Within expedited freight, network revenue will likely be further pressured by lower fuel surcharges amid diesel prices that are down over 20% year on year. This would be partially offset by increased final mile revenue driven by our FSA and Linstar acquisitions. In total, we could see expedited freight and intermodal revenues down 10 to 15% in April. Pool will be hit much harder. Temporary retail closures and stay-at-home orders have nearly wiped out Pool's April revenue, driving it down roughly 95%. At these low sales levels, Pool cannot cover its fixed costs and operate at a loss. As we enter May, we are cautiously optimistic that we're turning a corner. Weekly LTL tonnage, which was down roughly 30% by mid-April, is now down roughly 15%. Our customers are indicating that they are preparing for the economy to reopen, and we are beginning to see increased activity in expedited freight and, to a lesser extent, in intermodal. Pool could be slower to improve as retail malls gradually open across our footprint. but we are expecting Pools May revenue to be better than its April revenue. Our path traveled through the balance of the quarter will largely be determined by the timing and the impact of loosening stay-at-home orders and the extent to which the gradual reopening of the economy drives increased demand for non-essential goods. We have limited visibility, but our base case assumption is a slow sequential recovery through the rest of the quarter. We currently estimate that POOL's results will drive a discontinued operations loss of $10 to $15 million for the second quarter, which we expect will be big enough to drive a consolidated second quarter operating loss for Forward Air. On a continuing operations basis, however, We expect to have positive operating income for the second quarter, although margins may be very low. While many of us are sheltering in our homes to ride out the worst of COVID-19, Forward Air will continue to take shelter in its balance sheet. Our cash balance of $104 million, coupled with $75 million in availability on our committed credit line, gives us a total liquidity position of $179 million, which is almost nine times our historic target cash level. Our accounts receivables are currently being collected with no significant deferrals or defaults. On a consolidated basis, we expect to be free cash flow positive every quarter this year, and we currently plan to pay a dividend every quarter this year. We believe that our financial flexibility, coupled with the incredible people who make up Team Forward Air, will allow us to weather this terrible COVID-19 episode and emerge a stronger competitor. With that, Roxanne, let's open the line for Q&A, please.