Forward Air Corporation

Thank you for joining Forward Air Corporation's third quarter 2020 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 selection of Forward Air's website, www.forwardaircorp.com. With this morning's We have CEO Tom Schmidt and CFO Mike Morris. By now, you should have received the press release announcing our third quarter 2020 results, which was furnished to the SEC on Form 8-K and on the wire yesterday after the market closed. 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 about the effects of our business efforts and response to COVID-19, including the impacts on each of our businesses, the future plan for our pool business, steps to bolster our liquidity, steps to expand our operations organically and inorganically, the company's outlook for the fourth 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 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 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 we'll turn the conference over to Tom Schmidt, CEO of Forward Air.

Thank you, Tony, and happy Halloween weekend to all of you on the call. Sorry to disappoint up front. This call is actually not about scary. It's about precision execution of commitments we make and commitments we kept. Specifically, I'm going to address six commitments we made on this very call three months ago on the Q2 earnings call and how we kept those commitments and how we're going to take them forward. Commitment number one was, if you remember, we talked about bringing density back, bringing our people back, bringing volumes back to what we call zero plus, same as last year or more. And we did. In our flagship LTL business, we were there in July. In fact, July was 1.7% tonnage-wise ahead of July last year. August, 4.5%. September, 4.6%. For Q3 overall, 3.6% up over tonnage from previous year. Final mile, very, very strong growth as well. Same for drug load, especially in the Acid Light brokerage business. And in the modal, we see a recovery coming also. So 0%. same or better volumes than last year happening. That's on the way to our first double when we talk about double digit annual revenue growth. Our second commitment was we will not wait to bring all those high speed, high sensitive handling businesses that temporarily went to sleep in March back. We will not wait for that to happen, whether cruise lines, trade shows, concerts, conferences, airlines, whether we bring them back next year or the year after, we know we will, and we will bring them back strongly in great partnership, but we're not going to wait for that. In fact, rather than waiting, we are focusing on another leg of the stool and make this business more multi-pronged, stronger, more essential freight, more medical supplies. We dialed up those SIC codes as we committed on the call three months ago, and in Q3, our essential freight system was up 8% year over year. Our third commitment was to do a one-two punch. Yes, volumes back first, but complemented very closely by what we called a march for margins, meaning taking pricing action so that we can make the investments into our drivers and into the service commitments that we have and that we keep towards all of our customers. So Q2 zero plus volumes was top priority. Density restored, now in Q3, March for margins. Specifically in LTL, in September and October alone, we did implement a California surcharge of 5%, a high-class upcharge, a class fuel surcharge modification, a low-class upcharge, removal of unread volume discounts, and a $3 surcharge for lightweight shipments less than 300 pounds. Additional class actions to come, and in truckload, Select rate increases also in intermodal drainage. We're going to have a fourth quarter GRI coming. So overall, one-two punch committed, one-two punch kept. And the impact started showing in Q3. To take the example of expedited freight, which is our combined LTL, TL, and final mile business, in Q2 expedited freight had a 5% margin. In July, 7.1. August. 7.7. In September, 10% margin for expatriate freight. That sounds a bit like the second double in double-double, double-digit margins, which is also our medium-term commitment, the same way as average double-digit annual revenue growth is a medium-term commitment. We expect that with these measures being implemented in Q3, we'll have a full impact of those measures in Q4. Commitment number four was we are keeping organic expansion going. If you remember last call, we talked about Savannah, where we opened a brand new LTL terminal, piggybacking on our presence in final mile. We talked about, on the call, about our investment into the Columbus hub, our biggest hub. And in Q3, we kept going. We opened LTL facilities in Columbia, Missouri, in Roanoke, Virginia, also benefiting from our final mile presence in those markets. And there's big ones coming within the next few weeks. Allentown, Pennsylvania, conversion from an agent to our own facility. And then the big one in Ontario, California, a greenfield location about to open up. All happening within the next few weeks. Far from done. More coming next year. Commitment number five, we said there's no pause in M&A this year. If you remember, at the very beginning of the year, we had a LINSTAR close in our final mile business, a significant step up for that business unit. And just this quarter, Q3, we had a close in final mile as well with CLW in Johnson City, wonderful unit joining us, great teammates, and value logistics in Memphis, Tennessee, a very, very important intermodal drainage market that we wanted to make sure we have a stronger presence in. And then commitment number six, we also made very certain in everything we do, front office, back office, but certainly in operations, precision execution is happening. We have record service levels right now, and I'm proud to say we're actually delivering those record service levels with drivers who know us well, our independent contractors. Our outside miles, even in this tight market, if you exclude Los Angeles, a heavily congested area, our outside miles are still in the single digit area. It's our drivers that we know very well delivering those types of record service levels. So we kept our commitments we made last quarter, and we see ongoing ramp up of benefits going into the fourth quarter from having kept those commitments. And I want to thank you, all of our teammates. I want to thank all of our independent contractors, all of our business partners, for truly making each other better. It shows. And we're far from done. For the final commitment beyond the six I mentioned, we also have a strong commitment to robustness when it comes to liquidity and cash flow. I'm going to ask my teammate, our CFO, Mike Morris, to address commitment number seven, strong liquidity.

Thanks, Tom. Before I give a few quick updates, Let me provide some additional clarity on the earnings release we issued last night. First, the six cent charge we called out was recorded in other operations and did not impact expedited freight or intermodal segment results. Second, our fourth quarter 2020 guidance relates to continuing operations only. And finally, our EPS guidance range of 71 to 75 cents compares to 79 cents in the fourth quarter of 2019 on a continuing operations basis. We will be sure to provide this measure of clarity in our earnings releases going forward. Since we are only guiding to continuing operations, let me provide a brief outlook for pools. As physical retail continues to recover, Poole will return to profitability during the fourth quarter of 2020. We expect Poole's fourth quarter revenue will be between $45 and $50 million, and Poole's fourth quarter operating income will be between $1 and $2 million. Before we go to Q&A, let me close with an update on liquidity and capital allocations. This year has certainly tested the cash flow capabilities of our asset light business model. Although we greatly expanded our liquidity in response to COVID-19, we were able to remain free cash flow positive throughout the year by actively managing our operations while continuing to make key investments so we could emerge a stronger competitor. And if trouble does resurface, we believe we have ample liquidity to support our business and capital needs. So as we signaled on our last earnings call, we began to relax our excess cash position during the third quarter. We said we would reduce debt, and we repaid $20 million on our credit line, bringing our gross leverage down to one turn of EBITDA. We said we would resume share repurchases, and we bought back $30 million of stock during the quarter. We also said we would remain committed to our dividend, and we're pleased to announce a 16.7% increase to our quarterly dividend from 18 cents to 21 cents per share. Our dividend is an important component of our capital allocation philosophy, and between dividends and share repurchases, We have returned over $350 million to shareholders over the past five years. With that, Tani, let's open the line for Q&A, please.