Forward Air Corporation

Thank you for joining Forward Air Corporation's third quarter 2022 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 Schmidt and CFO Rebecca Garbrick. By now, you should have received the press release announcing our third quarter 2022 results which was furnished to the SEC on Form 8K and on the wire yesterday after the market closed. 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 Security 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 fourth quarter 2022 and fiscal year 2023. 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 Security 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. 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 in the Investors tab of our website. And now I'll turn the call over to Tom Schmidt, CEO of Forward Air.

Thank you, Rich. And good morning to all of you on the call joining us. I started our last earnings call with the statement, we keep getting better. That statement actually never gets old, so I'll say it again. We keep getting better and better. Q1 and Q2 were first and second quarter records. And Q3, the quarter we just finished, also was our best third quarter ever. We expect the fourth quarter to continue that track record and that string. In fact, we're shooting for earnings per share of $2 in the fourth quarter, which is a sequential step up from Q3, which we just released, finishing at $193. That step up is very much in line with what we had in the The two years just before the pandemic broke out, 2018 and 2019, those were $0.05 and $0.14 step up, respectively, from Q3 to Q4. So this year is very much in line with that. We therefore expect that the year will be finishing up in record territory of $750 plus. So that also still means we... we intend to get better and better, and we don't want to be done here. So next year, from where we're sitting right now, we expect it's going to be better than this year. So 2023 will be a step up from 2022. Now, on that last statement, you might ask, how so? Everybody else is being very cautious. So are we. We are seeing the same things everybody else is seeing. We get fewer imports via ocean and air. Some of our Customers, domestic forwarders, international forwarders specifically, with their imports, airlines with their imports, that is down. We see that. Even look at our tonnage in LTL. We saw a tonnage for Q3, the quarter we just finished, slightly ahead of last year, 1.5% over the previous third quarter. That's a good thing, but September was slightly down. If you run the math from the mid-quarter update to the full quarter, And even in October, for instance, last week, we were mid single digits tonnage down from last year. So we do see the same thing everybody else sees. And we also, in line with industry estimates, we also expect fuel to be down next year by about 70 cents or so per gallon. And that's, as you know, is a headwind in our industry. So why are we still saying that we expect 2023 to be a better year than 2022? It's because of our performance program called Forward 23. It's working. We have revenue and margin initiatives that we believe outweigh the fuel and volume headwinds for next year. It's our brand of what we call precision execution at work. Let me just briefly reinforce those six key levers inside that Forward 23 program that make us very, very confident. The first one is we will have more live events. We all talked about this a lot. We brought live events back together with our core customers this year, and we're going to bring back more next year. We're also going to tap into some smaller events orchestrators that do not use forwarders, so there could be more than just a bring back. Our numbers confirm that live events are coming back. And frankly, just when we walk through the Atlanta terminal, which I just did earlier this week, you can see it. You see the containers. You see the trade show containers, the concert setups. So we will have more live events next year than we had this year. Sometimes with the live events, you also have a beautiful trifecta. These are high-value freight shipments to begin with that are very profitable shipments for us. Oftentimes, these trade shows or concert movements go to many stops. So you have one sale event, but multiple revenue events coming from it. And then oftentimes there's a guaranteed service associated with it, where our customers want to make extra certain that we have all the handling principles in place last in first out that maximize the odds of a smooth hundred percent, uh, guaranteed and, uh, deliberate, uh, on time performance. Secondly, We also are looking to get more share of wallet with our existing core business partners. We have had tremendous domestic international forwarder customers for a long time. Those that know us best, they tag team with us. They go for high value freight with us together and we are winning more together with them. Even in a softer environment, we're growing with some of those core business partners that we know best and that know us best. Third, We are selling more direct to those types of shippers who do not use forwarders. And we said this is going to be early innings here this year, $20 million or so in LTL revenue from selling direct, and we're on track for that. Next year, we expect a ramp-up of that. So there's also untapped upsides that we intend to go after for next year. Number four, we are having much fewer outside brokered miles. Those are miles that typically are more expensive than using our core independent contractors. And also, some of those carriers do not know us or our customers as well as our independent contractors do. So when we're in 5% or so outside brokered miles as a percentage of total miles territory, that's a sweet spot. And that's where we're at right now, which means the vast majority of what we move gets actually handled by those drivers who know us and our customers best. The fifth lever is the supporting businesses. Yes, LTL is the main show, and the main show still is kind of in 80 OR territory for September, which is terrific, and the supporting businesses are doing their part certainly too. If you check out our release and you're looking at our intermodal drainage business, that's a rock star performance in the 15% OR margin territory or 85 OR territory for Q3, for instance. And the sixth and final lever is those supporting businesses, they do make our LTL business better more and more. Truckload has become a very significant LTL customer, uses LTL a lot, which helps balancing loads. Intermodal and LTL, we more and more co-sell our portfolio of those services to our customers. And Final Mile started relying actually on over-the-road LTL for its products also. So a lot of helping each other out and making the main show LTL better. So because of these six levers outweighing, in my mind and our estimate, the headwinds that we have from fuel and from software volumes overall, we do believe that 2023 will be another record year better than 2022. I spend a ton of time unintended with our teammates. They are focused laser sharp on making us all we can be. We are far from done, and we keep getting better and better. And with that, we're going to go straight into questions. So, Rich, back to you.

Certainly. Thank you. The floor is now open for questions and comments. You may ask as many questions as you like before we move to the next caller in queue. If you wish to ask a question, please press 1, then 0 on your touchtone phone. You may remove yourself from queue at any time by pressing 1, 0 again. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press 1, then 0 at this time. And we'll begin with the line of Bruce Chan with Stifel. Please go ahead.