Forward Air Corporation

Good day and welcome to the Forward Air fourth quarter and full year 2023 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. so others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star zero. 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, our interim CEO, Michael Hant, and CFO Rebecca Garbrick. By now you should have received the press release announcing our fourth quarter 2023 results, which was furnished to the SEC on form 8K and on the wire yesterday after the market closed. Forward Air has determined that it is unable to file its annual report on form 10K for the year ended December 31st, 2023 by the prescribed due date without unreasonable effort or expense as the company requires additional time to complete its financial statement reporting process in light of recent significant company transactions. This process includes finalizing the accounting treatment and related disclosures of the debt issued in connection with the acquisition of Omni, which impacts the company's balance sheet as of December 31, 2023, and statement of cash flows for the year then ended. The company expects to file its annual report on Form 10-K for the year ended December 31, 2023 within the extension period of 15 calendar days as provided under Rule 12-B-25 under the Securities Exchange Act of 1934 as amended. 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 first quarter, 2024, and fiscal year 2024. 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. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this call. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law. During the call, there may also be a discussion of financial metrics that do not conform to U.S. generally accepted accounting principles Management uses non-GAAP measures internally to understand, manage, and evaluate our business and make operating decisions. 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 on our website. Now I'd like to turn the conference over to Michael Hance.

Michael? Good morning, everyone. Thank you for joining the call today. Before we jump into the quarter, I just wanted to take a few moments to acknowledge the recent changes at Ford and introduce myself. Ford has been navigating a period of turbulence in the freight market and within our company. The past few months have been bumpy, but I am confident that is behind us and we are all united and energized by the opportunities ahead. We are moving forward. We appreciate the support we've received from many listening to the call today. We value your feedback and perspectives. And as you've seen from recent announcements, our Board has taken decisive action to ensure Forward is on the right track for the future. Earlier this month, the Board appointed me interim CEO in addition to my position as Chief Legal Officer and Secretary. Now, I've been with this company for 18 years in a number of different roles in legal and HR and have a strong understanding of the transportation industry and forward business. Taking on this role is personal for me. It is a position of trust. I care deeply about this company's success and the great people who come to work every day and serve our customers. I know that our people, our customers, and our shareholders are counting on us. My mandate during this period as interim CEO is to make sure we have the appropriate leadership to move forward while our board's dedicated search committee promptly identifies a top quality CEO to run the company during the next phase of our future growth and development. I want to be clear with you. We are not waiting or standing still during this interim period. Instead, we are rolling up our sleeves and doing the challenging and exciting work of integrating Ford and Omni. and positioning us to quickly capture the value this acquisition has made possible. I have the privilege of working with an incredibly capable management team, now complemented by colleagues from Omni. We are laser focused on integration. Over my 18 years with the company, I have come to firmly believe that the key to forward success lies squarely with the dedicated people consistently delivering incredible service to our customers for their mission critical freight. Our LTL customers expect and enjoy the highest levels of service and lowest claims and damage ratios in the industry. This continued without interruption during the last year, and it's not changing. We have been delighted to learn that Omni's success was built on the same foundation of high-quality service. A key part of my new role is to ensure that we do not waver in our collective commitment to this core principle and that it acts as the cornerstone of our integration plan. Now, I've been in my new role for about three weeks now, so I won't attempt to be exhaustive on this call. Here's what we're going to do. Today, we're going to provide you with an overview of Forward Air's Q4 financial performance, as well as the current performance of the legacy Forward Air business and our path to deleveraging through prudent capital allocation. We will then provide updates on customer retention, Omni's integration, and the combined company. Now, the information we provide about Omni's performance and our integration progress will be high level at this point. But we are committed to transparency and providing you with more detailed updates on both topics as we move forward. Before turning the call over to Rebecca, I do want to note up front that during this period of transition, we will not be issuing quarterly guidance and will evaluate when the timing is right to provide it on a go-forward basis. And now, over to Rebecca to run through the quarter.

Thanks, Michael, and good morning, everyone. I'll start by briefly touching on the 10-K, which was mentioned at the top of the call. We will require additional time to complete our financial reporting and file our 2023 Form 10-K. In light of the compressed closing timeline of the OMNI acquisition, we expect to file it within the extension period of 15 calendar days. What remains outstanding is finalizing the technical accounting treatment of the debt connected with the acquisition, which would impact our balance sheet of December 31, 2023, and statement of cash flows for the year then ended. However, we are confident that the outstanding item will have no impact on our income statement. Let's move on to reviewing the fourth quarter. In Q4, we announced the sale of our final mile business to Hub Group in December for an estimated total cash consideration of $260 million. Our results are adjusted for the sale of that business, which had an impact on our fourth quarter guidance. As a result of the Omni transaction, our reported fourth quarter results reflect two one-off items that impact profitability and free cash flow generation. The first are the professional fees or transaction costs incurred in connection with the acquisition of Omni Logistics in the amount of $30 million. While all these costs were incurred in 2023, the company expects to have transaction costs in the first quarter in connection with the closing of the acquisition in addition to integration costs. The second are the net interest payments due and payable on the high-yield notes in the term 1B in the amount of $21 million. The $21 million reflects the interest expense offset by the interest income earned on the investment of the proceeds. Both the high-yield notes in the Term 1B closed into escrow during the fourth quarter. As we continue to execute our growth strategies in the fourth quarter, we saw positive trends in our less-than-struck-load business, with pounds per day growth of more than 6% over the same period last year. Our freight quality also improved as weight per shipment increased more than 11% to 815 pounds over the prior year period. During the fourth quarter, we saw a 2.5% increase in the revenue per shipment, excluding fuel, and an 8% decrease in the revenue per hundredweight, excluding fuel. The decline in the revenue per hundredweight excluding fuels was primarily driven by the shift in the business mix as we explicate upon the expansion of our door-to-door solution. Challenging market conditions persisted throughout the quarter, particularly in the intermodal and truckload brokerage lines of businesses, which led to decreased customer demand for new services, a pattern that we've seen since the second quarter. This resulted in Q4 revenue of 338 million on a consolidated continuing operations basis compared to 403 million and 16% decline. This was within the guidance range of 9% to 19% decline. Operating income on an adjusted basis was 32.6 million compared to 58.4 million for the fourth quarter, which reflects the add back of the one-off costs that I mentioned earlier. We reported adjusted net income per diluted share on a continuing operations basis of 81 cents, above the guidance range of 78 cents to 80 cents. Our free cash flow for the fourth quarter was 48.9 million compared to 43.5 million for the same period in the prior year. The free cash flow was impacted by the payment of the professional fees incurred in connection with the acquisition of Omni. Looking to 2024 in January, as noted in our earlier press release, weight per shipment increased 9.8%. Pounds per day also increased 9.2% compared to the same period last year. Revenue per ton mile increased 1.9% over the prior year, excluding fuel. For the first few weeks in February, our pounds per day increased 8% over the same period last year. This increase excludes the impact of folding the Omni network into the Ford network. The 5.9% general rate increase we announced in December went into effect in February and will enable us to continue to serve customers with the same precision execution in an environment with rising operating costs. The capture rate was higher than 2022, and the rate increase is commiserate with the increase in operating costs expected for 2024. With regards to our capital position, we are still awaiting AMI's 2023 audited financials, but our net leverage ratio at the close of the transaction was estimated to be 5.2 times. This is based on our leverage formula used in the lender's net debt to EBITDA covenant. The calculation includes the full realization of cost energy opportunities and a maximum of $50 million of cash as an offset to debt. As of December 31, the combined entity had more than $200 million cash on hand. We are working to optimize our capital structure and would like to share a number of relevant terms of our existing debt facilities. First, we announced several weeks ago that we were able to amend our credit facility to temporarily increase the maximum consolidated first lien net leverage ratio permitted by our covenant. This amendment provides headroom as we continue to focus on our integration of the two companies and realize the cost synergy opportunities. We also repaid $80 million of aggregate principal on the term loan fee, along with accrued and unpaid interest. This reduced our net leverage ratio by 0.2 times and aligns with our capital allocation policy to use cash generated from the divestiture of businesses for the repayment of debt to accelerate the passive leverage. Going forward, our debt mix of term line B and bonds provides us with the payment flexibility, and we have additional capacity on our revolver. Under the new covenants, we are committed to returning to net leverage of four and a half times by the end of 2025. We are committed to de-risking our capital structure, and we are already undertaking several initiatives to de-leverage. As we have previously communicated, our policy is to run at a net leverage ratio of under two times. and we are committed to taking the necessary steps to adhere to that policy. These steps include a key focus on profitability of the combined entity and the realization of the cost synergies to generate cash from operations, as well as an accelerated portfolio review to identify potential divestitures. As part of the Omni integration efforts, we are identifying ways to streamline our portfolio and accelerate the repayment of debt. In response to the recent acquisition of AMI, we are making adjustments to our capital allocation policy and will prioritize the repayment of debt ahead of dividends, carry purchases, and M&A activity. We will continue to reinvest into our operations through capital expenditures that positively affect productivity, automation, and the replacement of vintage equipment to improve the operating efficiency of our LTO networks. In line with our focus on reducing leverage, as we announced in our earnings release, we have made a decision to suspend our quarterly dividend beginning with the first quarter of 2024, which would typically have been paid in March. We will provide updates in connection with reinstating the quarterly dividend as we make progress with our capital structure and the achievement of our net leverage targets. While we still await the audited financial statements for Omni for 2023, we wanted to provide context around trends we are seeing in Omni's businesses. In line with observations from our own business, certain of Omni's businesses were impacted by the challenging market conditions in 2023 that led to decreased customer demand. In the first few months of 2024, we are beginning to see demand improvements in the domestic market, though it remains soft internationally. We are cautiously optimistic about improvements in the back half of the year. I'll now turn the call back to Michael to discuss the path forward.