Thank you for joining Forward Air Corporation’s Second Quarter 2021 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 Schmitt; and CFO, Rebecca Garbrick. By now, you should have received the press release announcing our second quarter 2021 results, which was furnished to the SEC on Form 8-K 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 making 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. 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. And now, I’ll turn the call over to Tom Schmitt, CEO of Forward Air.

Thank you, Tawny, and good morning to all of you on the call. On our last call in May, I reinforced five observations that I made in February, observations that gave me confidence for our double-double. As I said in May, we are hitting our stride and if you go a bit further back all the way to March of last year, you could actually argue we were crawling last year in March, then walking, jogging, hitting our stride by May with our first quarter, and now we are running. Looking back at those five observations, the first one was a beat. We had a good beat in Q1. We have a stronger beat now in Q2. In fact, as one of our analysts pointed out, we did have a double-double, the first time since 2018, a double-digit margin as a company and double-digit revenue growth. The second observation is momentum. We finished the quarter with June being the best month ever in the history of our company. Top line, bottom line, we never had more revenue, we never had more operating income. That’s a super strong entry ramp into our third quarter. The third observation is around disciplined pricing. We are being very surgical in fine-tuning by weight, by distance, and accessorial so that we can move our customers’ freight very smoothly and do it economically, good for them and good for us ultimately. The fourth observation is around organic growth. We keep doing that. In fact, last week we talked about opening up a new access point for our LTL business in Vancouver, Canada, the third location we have up north, in addition to Toronto and Montreal. It’s worthwhile to remember, I always said we’re going to do more with our trading partners north and south. Both of them are among our top three trading partners. We will be doing more with them. Domestically, when you look at organic growth, we currently have record weight per shipment. We have never had higher weight per shipment in LTL than we have right now. The fifth observation that gives me confidence is around inorganic growth. Last time I talked about, for the first time in six years, we didn’t just buy tuck-in acquisitions in Intermodal or Final Mile. We actually bought an acquisition, J&P Hall Express, in our core LTL business. There will be more in the making here too. We are running. And when you’re running, you actually get kind of a runner’s high and I think that will show too going forward. Commercially, we are going to be even more surgical with our customers on ensuring that we move their freight on time without any damages. We are super-focused on palletization, on safe stacking, dimensional focus and we’re working with our customers hand-in-hand that the freight they give us will be in a shape that will smoothly run through our system and will be delivered on time, without damage. As I mentioned, we are still in mostly Q4 and 2022 bringing our events business back. We see some of that now. In fact, on Sunday, just a couple of days from now, I’m heading out to the National Home Delivery Association conference in San Diego, where I’m going to meet with some of our customers, some of our teammates and it’s an in-person event, so more of those are coming back a little bit now in the third quarter, more in the fourth quarter and definitely going into 2022. That will help us also. Operationally, as you saw in the release, we have an operational enhancement initiative underway where we fully expect to see profit improvement in our core LTL operations from having taken a fresh look. We actually call it Project Eagle Eye, looking closely at how we route and what we do inside our terminals. In M&A, I said we have a proven machine in place here, and we’re going to take advantage of that machine more in the future. Organically, let’s not forget, we keep expanding. In the last 12 months, we added 10 LTL terminals to our network, and we will keep that pace going over the next several quarters. As we keep running, we also need to make thoughtful considerations about how we allocate our capital. On that topic, our brand-new CFO, Rebecca Garbrick, my partner here, welcome to the earnings call, is going to take us through our thoughts around capital allocation before we open it up for questions and answers. So with that, over to you, Rebecca.

Great. Thanks, Tom. I’m happy to be with all of you today, and I look forward to playing a larger role in driving profitable growth at Forward Air. I know you’ve read our earnings release, so I’m not going to repeat our solid second quarter results. Instead, like Tom mentioned, let me offer you some comments on our capital allocation. Our capital allocation philosophy remains unchanged. We will use our cash flow to cover our CapEx needs, which we expect will remain modest over the medium term after we complete our Columbus investments. Our free cash flow will continue to support our dividend, which we would look to increase over time, commensurate with the increase in our earnings. In the past seven years, we have raised our dividend four times. When we see M&A opportunities, we will ensure that these can be realized as we recently did with our J&P Hall acquisition. As a side note, for your modeling purposes, we expect J&P Hall’s run rate revenue contribution to be about $19 million per year and our run rate EBITDA contribution to be about $1.6 million per year. Any excess cash flow will be returned to shareholders. In the past six years, we’ve repurchased over $250 million of shares. Year-to-date, we’ve repurchased roughly $34 million of shares. We expect to continue our repurchases in 2021 and beyond since we believe in our growth prospects. And with that, I will turn it back to Tawny to open the line for Q&A.

Our first question comes from Tyler Brown with Raymond James.

Rebecca, congrats on the new position. I just want to come back and look at the guidance on a sequential basis. So this is on my math, so I may be wrong. But I think on the midpoint, you’re looking for revenues to maybe be up slightly, call it, $10 million, but you’re looking for maybe a slight decrease in EBIT, even excluding that $0.03 charge. Again, I’m talking kind of sequentially Q2 to 3. So A, would that be the case? And B, what is the incremental pressure there sequentially that would cause revenue to rise and maybe EBIT to slightly fall or is my math way off?

Well, you’re pretty good with math, Tyler. So it’s not your math. Typically, when you look at Q2-Q3, if you go back to 2018, 2019, let’s put aside last year because the math is a bit challenged. What you typically see with us and many of our competitors is that Q2 tends to be the second strongest quarter. Q3 is a bit slower. On average, we tend to have a $0.08 to $0.10 EPS decline between Q2 and Q3. So that’s what historically, even when we run at the same level of pace and performance, is what we typically see. We expect, because we have good momentum, less of a decline than we typically see between Q2 and Q3. So when you look at $1.11 for Q2, and we guide to $1.05, that’s $0.06. That $0.06 would probably be zero, if not for two things. One, we do have an operational enhancement initiative, which has short-term expense, roughly speaking, $1 million in Q3. We expect to see a lot of payoff from that, and I’m confident in that. It’s a fresh look inside our terminals, a fresh look at rerouting. The second thing we are doing is that many of our associates and teammates were wiped out last year when it came to any type of incentive. We are over-accruing for our profit-sharing short-term incentive for our teammates. Some of that you also see in Q2 and in Q3. If that over-accrual did not take place, if the $0.03 expense for a very good investment into our operational capabilities did not happen, you wouldn’t see the typical decline from Q2 to Q3. This year, you are seeing, on paper, $0.06. If not for the two things I just mentioned, you wouldn’t see a decline at all. The momentum is unusually high this time.

Okay. That’s very helpful. Does that make sense?

Yes, absolutely. Yes, it does. It sounds like there’s just kind of some incremental things sequentially. And I know it typically falls sequentially. So that’s very helpful. But I do want to come back. So I think on the website, there was a bulletin about ‘21 peak season. One thing that stood out to me was a change to your peak capacity surcharges. I think you guys are tying those to the internet Truckstop Load to Truck index. Can you just talk a little bit about this change? I surmise this would help hedge your PT through peak? Yes. I mean, what we’re doing, Tyler, and I think we talked about this before. Job #1 for us is to keep our teammates safe on the road, and that involves lots of investments. Job #2 is to keep the commitments to our customers. When we talk about keeping people safe and keeping our commitments to our customers, it means we need top-quality drivers and they need to be in the right places. A lot of what we’re doing involves destination pay for drivers, like ensuring we pay them extra to go to locations where we need more of them for outbound runs. We also modify surcharges in specific locations based on volumes we see there. There are two reasons for doing this. One is to collaborate with our customers to find ways to bypass congested locations, which is beneficial for them and us. This enables us to keep our commitments to them more safely and economically. The second reason is if we cannot bypass those locations, we need to recover the costs so we can pay the extra cents and dollars to our drivers. So yes, our destination pay and peak surcharges are more surgical and precise than historically.

Okay, that’s helpful. And then just one last clarification regarding the event-type revenue. Is there an implied pickup in Q3? Or it sounded like maybe that was more of a Q4 and a ‘22 event. I’m just curious about what’s implied in the guidance there from that perspective.

Yes. So, and I know you will store that in your memory and hold it against me. If we see some of the events business coming back in Q3, that would help us exceed our guidance. We didn’t put anything in there really. I mentioned the conference I’m going to on Sunday. That’s happening. Some of that is happening around the country, but not at the levels we will see in Q4 and in 2022. So we did not include any of that into Q3 guidance. Any that we get will be upside to the guidance.

Okay. Very, very helpful.

Our next question comes from the line of Todd Fowler with KeyBanc Capital Markets.

Great. Rebecca, congratulations. I wanted to ask about the margins within Expedited Freight. Obviously, a lot of good things going on. And I know the mix with Truckload and Final Mile, there’s a little bit of a difference than some of the pure-play LTLs, but the OR is still above 90. To Tyler’s math, I think you’re probably still going to be above 90 maybe in the third quarter. So as we think about the yield environment and the tonnage environment, Tom, what’s your expectation or what will it take to move back into the 80s from an OR perspective in Expedited Freight?

The main thing is, obviously, how we’re going to keep improving our core LTL business. Again, we look at Expedited Freight as three business units collaborating closely. Truckload is the sister unit where we recruit for one fleet between LTL and TL, we also route together. So there may be an LTL move-out and a truckload move-back. Final Mile co-shares locations with LTL. We look at the margins from ensuring each unit makes its contribution. I called out in March or April that in LTL, we have seen 14-15% margins or putting it in your terms, Todd, that we have seen 85 ORs. So we know it’s possible. We have seen it this quarter; a double-double is possible. I expect our business to improve, not worsen. If you’re looking at a 10% margin as a company right now and close to 10% in Expedited Freight, I expect that number to increase.

Okay, got it. Yes. Okay. That makes sense, Tom. And then as a follow-up for me, very strong yields here in the quarter, with fuel up almost 9%, ex-fuel close to 7%. Can you give us a sense of how you see core pricing, and if you’re able to strip out maybe some of the accessorials and the surcharges that are happening? How do we think about what’s happening with core pricing in your business outside of the adjustments for the higher costs that you’re experiencing right now?

Pricing has never been better executed and designed than it is right now. Some of the parcel companies and rails have been leading the way over the last couple of decades. The LTL players, including us, are following that lead. We are getting better by the quarter and can still improve, which is why I see upside. It’s very disciplined. I mentioned before, the GRI we put in place in February; we never had a take rate like we did this time. I expect it to continue. So when we have our GRI next year in February, I expect the take rates to be similar to this year. We had a 6% nominal GRI, and we implemented most of that. There were very few customer exemptions. If you’re asking about pricing environment, the best companies, including us, are focused on safety and customer commitments. We keep those, and whatever investments we need to make and whatever pricing we need to implement to ensure that we keep our teammates safe and our customer commitments, we’re doing that. I expect pricing to be tight, disciplined, and the environment we saw in 2021 to continue throughout the year and into 2022.

Yes, that makes sense, Tom. So I guess if I’m trying to strip out some of the mix impacts and the profile changes within the revenue per hundredweight, it sounds like maybe the best proxy for core pricing right now is the level of the GRI that you put in. If we’re thinking about kind of a same-store sales number in that mid-to-high single digits right now, is that the right way to think about it?

That’s exactly right.

Our next question comes from the line of Bruce Chan with Stifel.

Tom, you mentioned that LTL weight per shipment is higher than it’s ever been before right now. I’m wondering if you can break that down a little for us. Is that due to TL overflow? Is that intentional freight selection there on the industrial side? What’s happening with that weight-per-shipment number?

Bruce, it’s mostly the second of the two pieces you suggested. We are getting better with tools and processes. On the commercial side, we implemented an adapted version of Salesforce.com a couple of years ago. Our commercial leader, Scott Schara, has been working surgically with the sales team on looking at the hundreds of thousands of potential shippers across the U.S. and Canada. We go by SIC code and specific company size. Over time, we see that density and weight per shipment tend to be higher in the following SIC codes: industrial, spare parts automotive, medical equipment. We are now emphasizing these in our call cycles with those higher density shipments as we are managing the freight that fits premium requirements, no damage, high reliability, faster service. When I walked through Chicago and Columbus, the crated medical equipment—MRI has quickly become a prime example of the freight we are seeking to handle more of.

That’s great color. And maybe just a follow-up. You talked about more of a dimensional focus in LTL. You’ve spoken in the past about getting more disciplined about validating customer freight. Can you give some comments on what you’re doing on the process side or the investment side, whether that’s investing in dimensionalizers or doing more re-weighs at terminals?

Yes. We are investing more in equipment to validate freight dimensions and weights. I expect the outcome of Project Eagle Eye to reinforce the importance of dimensionalizing and re-weighing. From a freight perspective, we are getting disciplined. We have operational guidelines stating we do not accept kayaks except for the last several years when we worked with our customers and accepted kayaks. This is not beneficial as it clogs our system. We are helping them out with this small piece of freight quality. As of August and September, there’s a bit of a timeline to enforce some of these rules. We will not accept kayaks or rugs. We will enforce palletization, stacking rules. When you have sensitive equipment stacked high, getting it delivered undamaged becomes a challenge. There’s sensitive collaboration with our customers as we enforce these rules to improve freight quality and ensure those shipments are delivered on time.

Okay, that makes sense. And maybe just a final follow-up here. When you consider what you just laid out and lay that on top of your final mile growth strategy, is there any conflict there, especially as you begin integrating those final mile locations with your traditional LTL locations?

It’s a great point. We need more capacity. If we are the double-double company for many years to come, there’s a need for additional capacity. As you pointed out, if we use a small fraction of our locations to hold high-value appliances for our final mile business, that reinforces the need for us to find more capacity. The acquisition of J&P Hall a few months ago has provided additional capacity for our LTL business in the greater metro Atlanta area and in the Southeast Georgia market. We will find organic ways to expand by opening more terminals. I’m going to Fontana next week; our Inland Empire Terminal that we opened last year is now one of our top 15 terminals. In addition to focusing on opening terminals, we’re looking for more J&P Hall-type acquisitions in the future. Last year, we had six terminals. This year, it will probably be more than that, and next year may be even more.

Our next question comes from the line of Jacob Lacks with Wolfe Research.

This is Jake on for Scott. So there’s been a lot of disruptions on the ocean supply chain. What impact are you seeing from port and rail congestion on your Intermodal business?

It’s creating choppiness. This is a supply chain industry issue. It’s not just LTLs; it starts with rail. We have seen ships waiting outside ports, creating significant delays. We have mentioned this before. A lot of what we talked about earlier regarding congested places and destination pay reflects the current needs. All of this is real, and I expect that we will see this choppiness for many more months to come. It’s difficult for our Intermodal business as we cannot predict unloading times. Delays can vary significantly. However, there’s a silver lining, as our customers are more than willing to pay a premium to make sure we reliably deliver their freight to them. Overall, though, the choppiness is challenging. While parts of it might be helpful for our business, the situation remains frustrating for everyone involved.

Got it. And you’ve given some margin targets around your Expedited business segments. Could you speak a bit on where the events business would fit into that? What should we expect in terms of margins as that comes online?

Yes. Whatever range you’re considering, I previously indicated that in LTL, if we run our business without distractions, we have seen margins at 14 to 15%. The events business is among the most profitable, often exceeding that margin average. A prime example could be an event like a Taylor Swift concert; there’s zero slack. That equipment has to be on time, and the cost of not delivering is significant.

That concludes Forward Air’s Second Quarter 2021 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.